Alcohol Fuels Credit

What is the ‘Alcohol Fuels Credit’

The alcohol fuels credit is a non-refundable tax credit that is equal to the amount of alcohol used to manufacture an alcohol-based fuel for sale or use in a taxpayer’s business. Several legislative acts led to the U.S. government providing tax incentives to promote the use of alternative fuels. The incentives cover purchasing alternative fuel, hybrid electric and fuel cell vehicles; installing alternative fueling infrastructure; and producing, selling or using alternative fuels. 

BREAKING DOWN ‘Alcohol Fuels Credit’

The alcohol fuels credit, which is detailed in the Internal Revenue Code (IRC), originated from the idea that it was in the best interest of the U.S. to reduce dependence on imported oil.  

Alcohol is defined as methanol and ethanol, but it does not include alcohol produced from petroleum, natural gas or coal. Also, it does not have a proof of less than 190. An alcohol fuel mixture is a mixture of alcohol and a taxable fuel like gasoline, diesel or kerosene that the taxpayer sells or uses as a fuel. Mixture credits require that production occurred by mixing a taxable fuel with an alternative fuel or, in the case of the alcohol fuel mixture credit, with alcohol. Producers, or in some cases blenders, that produce the mixture for sale or use the mixture in their businesses take the credit for these fuels. 

Fleet operators, fuel providers and fuel blenders may also be able to take advantage of the credit. To qualify for the credit, fuel composition, the manner in which fuel is used and the excise tax payment procedure must be clearly delineated. Internal Revenue Service Forms 8849, 4136, 6478 or 8864 can be used to make a claim or a refund for alcohol, biodiesel or renewable diesel, or alternative fuel used to produce a mixture. 

Alternative Fuels Definition

The Internal Revenue Service considers alternative fuels to be liquefied petroleum gas (LPG), compressed natural gas (CNG), liquefied natural gas (LNG), liquefied hydrogen, liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, liquid hydrocarbons derived from biomass, and P-Series fuels.

Note that while hydrocarbons include liquids that contain oxygen, hydrogen and carbon, and liquid hydrocarbons derived from biomass include ethanol, biodiesel and renewable diesel, the IRS does not include these fuels in the alternative fuels category. Tax incentives for these fuels are covered under the fuel categories of gasoline and diesel, respectively.

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