14.   Excise Taxes

Table of Contents

Reminders

 

Congress may take additional legislative action that would impact excise tax items for 2012, particularly the fuels listed in Table 14-1. To find out if additional legislation has been enacted, go to IRS.gov, and type “excise tax” (or a particular fuel) in the search box.

Introduction

You may be eligible to claim a credit on your income tax return for the federal excise tax on certain fuels. You may also be eligible to claim a quarterly refund of the fuel taxes during the year, instead of waiting to claim a credit on your income tax return.

Whether you can claim a credit or refund depends on whether the fuel was taxed and the purpose (nontaxable use) for which you used the fuel. The nontaxable uses of fuel for which a farmer may claim a credit or refund are generally the following.

  • Use on a farm for farming purposes.

  • Off-highway business use.

  • Uses other than as a fuel in a propulsion engine, such as home use.

Table 14-1 presents an overview of credits and refunds that may be claimed for fuels used for the nontaxable uses listed above. See Publication 510, Excise Taxes, for more information.

Topics - This chapter discusses:

  • Fuels used in farming

  • Dyed diesel fuel and dyed kerosene

  • Fuels used in off-highway business use

  • Fuels used for household purposes

  • How to claim a credit or refund

  • Including the credit or refund in income

Useful Items - You may want to see:

Publication

  • 510 Excise Taxes

Form (and Instructions)

  • 720 Quarterly Federal Excise Tax Return

  • 4136 Credit for Federal Tax Paid on Fuels

  • 8849 Claim for Refund of Excise Taxes

See chapter 16 for information about getting publications and forms.

Fuels Used in Farming

Owners, operators, and tenants of farms and certain other persons may be eligible to claim a credit or refund of excise taxes on fuel used on a farm for farming purposes. See Table 14-1 for a list of available fuel tax credits and refunds. Fuel is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes.

Farm.   A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards for finishing cattle. It also includes structures such as greenhouses used primarily for raising agricultural or horticultural commodities. A fish farm is an area where fish are grown or raised and not merely caught or harvested.

Table 14-1. Fuel Tax Credits and Refunds at a Glance

Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed.
Fuel Used On a Farm for Farming Purposes Off-Highway Business Use Household Use or Use Other Than as a Fuel1
Gasoline Credit only Credit or refund None
Aviation gasoline Credit only None None
Undyed diesel fuel and undyed kerosene Credit or refund Credit or refund2 Credit or refund2
Kerosene for use in aviation Credit or refund None None
Dyed diesel fuel and dyed kerosene None None None
Other Fuels (including alternative fuels)3 Credit or refund Credit or refund None
1For a use other than as fuel in a propulsion engine.
2Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending with undyed diesel fuel to be used for heating purposes.
3Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under Internal Revenue Code section 4081. It includes the alternative fuels: liquefied petroleum gas (LPG),“P” Series fuels, compressed natural gas (CNG), liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, liquid fuel derived from biomass, liquid natural gas (LNG), liquefied gas derived from biomass, and compressed gas derived from biomass.

Farming purposes.   As the owner, tenant, or operator and the ultimate purchaser of fuel that you purchased, you use the fuel on a farm for farming purposes if you use it in any of the following ways.

  1. To cultivate the soil or to raise or harvest any agricultural or horticultural commodity.

  2. To raise, shear, feed, care for, train, or manage livestock, bees, poultry, fur-bearing animals, or wildlife.

  3. To operate, manage, conserve, improve, or maintain your farm and its tools and equipment.

  4. To handle, dry, pack, grade, or store any raw agricultural or horticultural commodity. For this use to qualify, you must have produced more than half the commodity so treated during the tax year. The more-than-one-half test applies separately to each commodity. Commodity means a single raw product. For example, apples and peaches are two separate commodities.

  5. To plant, cultivate, care for, or cut trees or to prepare (other than sawing logs into lumber, chipping, or other milling) trees for market, but only if the planting, etc., is incidental to your farming operations. Your tree operations are incidental only if they are minor in nature when compared to the total farming operations.

  If any other person, such as a neighbor or custom operator, performs a service for you on your farm for any of the purposes included in list items (1) or (2), earlier, you are considered to be the ultimate purchaser who used the fuel on a farm for farming purposes. Therefore, you can still claim the credit or refund for the fuel so used. However, see Custom application of fertilizer and pesticide, later. If the other person performs any other services for you on your farm for purposes not included in list items (1) or (2) above, no one can claim the credit or refund for fuel used on your farm for those other services.

Buyer of fuel, including undyed diesel fuel or undyed kerosene.   If doubt exists whether the owner, tenant, or operator of the farm bought the fuel, determine who actually bore the cost of the fuel. For example, if the owner of a farm and his or her tenant equally share the cost of gasoline used on the farm, each can claim a credit for the tax on half the fuel used.

Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel).   Usually, the farmer is the only person who can make a claim for credit or refund for the tax on undyed diesel fuel, undyed kerosene, or other fuels (including alternative fuel) used for farming purposes. However, see Custom application of fertilizer and pesticide, next. Also see Dyed Diesel Fuel and Dyed Kerosene, later.

Example.

Farm owner Haleigh Blue hired custom operator Tyler Steele to cultivate the soil on her farm. Tyler used 200 gallons of undyed diesel fuel that he purchased to perform the work on Haleigh's farm. In addition, Haleigh hired contractor Lee Brown to pack and store her apple crop. Lee bought 25 gallons of undyed diesel fuel to use in packing the apples. Haleigh can claim the credit for the 200 gallons of undyed diesel fuel used by Tyler on her farm because it qualifies as fuel used on the farm for farming purposes. No one can claim a credit for the 25 gallons used by Lee because that fuel was not used for a farming purpose included in list items (1) or (2), above.

In the above example, both Tyler Steele and Lee Brown could have purchased dyed (untaxed) diesel fuel for their tasks.

Custom application of fertilizer and pesticide.   Fuel used on a farm for farming purposes includes fuel used in the application (including aerial application) of fertilizer, pesticides, or other substances. Generally, the applicator is treated as having used the fuel on a farm for farming purposes. For applicators using highway vehicles, only the fuel used on the farm is exempt. Fuel used traveling on the highway to and from the farm is taxable. Fuel used by an aerial applicator for the direct flight between the airfield and one or more farms is treated as used for a farming purpose. For aviation gasoline, the aerial applicator makes the claim as the ultimate purchaser. For kerosene used in aviation, the ultimate purchaser may make the claim or waive the right to make the claim to the registered ultimate vendor. A sample waiver is included as Model Waiver L in the appendix of Publication 510.

A registered ultimate vendor is the person who sells undyed diesel fuel, undyed kerosene, or kerosene for use in aviation to the user (ultimate purchaser) of the fuel for use on a farm for farming purposes. To claim a credit or refund of tax, the ultimate vendor must be registered with the Internal Revenue Service at the time the claim is made. However, registered ultimate vendors cannot make claims for undyed diesel fuel and undyed kerosene sold for use on a farm for farming purposes.

Fuel not used for farming.   You do not use fuel on a farm for farming purposes when you use it in any of the following ways.

  • Off the farm, such as on the highway or in noncommercial aviation, even if the fuel is used in transporting livestock, feed, crops, or equipment.

  • For personal use, such as mowing the lawn.

  • In processing, packaging, freezing, or canning operations.

  • In processing crude gum into gum spirits of turpentine or gum resin or in processing maple sap into maple syrup or maple sugar.

All-terrain vehicles (ATVs).   Fuel used in ATVs on a farm for farming purposes, discussed earlier, is eligible for a credit or refund of excise taxes on the fuel. Fuel used in ATVs for nonfarming purposes is not eligible for a credit or refund of the taxes. If ATVs are used both for farming and nonfarming purposes, only that portion of the fuel used for farming purposes is eligible for the credit or refund.

Dyed Diesel Fuel and Dyed Kerosene

If you purchase dyed diesel fuel or dyed kerosene for a nontaxable use, you must use it only on a farm for farming purposes or for other nontaxable purposes. For example, you should not use dyed diesel fuel in a truck that is used both on the farm for farming purposes and on the highway, even though the highway use is in connection with farm business. Excise tax applies to the fuel used by the truck on the highways. In this situation, undyed (taxed) fuel should be purchased for the truck. You should keep fuel records of the use of the truck on the farm for farming purposes, and for other uses. You may be eligible for a credit or refund for the excise tax on fuel used on the farm for farming purposes.

Penalty.   A penalty is imposed on any person who knowingly uses, sells, or alters dyed diesel fuel or dyed kerosene for any purpose other than a nontaxable use. The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. For more information on this penalty, see Publication 510.

Fuels Used in Off-Highway Business Use

You may be eligible to claim a credit or refund for the excise tax on fuel used in an off-highway business use.

Off-highway business use.   This is any use of fuel in a trade or business or in an income-producing activity. The use must not be in a highway vehicle registered or required to be registered for use on public highways. Off-highway business use generally does not include any use in a recreational motorboat.

Examples.   Off-highway business use includes the use of fuels in a trade or business in any of the following ways.

  • In stationary machines such as generators, compressors, power saws, and similar equipment;

  • For cleaning ; and

  • In forklift trucks, bulldozers, and earthmovers.

  Off-highway nonbusiness (taxable) use of fuel includes: use in minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment. For more information, see Publication 510.

Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines

You may be eligible to claim a credit or refund for the excise tax on undyed diesel fuel or kerosene used for home heating, lighting, and cooking. This also applies to diesel fuel and kerosene used in a home generator to produce electricity for home use. Home use of a fuel does not include use in a propulsion engine and it is not considered an off-highway business use.

How To Claim a Credit or Refund

You may be able to claim a credit or refund of the excise tax on fuels you use for nontaxable uses. The basic rules for claiming credits and refunds are listed in Table 14-2 .

Table 14-2. Claiming a Credit or Refund of Excise Taxes

This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a nontaxable use.
  Credit Refund
Which form to use Form 4136, Credit for Federal Tax Paid on Fuels Form 8849, Claim for Refund of Excise Taxes, and Schedule 1 (Form 8849), Nontaxable Use of Fuels
Type of form Annual Quarterly
When to file With your income tax return By the last day of the quarter following the last quarter included in the claim
Amount of tax Any amount $750 or more1
1You may carry over an amount less than $750 to the next quarter.

Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed. You do not have to use any special form, but the records should establish the following information.

  • The total number of gallons bought and used during the period covered by your claim.

  • The dates of the purchases.

  • The names and addresses of suppliers and amounts bought from each during the period covered by your claim.

  • The nontaxable use for which you used the fuel.

  • The number of gallons used for each nontaxable use.

It is important that your records separately show the number of gallons used for each nontaxable use that qualifies as a claim. For more information about recordkeeping, see Publication 583, Starting a Business and Keeping Records.

Credit or refund.   A credit is an amount that reduces the tax on your income tax return when you file it at the end of the year. If you meet certain requirements, you may claim a refund during the year instead of waiting until you file your income tax return.

Credit only.   You can claim the following taxes only as a credit on your income tax return.

  • Tax on gasoline and aviation gasoline you used on a farm for farming purposes.

  • Tax on fuels (including undyed diesel fuel or undyed kerosene) you used for nontaxable uses if the total for the tax year is less than $750.

  • Tax on fuel you did not include in any claim for refund previously filed for any quarter of the tax year.

Claiming a Credit

You make a claim for a fuel tax credit on Form 4136 and attach it to your income tax return. Do not claim a credit for any excise tax for which you have filed a refund claim.

How to claim a credit.   How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, trust, or farmers' cooperative association.

Individuals.   You claim the credit on the “Credit for federal tax on fuels” line of your Form 1040. If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit.

Partnership.   Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., showing each partner's share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. Each partner claims the credit on his or her income tax return for the partner's share of the fuel used by the 
partnership.

An electing large partnership can claim the credit on the “Other payments” line of Form 1065-B, U.S. Return of Income for Electing Large Partnerships.

Other entities.   Corporations, S corporations, farmers' cooperative associations, and trusts make the claim on the appropriate line of their income tax return.

When to claim a credit.   You can claim a fuel tax credit on your income tax return for the year you used the fuel.

You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. Generally, you must file an amended return by the later of 3 years from the date you filed your original return or within 2 years from the date you paid the income tax.

Claiming a Refund

Generally, you may claim a refund of excise taxes on Form 8849. Complete and attach to Form 8849 the appropriate Form 8849 schedule(s). The instructions for Form 8849 and the separate instructions for each schedule explain the requirements for making a claim for refund. If you file Form 720, you can use its Schedule C for your refund claims for the quarter. See the Instructions for Form 720. Do not claim a refund on Form 8849 for any amount for which you have filed or will file a claim on Form 720 or Form 4136.

You may file a claim for refund for any quarter of your tax year for which you can claim $750 or more. This amount is the excise tax on all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other claim has been filed) during the tax year.

If you cannot claim at least $750 at the end of a quarter, you carry the amount over to the next quarter of your tax year to determine if you can claim at least $750 for that quarter. If you cannot claim at least $750 at the end of the fourth quarter of your tax year, you must claim a credit on your income tax return using Form 4136. Only one claim can be filed for a quarter.

You cannot claim a refund for excise tax on gasoline and aviation gasoline used on a farm for farming purposes. You must claim a credit on your income tax return for the tax.

How to file a quarterly claim.   File the claim for refund by filling out Schedule 1 (Form 8849) and attaching it to Form 8849. Send it to the address shown in the instructions. If you file Form 720, you can use its Schedule C for your refund claims. See the Instructions for Form 720.

When to file a quarterly claim.   You must file a quarterly claim by the last day of the first quarter following the last quarter included in the claim. If you do not file a timely refund claim for the fourth quarter of your tax year, you will have to claim a credit for that amount on your income tax return, as discussed earlier.

  
In most situations, the amount claimed as a credit or refund will be less than the amount deducted as fuel tax expense because the Leaking Underground Storage Tank (LUST) tax of $0.001 per gallon is generally not subject to credit or refund.

Including the Credit or Refund in Income

Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability.

Which year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting.

Cash method.   If you use the cash method and file a claim for refund, include the refund amount in gross income for the tax year in which you receive the refund. If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit.

Example.

Sharon Brown, a cash basis farmer, filed her 2011 Form 1040 on March 3, 2012. On her Schedule F, she deducted the total cost of gasoline (including $110 of excise taxes) used on the farm for farming purposes. Then, on Form 4136, she claimed the $110 as a credit. Sharon reports the $110 as other income on line 8b of her 2012 Schedule F.

Accrual method.   If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels. It does not matter whether you filed for a quarterly refund or claimed the entire amount as a credit.

Example.

Patty Green, an accrual basis farmer, files her 2011 Form 1040 on April 17, 2012. On Schedule F, she deducts the total cost of gasoline (including $155 of excise taxes) she used on the farm for farming purposes during 2011. On Form 4136, Patty claims the $155 as a credit. She reports the $155 as other income on line 8b of her 2011 Schedule F.

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