If you sell or use alcohol as a fuel, you may be eligible for an income tax credit. The alcohol fuel credit consists of a straight alcohol credit, an alcohol mixture credit, and a small ethanol producer credit. Each of these credits is discussed later.

Alcohol eligible for the credit includes methanol and ethanol. This includes methanol produced from methane gas formed in waste disposal sites. But it does not include any of the following.

• Alcohol produced from petroleum, natural gas, or coal (including peat).
• Alcohol with a proof of less than 150.
• Ethanol produced as a by-product from manufacturing ethylcellulose derived from ethane.

In figuring the proof of any alcohol, disregard any denaturants (additives that make the alcohol unfit for human consumption).

Straight alcohol credit. You can claim the credit for any alcohol not mixed with gasoline or a special fuel other than denaturants.

You are eligible for the credit for straight alcohol only if you met one of the following requirements during the tax year.

• You used it as a fuel in your trade or business.
• You sold it at retail and placed it in the fuel tank of the buyer's vehicle.

The buyer cannot claim the credit for the alcohol bought at retail, even if the buyer uses it as a fuel in a trade or business.

Mixing or failure to use as fuel. If the credit applied to alcohol you bought and you later mix the alcohol or do not use it as a fuel, you must pay a tax equal to the credit. Report this tax on Form 720.

Table 4-1. How To Figure the Straight Alcohol and Alcohol Mixture Credits

IF the alcohol is...	AND it is...	THEN the credit for each gallon is...
At least 190 proof	�Alcohol (other than ethanol) �Ethanol	$.60 $.53
At least 150 proof but less than 190 proof	�Alcohol (other than ethanol) �Ethanol	$.45 $.3926

Alcohol mixture credit. You can take the credit for alcohol you use to produce a qualified mixture. A qualified mixture is a mixture of alcohol with gasoline or with a special fuel. You do not treat adding denaturants to alcohol as the production of a mixture.

You can take the credit only for a mixture you produce. You must sell the mixture for use as a fuel, not merely as an octane enhancer, or use it as a fuel in your trade or business. You can claim the credit whether you sell the fuels directly to the user or to a buyer for resale to the user. Take into account alcohol you use to produce a qualified mixture only if the sale or use is in your trade or business and only for the tax year in which the sale or use occurs.

A special fuel includes any liquid fuel, other than gasoline, suitable for use in an internal combustion engine.

You cannot take a credit for the casual off-farm production of a qualified mixture.

If you combine alcohol eligible for the credit with alcohol that is not eligible and use the combined alcohol in a way that qualifies for the credit, you figure the credit based on the proportionate amount of eligible alcohol contained in the combined alcohol.

Separation or failure to use as fuel. If the credit applied to alcohol used in the production of a qualified mixture, and you later separate the alcohol from the mixture or do not use the mixture as fuel, you must pay a tax equal to the credit. Report this tax on Form 720.

Amount of credit. The straight alcohol credit and the alcohol mixture credit are based on the proof content of the alcohol. You figure the proof without considering denaturants added to the alcohol. Use Table 4-1 to determine the credit for each gallon of alcohol.

Reduced credit for certain excise tax benefits. You may have been entitled to a reduced rate, an exemption, credit, or refund for the federal excise tax on certain fuel-alcohol mixtures. You must reduce the credit allowable on these mixtures (such as gasohol) by the amount of these benefits.

Volume of alcohol. When figuring the number of gallons of alcohol sold or used, include the volume of any denaturant (including gasoline) added under formulas approved by the Secretary of the Treasury. Also include the denaturant when you figure the percentage of any mixture that is alcohol. However, denaturants can be counted only up to 5% of the total volume of alcohol.

Small ethanol producer credit. If you are an eligible small ethanol producer, you qualify for a credit on up to 15 million gallons of your qualified ethanol fuel production for any tax year. This additional alcohol fuel credit is 10 cents for each gallon.

You are an eligible producer if, at all times during the tax year, you have an annual productive capacity of not more than 30 million gallons of any type of alcohol.

For a partnership, trust, or S corporation, the 15- and 30-million gallon limits apply at both the entity level and the partner, beneficiary, or shareholder level.

Qualified ethanol fuel production. Your qualified ethanol fuel production is any ethanol you produce and sell during the tax year to another person for any of the following purposes.

• Use in the production of a qualified mixture in that person's trade or business (except casual off-farm production).
• Use as a fuel in that person's trade or business.
• Sale at retail by that person who puts the ethanol in the fuel tank of the buyer's vehicle.

It also includes your use or sale of the ethanol for these purposes.

Qualified ethanol fuel production does not include any alcohol bought by a producer who then increases the proof of the alcohol by additional distillation.

Failure to use for qualifying purposes. If the credit applied to an eligible small ethanol producer and you do not use the ethanol for a purpose listed under Qualified ethanol fuel production, you must pay a tax equal to the credit. Report this tax on Form 720.

How to claim the credit. You take the alcohol fuel credit by completing Form 6478, Credit for Alcohol Used as Fuel, and attaching it to your income tax return. All individuals and corporations taking the credit use Form 6478. Partnerships (including electing large partnerships), S corporations, estates, and trusts figure the credit on Form 6478 but divide the credit among their partners, shareholders, or beneficiaries.

If you take the alcohol fuel credit, you must include the credit for the tax year in your gross income for that year.

General business credit. You combine the alcohol fuel credit with other credits on Form 3800, General Business Credit, to figure your general business credit for the year. See the Form 6478 instructions for a list of these credits and whether you must file Form 3800.

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