Publication 378 (04/2005), Fuel Tax Credits and Refunds

6. Alcohol Fuel Credit

Table of Contents

If you sell or use alcohol (not in a mixture) as a fuel, you may be eligible for a general business credit on your income tax return. The alcohol fuel credit consists of the straight alcohol credit, the alcohol fuel mixture credit, and the small ethanol producer credit. The alcohol fuel mixture credit was discussed in Chapter 4 earlier.

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.

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

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.

Amount of credit. The straight alcohol credit is based on the proof content of the alcohol. You figure the proof without considering denaturants added to the alcohol. Use Form 6478 to determine the credit for each gallon of alcohol.

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.

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 (including denaturants).

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 small ethanol 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.

Cooperative election to allocate the small ethanol producer credit to patrons. For tax years ending after October 22, 2004, a cooperative described in section 1381(a) can elect to allocate any part of the small ethanol producer credit to patrons of the cooperative. The credit is allocated among the patrons on the basis of the quantity or value of business done with or for the patrons for the tax year. For more information, see Form 6478.

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 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.

Form 6478 is the only form on which you can claim the straight alcohol fuel credit and the small ethanol producer credit.

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 3800 instructions for a list of these credits and whether you must file Form 3800.