The Inflation Reduction Act of 2022 (IRA) has changed, updated, or extended federal tax provisions governing energy credits and excise taxes. In short, this new legislation extends multiple existing fuel credits now available to taxpayers through 2024 and establishes new credits to accelerate the production and use of low-emission fuels.
It is beneficial to become familiar with current IRA legislation if your company engages in activities relating to clean fuels, oil, or petroleum products. Treasury Regulations, excise tax forms, and returns are all important to ensure compliance with the recently passed IRA rules.
When it comes to taxes, even though lawmakers work hard to pass relief provisions to aid taxpayers, there is a lot of information that can get lost in translation. Confusing messages and poor communication can undermine the best of intentions. This is precisely what TiP Excise wants to help you avoid. Understanding excise tax as it relates to fuel is difficult, but our expert team can help clarify tax law and walk you through the process of attaining the most tax return for your fuel expenses.
What is the Inflation Reduction Act of 2022?
President Joe Biden approved the Inflation Reduction Act of 2022 on August 16th. This new legislation marks the largest investment in U.S. history which focuses on combating climate changes. Additionally, it focuses on increasing taxes on corporations and decreasing the price of prescription medication.
What is an Excise Tax?
Before we move on to examine how the IRA affects tax credits related to fuel, let’s define excise tax. Excise tax is something that many people pay, but few taxpayers understand. Establishing a basic understanding will help you to determine whether you have been paying excise tax without realizing it. This is your opportunity to benefit fully from the tax breaks that our government provides.
An excise tax is a legislated and intranational tax imposed within a government infrastructure rather than international taxes imposed across country borders. In the United States, a federal excise tax usually collects from motor fuel sales, airline tickets, tobacco, and other goods and services. However, we will focus on excise fuel tax credits.
Federal Excise Tax Paid on Fuels
The federal government adds a special tax to all fuel purchased at retail gas stations. Gasoline and diesel fuel tax by state are also included. This fuel tax can also pay for the maintenance of roads, bridges, and public transportation systems. However, businesses that use fuel to power off-highway equipment are eligible for an excise tax credit or refund.
- Farming equipment
- Commercial fishing boats
- Stationary machines
- power saws
- Mobile machines
- forklift trucks
Changes for Fuel Tax Credit
The Inflation Reduction Act of 2022 includes a $369 billion in spending and tax credits over ten years for climate and energy programs. Specific to fuels, a significant portion of these credits and incentives are reserved to produce clean fuels. A new credit for sustainable aviation fuel is permitted by the IRA. Additionally, with an extension of the alternative fuel and biodiesel fuel credits. Additionally, a new technology neutral credit is offered for the creation of clean fuel.
Biodiesel, Renewable Diesel, and Alternative Fuels
The IRA extends and revives income and excise tax credits for biodiesel, biodiesel mixtures, and alternative fuels through December 31, 2024. It is important to note that the IRA also removed liquefied hydrogen from the list of acceptable alternative fuels.
Taxpayers can expect the $1.00 per gallon biodiesel and renewable diesel credit, along with the $1.00 per gallon biodiesel mixture credit beyond their original scheduled expiration date at the end of 2022.
Several credits for biodiesel and alternative fuels were set to expire at the end of 2021, however they are renewed by the IRA. Additionally, it covers the 50 cents per gallon credit for alternative fuel used in motor vehicles, motorboats, or as aviation fuel.
Note that biodiesel or renewable diesel mixture portions of the credit may also be claimed as an excise tax credit.
Sustainable Aviation Fuel Credit
In a new development, the IRA establishes an excise tax credit for sustainable aviation fuel (SAF) mixtures sold or used beginning on January 1, 2023, through December 31, 2024. An eligible combination including sustainable aviation fuel at a rate of $1.25 per gallon, plus any appropriate additional amounts, qualifies for the credit.
The credit is specific to a qualified mixture of sustainable aviation fuel and kerosene produced by taxpayers in the United States. Furthermore, the qualified mixture must be used by the taxpayer in an aircraft or sold to be used in an aircraft in the regular course of business. Lastly, the fueling must also occur in the United States.
For every percentage point that the fuel reduces the lifecycle greenhouse gas emissions by more than 50% compared to jet fuel derived from petroleum, the applicable bonus amount is equivalent to one cent. The maximum supplementary amount is 50 cents. This brings the total possible credit to $1.75 per gallon.
To meet ASTM International Standards, sustainable aviation fuel must meet the following conditions:
- comes from biomass, waste streams, renewable energy sources, or gaseous carbon oxides
- does not originate from palm oil
- reduce lifecycle emissions by 50 percent
Clean-Fuel Production Credit
A technology neutral clean fuel production tax credit is also created by the IRA. The credit applies to transportation fuel that meets a particular emissions reduction factor and is produced and sold by the taxpayer from December 31, 2024 through December 31, 2027. A base credit of 20 cents per gall or $1.00 per gallon if prevailing wage and apprentice requirements are met.
The IRA offers a base credit for sustainable aviation fuel of 35 cents per gallon, or $1.75 per gallon if the standards for prevailing wage and apprentices are met. To determine the actual credit amount, a formula that considers the base credit amount and the greenhouse gas emissions factor.
How Can the Inflation Reduction Act Work for You?
Tax laws are complicated and complex to navigate. Unfortunately, most CPAs who typically serve industries that use fuel for off-highway business purposes don’t even know the new legislation.
This is where TiP Excise can help! Fuel tax experts at TiP Excise are available to assist in determining how the Income Reduction Act 2022 impacts on your tax status. Our team has a comprehensive system in place for all of our clients, including help with identifying excise fuel tax opportunities and filing for tax credit. Let’s discuss how we can help you recover the tax refunds you deserve.