Companies hoping to reduce their tax bills or increase their refunds shouldn’t overlook the fuel tax credit. It’s available for federal tax paid on fuel used for nontaxable purposes.
When does the federal fuel tax apply?
The federal fuel tax, which is used to fund highway and road maintenance programs, is collected from buyers of gasoline, undyed diesel fuel, and undyed kerosene. (Dyed fuels, which are limited to off-road use, are exempt from the tax.)
But purchasers of taxable fuel may use it for nontaxable purposes. For example, construction businesses often use gasoline, undyed diesel fuel, or undyed kerosene to run off-road vehicles and construction equipment, such as front loaders, bulldozers, cranes, power saws, air compressors, generators, and heaters.
How much can you save?
Currently, the federal tax on gasoline is $0.184 per gallon and the federal tax on diesel fuel and kerosene is $0.244 per gallon. Calculating the fuel tax credit is simply a matter of multiplying the number of gallons used for nontaxable purposes during the year by the applicable rate.
So, for instance, a company that uses 7,500 gallons of gasoline and 15,000 gallons of undyed diesel fuel to operate off-road vehicles and equipment is entitled to a $5,040 credit (7,500 x $0.184) + (15,000 x $0.244).
A tax credit reduces your tax liability dollar for dollar, making it more valuable than a deduction, which reduces only your taxable income.
Keep in mind, though, that fuel tax credits are includable in your company’s taxable income. That’s because the full amount of the fuel purchases was previously deducted as business expenses, and you can’t claim a deduction and a credit on the same expense.
How do you claim it?
You can claim the credit by filing Form 4136 Credit for Federal Tax Paid on Fuels with your tax return. If you don’t want to wait until the end of the year to recoup fuel taxes, you can file Form 8849 Claim for Refund of Excise Taxes to obtain periodic refunds.
Alternatively, if your business files Form 720 Quarterly Federal Excise Tax Return, you can claim fuel tax credits against your excise tax liability.
No one likes to pay taxes they don’t owe, but if you forgo fuel tax credits, that’s exactly what you’re doing. Given the minimal burden involved in claiming these credits—it’s just a matter of tracking your nontaxable fuel uses and filing a form—there is only a benefit in doing so.