Fuel Tax Credit: What Is It?

Regular gasoline and diesel fuel both reached above $5 per gallon in 2022—a record high that has put a strain on business and consumer budgets alike. This year’s fuel prices have impacted operations for business owners who operate vehicles or gas-fueled equipment.

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That said, some business-related use of motor fuel is categorized as non-taxable. However, the only way to recoup that money is to claim a fuel tax credit when filing taxes for your enterprise. 

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Below we’ll look at who qualifies for the fuel tax credit and how to apply for it.

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What Is the Fuel Tax Credit?

What is a fuel tax credit and why does it exist? The primary reason for the federal fuel tax credit is to give a break to non-highway-use fuel purchases.

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The federal government imposes two types of tax on gasoline and diesel fuel:

1. Excise tax – Primarily used to maintain and repair highways and support mass transit
   (18.3 cents per gallon for gasoline; 24.3 cents for diesel)
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2. Cleanup tax – To address leaking underground storage tanks.
   (0.1 cents per gallon on both types of fuel)

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The federal tax on fuel is essentially a you-play-you-pay setup. The theory is that, regardless of income or assets, the more fuel you buy, the more strain you put on the public highway system—and thus the greater your responsibility for contributing to it.

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Mostly this is true—we buy gas for cars, and we drive cars on roads. But what if you’re purchasing fuel for machines that never set foot (or tire) on public highways?  Understanding FMCSR can help clarify these exemptions.

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Making gas stations responsible for sorting out who should or shouldn’t pay the federal tax isn’t practical. Instead, the excise tax is built into gas and diesel prices, and the government pays it back to qualifying businesses as a credit on their taxes. 

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Who Qualifies For The Fuel Tax Credit?

Whether you run delivery management operations or are in charge of fleet management costs, it’s best to know who qualifies for the fuel tax credit. The federal fuel tax credit is a business credit—an individual or a partnership cannot claim it. Businesses can qualify for certain uses of: 

• Regular gasoline
• Diesel fuel (undyed)
• Kerosene (undyed)
• Aviation gasoline or kerosene
• Specified alternative fuels

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The most common example of nontaxable fuel use that qualifies for credit is for construction or farming equipment. However, per the IRS, the list also includes:

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Note that the off-highway business use category can be applicable for many small businesses that use machinery such as:

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• Lawnmowers, snowblowers, and leaf blowers
• Steam cleaners and vacuums 
• Generators
• Compressors and pumps
• Power saws
• Forklifts
• Bulldozers and earthmovers

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How to File for a Fuel Tax Credit

Before the tax year ends, you’ll need to incorporate some recordkeeping. The first step in filing for a fuel tax credit is to keep track of fuel use throughout the year. 

A simple way to approach this is to assign fuel or fleet cards by purpose as well as use. If a specified card is used solely to purchase off-highway-use fuels, you’ll have a simple and clean tracking mechanism and legal record of your purchases. 

Wondering, what is a fleet card? You can check out our blog to learn more!

When tax time hits, you’ll first want to ensure DOT compliance and file Form 4136, Credit for Federal Tax Paid on Fuels, with the IRS. The four-page form is broken down by type of fuel. Under each, you’ll identify:

• Usage category (farming, buses, trains, export, or nontaxable use)
• Specific type of nontaxable use (per the 16-item list above)
• How many gallons used

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The form contains a per-gallon rate based on usage category—you’ll multiply the number of gallons by that rate for each type of use. You can also find resources on how to calculate IFTA to ensure accurate filing. Many businesses may just fill out the gasoline and/or diesel sections on page one and then skip to the end to enter a total amount.

Is There a Fuel Tax Credit in Your State?

When you hear a generic mention of tax credits or deductions, it’s usually about federal taxes. But you may be able to double down on getting your money back if your state also offers a fuel tax credit program. 

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The majority of states impose a tax on fuel similar to the federal government approach—a “pay as you go” excise tax intended to be used for road construction and maintenance, as opposed to a sales tax intended to collect general use tax revenue concerning individual or business spending, fuel tax rates vary across states.

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Some states, such as California and New York, also follow the IRS’s lead in refunding taxes spent on fuel used in a nontaxable category (largely—if it’s not used on the highway, it shouldn’t be charged an excise tax to keep the highways in good repair). 

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Is it worth checking if your state has a fuel tax credit? Most definitely—especially if you’re fueling up in the Golden State, Illinois, or Pennsylvania:

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• California – Tops the nation with 70.95¢ per gallon of gasoline and 102.01¢ diesel
• Illinois –  59.6¢ per gallon of gasoline and 67.02¢ diesel
• Pennsylvania – 58.7¢ per gallon of gasoline and 75.2¢ diesel

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To compare, the average state gasoline tax is 29.15¢ per gallon, and the average state diesel tax is 31.19¢ per gallon.

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Benefits of Fuel Tax Credits

Ideally, you’d never pay the excise taxes on fuel if you’re using it for a nontaxable purpose, but credit is the next best option. 

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A tax credit provides you with a dollar-for-dollar fuel tax refund of your spending, as compared to a deduction, which only reduces your taxable income and tax liability. For instance, if you paid $400 for fuel used in farming equipment, you’ll get $400 back with a tax credit versus $100 back in a deduction (based on a 25% tax rate).

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There is no cap (maximum) on the amount of fuel tax credit you can claim—it’s entirely dependent on how much qualifying fuel you’ve purchased. 

While it’s not unanimous, most analysts in a CNBC poll predict that oil prices will see a slight decline in the future. That said, fuel prices still aren’t cheap—and if you’re paying taxes you don’t need to, pursuing a fuel tax credit can provide your company with financial benefits.

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Tax Credit for Alternative Fuels

Fuel tax credits have also been employed to incentivize businesses to experiment with alternative fuel mixture alternatives. These purchases may qualify for a tax credit regardless of use (including typical highway use by a standard consumer or commercial vehicle), plus additional credit if used in a nontaxable usage category. 

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Currently, alternative fuels that qualify for a federal tax credit include:

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• Biodiesel and agri-biodiesel mixture types 
• Compressed gas derived from biomass 
• Compressed natural gas (CNG) 
• Fischer-Tropsch process liquid fuel from coal (including peat)
• Liquefied gas derived from biomass
• Liquefied hydrogen 
• Liquefied natural gas (LNG)
• Liquefied petroleum gas (LPG) 
• Liquid fuel derived from biomass 
• Renewable diesel mixtures
• “P Series” fuels

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However, note that as technologies change, the types of alternative fuel and their tax credit rates also continue to change. Consult your tax and financial professionals about fuel credits as part of new equipment and motor vehicle investment planning.

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This is another area to investigate at the state level—many states offer a tax incentive for alternative fuels to influence behavior related to alternative fuel and alternative-fuel machinery and vehicles.

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AtoB: A Path to Saving Company Dollars

Knowledgeable tax and financial planning is key to trimming your tax costs and keeping accurate records of every fuel purchase. But how else can you reduce your fuel budget before tax season hits?

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The AtoB fuel card is a unique option to save money on professional vehicle use, whether you’re an owner-operator or a fleet manager. Unlike other fuel discount cards, AtoB has no hidden fees and doesn’t require a monthly subscription, transaction fee, or ACH payment fee.

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Plus, the AtoB fuel card allows you to charge fuel, repairs and parts, road tolls, insurance, and more at any location or vendor that accepts Visa cards. This means you can always opt for the lowest-priced or most immediate option, whether that’s a major chain or a mom-and-pop station or repair shop. And through our accessible platform, you can easily monitor the costs and minimize the risk of fuel card fraud.

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AtoB offers the most flexible and easy-to-start fuel cards program to single-owner LLCs, OTR trucking companies, and everyone in between. Learn more and get started with an AtoB OTR fuel card today.

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Sources:

Statistica. Daily average regular gas and diesel prices in the United States throughout the war in Ukraine.
‍https://www.statista.com/statistics/1293019/us-daily-average-gas-prices/

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U.S. Energy Information Administration. How much tax do we pay on a gallon of gasoline and on a gallon of diesel fuel?
‍https://www.eia.gov/tools/faqs/faq.php?id=10&t=5

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IRS. Instructions for Form 4136 (2021).
‍https://www.irs.gov/instructions/i4136

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H&R Block. Business Tax Credit For Fuel Use.
‍https://www.hrblock.com/tax-center/filing/credits/fuel-tax-credit/

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CNBC. Oil prices will hold steady this year, analysts say, though 2023 may see declines.
‍https://www.cnbc.com/2022/09/01/oil-prices-will-hold-steady-but-more-bullish-factors-ahead.html

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Kiplinger. 10 States with the Highest Gas Taxes.
‍https://www.kiplinger.com/taxes/state-tax/603259/states-with-the-highest-gas-taxes
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World Population Review. Gas Taxes by State 2022.
‍https://worldpopulationreview.com/state-rankings/gas-taxes-by-state

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