Propane Tax Credit

Propane is becoming increasingly attractive as a cost savings opportunity for fleet owners. With the escalating cost of gasoline and diesel, new emissions regulations for 2007 and 2010, and the requirements for ultra low sulfur diesel (ULSD), business owners are reconsidering their fleet fuel choices. The taxes incentives that took effect December 31, 2005 and October 1, 2006 by the passage of the 2005 Energy and Highway bills create a significant growth opportunity for the propane engine fuel market as well as for all alternative fuels. The following information is a summary of the federal tax incentives available from the IRS.

Volumetric Excise Tax Credit (VEETC)

(Effective October 1, 2006 – September 30, 2009)

The gross alternative fuel tax credit is 50 cents per gallon of propane sold by the taxpayer. It must be used as a motor fuel in a motor vehicle or motorboat. Normally, propane engine fuel is federally taxed at 13.6 cents per gallon. For the purpose of this tax credit, propane is federally taxed at 18.3 cents a gallon.

For Customers without Tax Liability

(i.e. Nonprofit educational organizations)

The sale of propane to a government or nonprofit educational organization or off-highway business such as forklifts and airport tugs is exempt from tax. Therefore, it is not necessary to file Form 720 as no tax is owed. However, these sales will be eligible to receive the 50 cent/gallon credit as long as the organization pumps its own fuel. In off-highway sales, the only way the retailer will be able to claim the credit is if the retailer delivers the fuel directly into the fuel supply tank (fueling system) of the tax-exempt vehicle. Otherwise it is the tax-exempt entity that receives the credit.

How to Claim the Credit:
To claim the 50 cent/gallon credit as a rebate for tax-exempt entities, organizations will need to fill out IRS Form 4136. We suggest you consult your tax attorney or specialist for more information about additional requirements.

For Customers with Tax Liability:

Federal Excise Tax on Propane – The excise tax on the sale of propane for motor vehicles does not change who is liable for the tax. Therefore, those who have been paying the tax on various sales transactions must continue to do so. As indicated above, the rate of federal tax on propane used in motor vehicles increases from 13.6 cents/gallon to 18.3 cents/gallon effective October 1, 2006. IRS Form 720 (Quarterly Federal Excise Tax Return) must be used to report this tax. Further explanation of who is liable for the tax is provided below under the section entitled "Tax Test."

Who Qualifies for the Credit? - To obtain the 50 cents/gallon credit on the propane sold for motor vehicle use, the following is required:

Registration Test – You must register with the IRS and be classified as an "Alternative Fueler." To be classified as one of the above, complete and mail IRS Form 637 titled "Application for Registration for Certain Excise Tax Activities." The IRS will notify you when you are registered. If you currently have a Certificate of Registry or a Letter of Registration, you are grandfathered in and do not have to register. You can begin claiming the credit on Form 720 filings. It is highly recommended that you file Form 637 to become an "Alternative Fueler".

How to Claim the Credit:
Once properly registered you may start claiming the credit. First, the 50 cent credit must be claimed as a credit against your propane or other special fuel tax liability under Section 4041 of the IRC on Form 720. On Form 720 report the 18.3 cents per gallon tax on Part 1. On Schedule C, claim the 18.3 cents of the 50 cents as a credit. The net tax liability for these filings should typically be zero. To receive the remainder of the 50 cent/gallon credit (31.7 cents) you must file IRS Form 4136 at the end of the taxable year. Form 4136 allows you to claim a credit against your income tax liability. If your income tax liability is less than the credit, the IRS will send you a check for the difference. In other words, this is a refundable credit and is due to you even if you have no further federal tax liability.

Alternative Fuel Vehicle Refueling Property Credit

(Effective December 31, 2005 – December 31, 2009)

The alternative vehicle refueling property credit allows companies to claim a 30 percent tax credit for the cost of installing an alternative fuel vehicle refueling station for use in a trade or business of the taxpayer, or installed at the principal residence of the taxpayer. This tax credit may not exceed $30,000. Additionally, tax credits for a residential refueling station may not exceed $1,000.

Alternative Motor Vehicle Credit

(Effective December 31, 2005 – January 1, 2011)

The vehicle tax credit for the purchase of a new qualified alternative motor vehicle (e.g., a new dedicated propane vehicle) is 50 percent of the incremental cost which is the difference in the purchase price between a gasoline fueled vehicle and a propane-powered version of the same model.

An additional credit of 30 percent of the maximum allowable incremental cost may be given if the vehicle meets certain emissions standards. The credit may not exceed $4,000 to $32,000, with the maximum allowable credit based on the vehicle's weight as the following table outlines:

Vehicle Gross Weight Rating (in pounds)	Maximum Allowable Incremental Cost	Maximum Credit (Based on qualifying for 80% of incremental cost)
< 8,500	$5,000	$4,000
8,500 - 14,000	$10,000	$8,000
14,000 - 26,000	$25,000	$20,000
26,000+	$40,000	$32,000

A new qualified alternative fuel motor vehicle, for the purposes of this section, means: Any motor vehicle that operates only on an alternative fuel, the original use of which begins with the taxpayer; is acquired by the taxpayer for use or lease, but not for resale; and which is made by a manufacturer or converted with an approved EPA system. The credit applies to vehicles used predominately in the U.S. and those placed in service after December 31, 2005 and before January 1, 2011.

IRS Notice 2006-54

On June 2, 2006, the IRS released IRS Notice 2006-54, which outlines the procedures a vehicle manufacturer must use to certify the vehicle meets the specified requirements in order to qualify for the alternative fuel vehicle credit.

A new qualified alternative fuel motor vehicle, for the purposes of this section, means: Any motor vehicle that operates only on an alternative fuel, the original use of which begins with the taxpayer; is acquired by the taxpayer for use or lease, but not for resale; and which is made by a manufacturer or converted with an approved EPA system. The credit applies to vehicles used predominately in the U.S. and those placed in service after December 31, 2005 and before January 1, 2011.

IRS Notice 2006-54

On June 2, 2006, the IRS released IRS Notice 2006-54, which outlines the procedures a vehicle manufacturer must use to certify the vehicle meets the specified requirements in order to qualify for the alternative fuel vehicle credit.

Biodiesel and Ethanol (VEETC) Tax Credit

The American Jobs Creation Act of 2004 (Public Law 108-357) created tax incentives for biodiesel fuels and extended the tax credit for fuel ethanol. The biodiesel credit is available to blenders/retailers beginning in January 2005. It also established the Volumetric Ethanol Excise Tax Credit (VEETC), which provides ethanol blenders/retailers with $.51 per pure gallon of ethanol blended or $.0051 per percentage point of ethanol blended (i.e., E10 is eligible for $.051/gal; E85 is eligible for $.4335/gal). The incentive is available until 2010.

Section 1344 of the Energy Policy Act of 2005 extended the tax credit for biodiesel producers through 2008. The credits are $.51 per gallon of ethanol at 190 proof or greater, $1.00 per gallon of agri-biodiesel, and $.50 per gallon of waste-grease biodiesel. If the fuel is used in a mixture, the credit amounts to $.0051 per percentage point ethanol or $.01 per percentage point of agri-biodiesel used or $.0050 per percentage point of waste-grease biodiesel (i.e. E100 is eligible for $.51 per gallon)