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Increase Tax Savings with the Fuel Tax Credit

The fuel tax credit should not be overlooked by businesses looking to lower their tax bills or boost their refunds. It is applicable to fuel used for nontaxable purposes that were taxed at the federal level.

When is the federal fuel tax applicable?

The federal fuel tax is levied on consumers of gasoline, undyed diesel fuel, and undyed kerosene. It is used to finance highway and road maintenance projects. (The tax is waived for dyed fuels, which are only permitted for off-road use.)

However, buyers of taxable fuel are allowed to use it for nontaxable applications. In the construction industry, off-road vehicles and construction machinery like front loaders, bulldozers, cranes, power saws, air compressors, generators, and heaters are frequently powered by gasoline, undyed diesel fuel, or undyed kerosene.

A federal gasoline tax holiday has been proposed; however, businesses can take advantage of the fuel tax credit for the months the holiday isn’t in place even if it is signed into law (check with your tax expert for the most recent information).

How much does the credit save?

Currently, there is a federal tax of $0.184 per gallon on gasoline and $0.244 per gallon on diesel and kerosene. The fuel tax credit is equal to the amount of gallons utilized for nontaxable purposes during the year multiplied by the applicable rate.

A corporation, for example, is eligible for a $5,040 credit if it consumes 7,500 gallons of gasoline and 15,000 gallons of undyed diesel fuel to power off-road vehicles and equipment (7,500 x $0.184) + (15,000 x $0.244).

Although this may not seem like a lot, over time it can add up. And keep in mind that a tax credit offsets your tax obligation dollar for dollar. That is significantly more beneficial than a deduction, which just lowers your taxable income.

But keep in mind that fuel tax credits are included in the taxable income of your company. The reason for this is because you cannot claim a deduction and a credit for the same item because the full cost of the fuel purchases was previously written off as a business expense.

How to claim the fuel tax credit

By filing Form 4136, “Credit for Federal Tax Paid on Fuels,” with your tax return, you can claim the credit. You can file Form 8849, “Claim for Refund of Excise Taxes,” to request periodic refunds if you don’t want to wait until the end of the year to recover fuel taxes.

Additionally, you can offset your excise tax due by claiming fuel tax credits if your company files Form 720, “Quarterly Federal Excise Tax Return.”

Claiming the fuel tax credit is easy

Nobody loves paying taxes they don’t have to, but that’s precisely what you’re doing if you don’t take advantage of fuel tax credits. It’s very easy to claim these credits—it only requires keeping track of the nontaxable fuel you use and submitting a form. Contact us with questions about the fuel tax credit, and check out our post on tax credits for small businesses.