Biodiesel Back in the Tax Credit Game

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The U.S. Senate voted 62 to 36 Wednesday to pass a tax extension bill (H.R. 4213) that includes a key $1 biodiesel tax credit.

The expiration of the credit on Dec. 31, 2009 put the breaks on an expanding industry and raised questions about biodiesel’s future in the U.S.

With many biodiesel plants either idle or shutdown throughout the country, the bill will reinstate the credit retroactively, extending it through Dec. 31., 2010.

Although biodiesel received a tremendous boost under the new renewable fuel standard (RFS2), without a tax credit, the industry could not compete on price with petroleum-based diesel.

RFS2 rules issued by the EPA include strong “biomass-based biodiesel” or “advanced biofuel” carve outs for biodiesel so long as it can show a favorable greenhouse gas (GHG) profile.  The tax credits will allow the biodiesel industry to begin taking advantage of its carve out under the new RFS2 definitions.

The biodiesel incentive is designed to encourage the domestic production and use of biodiesel by making the fuel price competitive with petroleum diesel fuel.  The subsidy is structured so that the value of the incentive is reflected in the market price of the fuel.

The new tax credit is contained in the bill’s “Title IV: Energy Provisions” (Section 401) and extends through 2010 energy conservation and production provisions, including:

(1) the tax credits for biodiesel and renewable diesel used as fuel;

(2) the alternative motor vehicle tax credit for large hybrid vehicles;

(3) the alternative fuel excise tax credit for natural gas and liquefied petroleum gas; and

(4) tax rules relating to sales required to implement federal and state restructuring policy for qualified electric utilities.

Specifically, sections 40A, 6426, and 6427(e) of the Internal Revenue Code provide tax incentives for the production, sale, and use of biodiesel and biodiesel mixtures.  Under the Code, the production tax credit applies to qualified blenders of biodiesel and agri-biodiesel fuels and allows them to receive an income and excise tax credit if certain conditions are met.

Biodiesel Mixture Excise Tax Credit

Excise taxes are imposed on gasoline, diesel fuel, and kerosene both for auto transport and aviation at the point of their removal from a refinery or terminal, entry into the United States, and sale.  A dollar excise tax credit is available to anyone that blends pure biodiesel or agri-biodiesel with petroleum diesel to produce a mixture containing at least 0.1 percent diesel fuel.

To qualify for the credit, the blender must be registered with the Internal Revenue Service.  A qualifying mixture must either be sold for use (sold by the producer to a buyer for use by the buyer as a fuel) or used as a fuel to operate a motor vehicle (be used as a fuel in the trade or business of the producer).

Small Agri-Biodiesel Producer Credit

A small agri-biodiesel producer credit is a volumetric based income tax credit for the production of Aagri-biodiesel.”  It allows any “eligible small agri-biodiesel producer,” meaning a person who, at all times during the taxable year, has a productive capacity for agri-biodiesel not in excess of 60,000,000 gallons, a $1.00 credit.

Definitions

  • Biodiesel means the monoalkyl esters of long chain fatty acids derived from plant or animal matter which meet the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act, and the requirements of the American Society of Testing and Materials (ASTM) D6751.
  • Agri-biodiesel means biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and (for fuel produced, and sold or used, after 2008) camelina, and from animal fats.

The bill now moves the measure into a reconciliation phase with the House’s version of the bill, which passed at the end of 2009.

Mackinnon Lawrence is an attorney, principal consultant with Biomass Advisors, and editor & publisher of Biomass Intel. Article appearing courtesy Biomass Intel.

photo: lincolnblues

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