Alcohol Fuel Credit(p21)

If you sell or use alcohol (not in a mixture) as a fuel, you may be eligible for a credit on your income tax return. The alcohol fuel credit consists of the straight alcohol credit, alcohol fuel mixture credit, small ethanol producer credit, and cellulosic biofuel producer credit. The alcohol fuel mixture credit was discussed earlier.

Alcohol eligible for the credit includes methanol and ethanol. This includes methanol produced from methane gas formed in waste disposal sites. But it does not include any of the following.

• Alcohol produced from petroleum, natural gas, or coal (including peat).
• Alcohol with a proof of less than 150.
• Ethanol produced as a by-product from manufacturing ethylcellulose derived from ethane.

In figuring the proof of any alcohol, disregard any denaturants (additives that make the alcohol unfit for human consumption).

You can claim the credit for any alcohol not mixed with gasoline or a special fuel other than denaturants.

You are eligible for the credit for straight alcohol only if you met one of the following requirements during the tax year.

• You used it as a fuel in your trade or business.
• You sold it at retail and placed it in the fuel tank of the buyer's vehicle.

The buyer cannot claim the credit for the alcohol bought at retail, even if the buyer uses it as a fuel in a trade or business.

A special fuel includes any liquid fuel, other than gasoline, suitable for use in an internal combustion engine.

The straight alcohol credit is based on the proof content of the alcohol. You figure the proof without considering denaturants added to the alcohol. Use Form 6478 to determine the credit for each gallon of alcohol.

If you combine alcohol eligible for the credit with alcohol that is not eligible and use the combined alcohol in a way that qualifies for the credit, you figure the credit based on the proportionate amount of eligible alcohol contained in the combined alcohol.

When figuring the number of gallons of alcohol sold or used, include the volume of any denaturant (including gasoline) added under formulas approved by the Secretary of the Treasury. However, denaturants can be counted only up to 2% of the total volume of alcohol (including denaturants). See Notice 2009-6 for a temporary safe harbor and transitional rule for the volume of denaturants

If you are an eligible small ethanol producer, you qualify for a credit on up to 15 million gallons of your qualified ethanol fuel production for any tax year. This additional alcohol fuel credit is 10 cents for each gallon.

You are an eligible small ethanol producer if, at all times during the tax year, you have an annual productive capacity of not more than 60 million gallons of any type of alcohol, including alcohol not eligible for the credit.

For a partnership, trust, or S corporation, the 15- and 60-million gallon limits apply at both the entity level and the partner, beneficiary, or shareholder level.

Your qualified ethanol fuel production is any ethanol you produce and sell during the tax year to another person for any of the following purposes.

• Use in the production of a qualified mixture in that person's trade or business (except casual off-farm production).
• Use as a fuel in that person's trade or business.
• Sale at retail by that person who puts the ethanol in the fuel tank of the buyer's vehicle.

It also includes your use or sale of the ethanol for these purposes.

Qualified ethanol fuel production does not include any alcohol bought by a producer who then increases the proof of the alcohol by additional distillation.

A cooperative described in Internal Revenue Code section 1381(a) can elect to allocate any part of the small ethanol producer credit to patrons of the cooperative. The credit is allocated among the patrons on the basis of the quantity or value of business done with or for the patrons for the tax year. For more information, see Form 6478.

If the credit is applied to an eligible small ethanol producer and you do not use the ethanol for a purpose listed under Qualified ethanol fuel production, you must pay a tax equal to the credit. Report this tax on Form 720.

You can claim a credit for each gallon of qualified cellulosic biofuel production if you are registered by the IRS as a cellulosic biofuel producer. Cellulosic biofuel is defined in chapter 1.

Your qualified cellulosic biofuel production is any cellulosic biofuel you produce and sell for use during the tax year to another person for any of the following purposes.

• Use in the production of a qualified cellulosic biofuel mixture in that person's trade or business (except casual off-farm production).
• Use as a fuel in that person's trade or business.
• Sale at retail by that person who puts the cellulosic biofuel in the fuel tank of the buyer's vehicle.

Qualified production also includes your use or sale of cellulosic biofuel for these purposes. Qualified production does not include any alcohol bought by a producer who then increases the proof of the alcohol by additional distillation.

A cooperative described in Internal Revenue Code section 1381(a) can elect to allocate any part of the cellulosic biofuel producer credit to patrons of the cooperative. The credit is allocated among the patrons on the basis of the quantity or value of business done with or for the patrons for the tax year. For more information, see Form 6478.

If the credit is applied to a cellulosic biofuel producer and you do not use the cellulosic biofuel for a purpose listed under Qualified cellulosic biofuel production, you must pay a tax equal to the credit. Report this tax on Form 720.

The credits discussed under Alcohol Fuel Credit may not be claimed for alcohol or cellulosic biofuel that is produced outside the United States for use as a fuel outside the United States. The United States includes any possession of the United States.

The credit is not available for fuel sold or used after December 31, 2009, if more than 4% of the fuel (determined by weight) is any combination of water and sediment, if the ash content of the fuel is more than 1%, or the fuel has an acid number greater than 25.

You take the alcohol fuel credit by completing Form 6478. All individuals and corporations taking the credit use Form 6478. Partnerships (including electing large partnerships), S corporations, estates, and trusts figure the credit on Form 6478 but divide the credit among their partners, shareholders, or beneficiaries.

If you take the alcohol fuel credit, you must include the credit for the tax year in your gross income for that year.

Form 6478 is the only form on which you can claim the straight alcohol fuel credit, small ethanol producer credit, and cellulosic biofuel producer credit.

If the credit is applied to alcohol you bought and you later mix the alcohol or do not use it as a fuel, you must pay a tax equal to the credit. Report this tax on Form 720.