Motor Fuel Tax Refund for Off-Road Use

BY MARC I. LEBOW, CPA, PH.D. AND MICHAEL MCLAIN, CPA, DBA
March 1, 2011

Many taxpayers may be overlooking the refund or credit available under IRC § 6421 for federal excise taxes paid for motor fuels and similar state provisions. The taxes are on fuels used to power vehicles and equipment on roads and highways. Taxes paid for fuel to power vehicles and equipment used off-road may qualify for the refund or credit. This includes farm equipment and certain boats, trains and airplanes.

 

In most states and for the federal government, the taxes collected are placed into a special fund designated for highway and road construction and maintenance. The federal trust fund is primarily devoted to the interstate highway system and related infrastructure maintenance and improvement. Each state administers its own highway trust fund. For federal purposes, the credit applies only to business use of fuel. With some exceptions, states with specific laws and procedures for a refund or credit for off-road fuel use generally do not require that use to be for business purposes. A number of states, however, do not allow refunds for fuels used in recreational vehicles or recreational use of motor boats. Some set a threshold number of gallons purchased and used during a year or other period for claiming a refund.

 

For large farming, fishing or other fuel-intensive businesses, the amount of the refund can be significant. In 2010, the federal tax per gallon generally was 18.3 cents for gasoline and 24.3 cents for diesel fuel. Diesel fuel is also available for off-road use without payment of excise tax, in which case it is dyed to designate it as exempt. Taxpayers that produce their own fuel, such as biodiesel, are required to file and pay for any over-the-road usage of the fuel.

 

To claim a credit for the federal tax, taxpayers file with their tax return Form 4136, Credit for Federal Tax Paid on Fuels. If the expense for purchasing the fuel (including the tax) is deducted as a business expense, the credit or refund must be included in gross income by the taxpayer. Taxpayers with at least $750 in credit or refund due in a quarter or any number of quarters within a year may file for a refund with Schedule 1 of Form 8849, Claim for Refund of Excise Taxes.

 

Taxpayer records should include the name and address of the seller of the fuel, dates of purchase and number of gallons purchased during the year for each type of qualified business use. Under Treas. Reg. § 48.6421-4(b), qualified business use of gasoline includes gasoline used in stationary engines for certain equipment, such as compressors and generators. Furthermore, for a highway vehicle, not only must the use be off a road or highway, but also the vehicle must not be registered or required to be registered for highway use under the laws of any state or foreign country (IRC § 6421(e)(2)(A)). A credit was denied a trucking company for fuel consumed while its trucks idled at rest stops beside the highway, even though on-board computers recorded the amount of fuel so used (Hi-Way Dispatch Inc. v. U.S., 858 F. Supp. 880 (1994)). Only fishing or whaling are considered qualifying business uses of a motorboat (section 6421(e)(2)(B)).

 

A refund is also available under sections 6421(b) and (c) to private operators of school buses and buses for public transport and certain other exempt purposes described in section 4221.

 

STATE REFUNDS

The state taxes per gallon of motor fuel vary from 8 cents in Alaska to 37.5 cents in Washington. For diesel fuel, the state tax rates vary from 8 cents in Alaska to 39.6 cents in Connecticut. Each state has its own forms and rules for applying for a state motor fuel tax refund. For example, in North Carolina, a taxpayer must keep track of fuel purchased for approved uses and report the number of gallons used on the appropriate tax form, such as Form GAS 1201, Motor Fuel Claim for Refund Tax-Paid Motor Fuel Used Off-Highway. The taxpayer must also report the type of equipment using the fuel, type of fuel used in each vehicle and fuel tank capacity. For farms, the taxpayer also must report the number of acres farmed.

 

Taxpayers that own watercraft often overlook the fact that some states refund at least some of the taxes paid on motor fuel used to operate them. The American Boating Association has links to several states to assist in claiming the refund (americanboating.org/fueltax.asp). A separate claim is required for each state of purchase.

 

EXAMPLE: OFF-ROAD USE BY A BUSINESS

ABC Quarries operates gasoline-powered rock drills, crushers, generators and other equipment and six diesel-powered front-end loaders in its limestone quarries in Texas. During 2010, ABC purchased and used in the equipment 8,000 gallons of gasoline for which excise taxes were included and 9,000 gallons of undyed diesel. On its 2010 federal income tax return, ABC claims the following federal credit or refund for off-highway business use:

 

Fuel Gallons Credit per gallon Amount
Gasoline 8,000 $0.183 $1,464
Diesel 9,000 $0.243 $2,187
Total federal refund/credit $3,651

 

ABC also calculates a Texas state refund (Form 06-106, Texas Claim for Refund of Gasoline or Diesel Fuel Taxes):

 

Fuel Gallons Credit per gallon* Amount
Gasoline 8,000 $0.20 $1,600
Diesel 9,000 $0.20 $1,800
Total Texas state refund $3,400

 

* Rates are per Tex. Tax Code Ann. §§ 162.102 and 162.202.

 

Total federal and state refund/credit                            $7,051

ABC reports the refund or credit in gross income on its federal income tax return. Applying a marginal corporate income tax rate of 35% makes the after-tax value of the refund or credit $4,583, less any similar effect on ABC’s Texas corporation franchise tax liability.

 

By Marc I. Lebow, CPA, Ph.D., ( marc.lebow@hamptonu.edu) and Michael McLain, CPA, DBA, (mcklaipm@gmail.com) both of Hampton University.

                                               

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.

 

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