The Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (PL 109–59, § 11113, 26 USC § 6426, § 6427) provides an incentive for compressed natural gas (CNG) and liquefied natural gas (LNG) when used as a “motor vehicle” fuel (including use in some non-road vehicles). The 50-cent incentive is provided to businesses, individuals, and tax-exempt entities that sell or, in some cases, use the fuel. The general rule is that the credit goes to the seller in the case of retail transactions. If the CNG or LNG, however, is dispensed using a private fueling station, the credit may go to the user of the fuel. This is explained below in greater detail. For businesses and tax-exempt entities (e.g., federal, state and local governments), the credit must first be taken as an excise tax offset against taxes otherwise owed on alternative fuel they use or sell, and then it may be taken as a refundable credit. Many tax-exempt entities will not owe any excise taxes and can immediately apply for a payment that essentially amounts to a rebate. In the case of individuals using the fuel for personal vehicles, the incentive is limited to an excise tax offset. This fact sheet is not intended to address all of the issues associated with this incentive. Persons interested in learning more about how the incentive may be claimed should review the relevant IRS documents and consult a tax adviser.
LNG — $0.50 per gallon
CNG — $0.50 per gasoline gallon equivalent (GGE) (See IRS Guidance below for additional information)
The tax incentive for selling or using CNG and LNG is usually referred to as an excise tax credit. However, the incentive is actually three things—an excise tax credit, a refundable income tax credit, and a rebate. Tax-exempt entities that own their own fueling stations or take title to the natural gas prior to compression or delivery into the tank of a motor vehicle can claim the 50-cent credit. This is true whether they are using the fuel in their own vehicles or selling the fuel to other customers. If they sell CNG or LNG to other fleets that are not tax-exempt, however, they may be liable for paying the excise taxes associated with taxable fuel ($0.183 cents per GGE of CNG and $0.243 cents per gallon of LNG).
For the most part, individual consumers cannot claim the credit for using CNG or LNG because the person selling the fuel will be the claimant. However, an individual that owns a home refueling unit can partially benefit from the tax incentive for CNG. The incentive in this case acts as an excise tax offset, zeroing out the person’s liability for federal excise taxes. In the case of CNG, the federal excise tax due is $0.183 per GGE. Individual consumers, however, cannot claim a refundable income tax credit for the remainder of the credit (31.7 cents per GGE) because the refundable credit is limited to persons that sell or use natural gas for business purposes. Under this reasoning, a person who owns a home refueling unit and uses the fuel for business purposes would be able to claim the full 50-cent credit.
Effective Date (retroactive through 2014)
The credit for CNG and LNG took effect on October 1, 2006 and originally expired on September 30, 2009. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (PL 111–312, § 701) extended the CNG and LNG fuel credits for 2011 and also made them retroactive for 2010. The American Taxpayer Relief Act of 2012 (HR 8; PL 112–240, § 412) extended the availability of the 50-cent credit through the end of 2013 and makes it retroactive for 2012. The most recent extension was part of the Tax Increase Prevention Act of 2014 (H.R. 5771), a law that makes the credit retroactive for 2014.
IRS Regulations, Guidance, and Forms
IRS Notice 2006–92 provides guidance on implementation of the incentive for selling or using CNG and LNG as motor vehicle fuels. The guidance provides information on who receives the tax credit, how to take the credit, the units of measurement to use for calculating the tax provisions, and which tax forms to use. The 50-cent credit can be taken as an excise tax credit, an income tax credit, or a direct payment, depending on the particular circumstances. In order to claim the credit, claimants must first register as an alternative fueler with the IRS and receive a registration number.
In retail sales situations, the person selling the fuel is the one who will claim the incentive. However, in certain other cases the user or person that owns the fuel prior to placement into a motor vehicle can claim the credit. This is often the case with privately owned stations where a business or governmental entity refuels its own fleets. It also may be the case where an entity purchases natural gas on its own but pays someone else a fee to own and operate a fueling station on its premises. The claimant in both cases would be the person or entity that owns the fuel just prior to its placement into the motor vehicle. The IRS guidance indicates that a gasoline gallon equivalent (GGE) of CNG is 121 cubic feet. We recommend that claimants work with their local utility or fuel supplier if they need to convert another unit of measurement (e.g., Therms) to cubic feet.
The tax incentive for using CNG and LNG as motor vehicle fuel extends to some non-road or off-road vehicles. This is because the IRS definition of “motor vehicle” used for the alternative fuel incentive is broader than the definitions used for other purposes (e.g., implementation of the alternative fuel vehicle and infrastructure credits). The other incentives are limited to motor vehicles that are manufactured primarily for highway use. For purposes of the fuel credit, the relevant definition of motor vehicle is found in section 48.4041-8(c) of the IRS’s regulations, and it includes “all types of vehicles propelled by motor that are designed for carrying or towing loads from one place to another, regardless of the type of load or material carried or towed and whether or not the vehicle is registered or required to be registered for highway use. Included are fork lift trucks used to carry loads at railroad stations, industrial plants, warehouses, etc. The term does not include farm tractors, trench diggers, power shovels, bulldozers, road graders or rollers, and similar equipment which does not carry or tow a load; nor does it include any vehicle which moves exclusively on rails.”
In the coming weeks, the IRS is expected to issue guidance to claim tax credits or payments for natural gas fuel and infrastructure in 2014. This information will be provided here when it becomes available.
Links to IRS and Other Resources