How to Maximize Fuel Tax Credits: Off-Highway Use and Limits

Fuel is expensive. Fortunately, the government recognizes this and has created tax credits to reduce tax liability for businesses that purchase fuel for both on- and off-highway business use.

I’ll explain the scope and limits of fuel use tax credits, identify potential scams, and provide industry-specific considerations to help you leverage these credits successfully.

Here are three things you need to know about the federal fuel tax credit.

According to the Internal Revenue Service (IRS), a business can claim fuel tax credits for fuel used in off-highway business activities, such as construction, landscaping, and farming. The tax reduction is significant, which is why I count fuel credits as one of the most important tools in reducing taxable income for construction companies. If your business builds, you need to be tracking every drop of fuel used.¹

1. Federal tax paid on fuel used off-highway can be credited back to you.

Fuel tax credits are for business purposes only, so in your accounting and reporting, be sure to sharply define the distinction between business operations and personal use. You need to keep detailed logs of fuel purchases and usage to claim the credit for tax savings and in the case of an audit.

2. Off-highway use includes fuel used in equipment and machinery.

Businesses in various industries may be eligible for fuel use tax credits without realizing it. Here are some examples of industries that often use fuel in ways that qualify for these credits.²

• Construction: Fuel used in machinery such as bulldozers, excavators, and other heavy equipment.
• Landscaping: Fuel for lawnmowers, trimmers, and other gardening equipment for credits toward excise taxes.³
• Trucking: Fuel for refrigeration units on trucks used in transporting goods.
• Farming: Fuel for tractors, harvesters, and other agricultural machinery.
• Manufacturing: Fuel for forklifts, generators, and other industrial equipment.
• Mining: Fuel used in drilling and extraction equipment.
• Forestry: Fuel for chainsaws and logging machinery.

3. Unleaded gasoline has different rules than diesel.

Gasoline is the liquid fuel used in most cars on the road. It also can be used in various off-highway business activities.

Diesel fuel, on the other hand, is typically used in heavy machinery and equipment. It has specific rules and higher eligibility for certain credits. Diesel used in construction, farming, and other industrial activities can significantly reduce excise tax liability.⁴

Undyed diesel fuel is sold at most gas stations, and you pay taxes at the pump.

Special red-dyed diesel fuel can be purchased that is not subject to federal excise taxes.

Alternative fuels are also eligible for a business tax credit. Examples include:

• Compressed natural gas,
• Liquefied natural gas, and
• Liquefied petroleum gas (aka propane).

If you aren’t sure which type of alternative fuel you use or if you’re eligible for a tax credit, discuss the details with an expert.

Avoid fuel-use scams; they’re costly.

The IRS has issued warnings about false fuel tax credit claims.⁵ The risk of falling for scams has taken off in the internet age.

Learn how to recognize the red flags of fuel tax scams.

Scammers may

• Promise that they can get you an unrealistically large tax credit;
• Claim you’re entitled to a non-existent tax refund;
• Offer to file claims on your behalf; and
• Encourage you to make fraudulent claims.

Hiring a tax professional is one of the best ways to protect your business from scammers.

The IRS takes fraudulent claims seriously.

Submitting a fraudulent fuel tax credit claim can lead to serious legal consequences, including fines and criminal charges. The IRS has dedicated programs to investigate and prosecute offenders, so if you suspect a scam, report it immediately.

Consult with a professional to navigate fuel tax credits effectively.

Working with a CPA offers three major benefits:

1. You can maximize tax savings without navigating complex tax rules.
2. You can ensure all claims are legitimate and properly documented.
3. You can avoid costly mistakes and ensure long-term compliance.

Don’t miss out on a single tax credit. Schedule a discovery call today, and I can help you save money and keep your business running smoothly.

Talk soon,
Jeremy A. Johnson, CPA

References

1. Farm and Energy Initiative. Energy Use in Agriculture [Internet]. Available from: https://farmandenergyinitiative.org/wp-content/uploads/2020/08/Energy-Use-in-Agriculture.pdf
2. Internal Revenue Service. Excise tax [Internet]. Available from: https://www.irs.gov/businesses/small-businesses-self-employed/excise-tax#:~:text=Excise%20taxes%20are%20taxes%20imposed,depending%20on%20the%20specific%20tax
3. United States Environmental Protection Agency. Diesel Emissions Reduction Act (DERA) [Internet]. Available from: https://www.epa.gov/dera
4. Internal Revenue Service. Dirty Dozen: IRS warns about false fuel tax credit claims; taxpayers should be wary of scammers, heightened review [Internet]. Available from: https://www.irs.gov/newsroom/dirty-dozen-irs-warns-about-false-fuel-tax-credit-claims-taxpayers-should-be-wary-of-scammers-heightened-review
5. Internal Revenue Service. Program and Emphasis Areas for IRS Criminal Investigation [Internet]. Available from: https://www.irs.gov/compliance/criminal-investigation/program-and-emphasis-areas-for-irs-criminal-investigation