To encourage the continued growth and expansion of renewable fuels like ethanol, federal and state governments offer financial incentives to help drive innovation in the industry and to make ethanol more accessible to American consumers. However, to be truly effective, federal renewable fuel tax policy must be reformed in a way that creates a consistent and stable tax policy framework for ethanol producers and industry investors.
RFA is also working to expand the incentives available to the industry so they recognize changing market dynamics and ongoing consumer and industry challenges. That’s why the RFA is working together with policymakers to improve current renewable fuel tax policy, making it more effective at driving growth and innovation in the industry. However, until such tax policy reforms can pass Congress, the RFA continues to advocate for multiyear extensions of the biofuel tax incentives currently in law.
Late in 2020, Congress passed the Consolidated Appropriations Act, 2021, the year-end Coronovirus relief and omnibus tax and spending legislation, which included a one-year extension of several key tax incentives that are designed to encourage the production and use of ethanol. The legislation, which was signed into law by former President Trump on December 27, 2020, (reference Public Law 116-260 and 26 U.S. Code § 40) extended each of the following ethanol-related incentives for one year through 2021:
- Second Generation Biofuel Producer Credit
- Special Allowance for Second Generation Biofuel Plant Property
- Alternative Fuel Vehicle Refueling Property Credit
The funding bill also included a 5-year extension of the Biodiesel Tax Credit through 2025.
Going forward, the RFA is committed to finding a long-term solution to the yearly tax extender fights and is working with our friends and champions in the House and Senate to help modify the existing suite of tax incentives to make them more effective in driving investment and innovation in the industry.
A second generation biofuel producer that is registered with the IRS may be eligible for a tax incentive in the amount of up to $1.01 per gallon of second-generation biofuel that is: sold and used by the purchaser in the purchaser’s trade or business to produce a second-generation biofuel mixture; sold and used by the purchaser as a fuel in a trade or business; sold at retail for use as a motor vehicle fuel; used by the producer in a trade or business to produce a second-generation biofuel mixture; or used by the producer as a fuel in a trade or business. If the second-generation biofuel also qualifies for alcohol fuel tax credits, the credit amount is reduced to $0.46 per gallon for biofuel that is ethanol and $0.41 per gallon if the biofuel is not ethanol. Second-generation biofuel is defined as liquid fuel produced from any lignocellulosic or hemicellulosic matter that is available on a renewable basis or any cultivated algae, cyanobacteria, or lemna. To qualify, fuel must also meet the U.S. Environmental Protection Agency fuel and fuel additive registration requirements. Alcohol with a proof of less than 150, fuel with a water or sediment content of more than 4%, and fuel with an ash content of more than 1% are not considered second-generation biofuels. The incentive is allowed as a credit against the producer’s income tax liability. Under current law, only qualified fuel produced in the United States between January 1, 2009, and December 31, 2021, for use in the United States may be eligible. For more information about claiming the credit, see IRS Forms 637 and 6478.
The law provides a 50% special depreciation allowance to recover part of the cost of qualified second-generation biofuel plant property placed. The allowance applies only for the first year that property was placed in service. Under current law, only biofuel plant property purchased and used in the United States between December 21, 2006, and December 31, 2021, may be eligible. Qualified property placed in service in 2021 may be eligible to take an additional 50% or 100% special depreciation allowance, depending on the date the property was acquired. View more information about claiming the Special Depreciation Allowance here.
The law provides a 30% credit of up to $30,000 for the cost of installing qualified clean-fuel pumps through December 31, 2021. Qualified refueling property includes fuel pumps that sell E85 ethanol. For more information about claiming the credit, see IRS Form 8911.
An alternative fuel blender that is registered with the Internal Revenue Service (IRS) may be eligible for a tax incentive on the sale or use of the alternative fuel blend (mixture) for use as a fuel in the blender's trade or business. The credit is in the amount of $0.50 per gallon of alternative fuel used to produce a mixture containing at least 0.1% gasoline, diesel, or kerosene. Qualified alternative fuels are liquefied hydrogen, P-Series fuel, liquid fuel derived from coal through the Fischer-Tropsch process, and liquid fuel derived from biomass. The incentive must be taken as a credit against the blender's alternative fuel tax liability. The tax credit is not allowed if an incentive for the same alternative fuel is also determined under the rules for the ethanol or biodiesel tax credits.
For more information about claiming the credit, see IRS Form 720, which is available on the IRS Forms and Publications website. (Reference Public Law 116-260, Public Law 116-94, Public Law 115-123, Public Law 114-113, and 26 U.S. Code 6426).
The 45Q carbon capture credit was reformed as part of the 2017 tax reform bill to include a broader swath of eligible parties for the credit, by reducing the required amount of carbon captured needed for eligibility. Under the former eligibility rules, typical ethanol production facilities did not capture enough carbon to be eligible to use the credit.
The tax credit applies to carbon sequestered in the ground, as has been the case for certain ethanol producers that have the appropriate geological structure below their plants. It is also beneficial for the delivery of carbon dioxide (CO2) for enhanced oil recovery efforts that use carbon dioxide to inject into wells in connection with the process of fracking. This could drive the development of carbon dioxide pipelines.
The credit incentivizes decarbonization by the above types of activities and helps ethanol producers increase market demand for the use and utilization of CO2. That has a direct economic benefit for producers selling CO2, but also will indirectly help producers by reducing the carbon scores for their fuel, for purposes of entering into low carbon fuel standard (LCFS) markets like California.
As part of the 2020 year-end Coronovirus relief package, the 45Q was extended to allow eligibility for carbon capture projects beginning before the end of 2025.