Publication 225: Farmer's Tax Guide; Excise Taxes

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Table of Contents

Important Reminders

A change to note. You may be able to amend a previously filed income tax return to make a claim on Form 4136, Credit for Federal Tax Paid on Fuels. See Claiming a Credit later.

Dyed diesel fuel and dyed kerosene. Dyed diesel fuel and dyed kerosene used for a nontaxable use (such as use on a farm for farming purposes) are not taxed. However, the tax applies if these fuels are used for a taxable use (such as in operating a vehicle on the highway). In addition, a penalty is imposed on a person who uses dyed diesel fuel or dyed kerosene for a taxable use and knows or has reason to know the fuel was dyed. For more information, see How To Buy Diesel Fuel and Kerosene Tax Free later.

Undyed diesel fuel and undyed kerosene. A registered ultimate vendor that sells undyed diesel fuel or undyed kerosene for use on a farm for farming purposes is allowed to claim a credit or refund of the excise tax on that fuel. Farmers cannot claim a credit or refund for the excise tax paid on that fuel. See How To Buy Diesel Fuel and Kerosene Tax Free later.

Introduction

You may be eligible to claim a credit on your income tax return for the federal excise tax on certain fuels. You may also be eligible to claim a quarterly refund of the fuel taxes during the year, instead of waiting to claim a credit on your income tax return.

Whether you can claim a credit or refund depends on the kind of fuel you purchased, whether it was taxed, and the purpose (nontaxable use) for which you used the fuel. The nontaxable uses of fuel for which a farmer may claim a credit or refund are generally the following.

Table 18–1 presents an overview of credits and refunds that may be claimed for fuels used for the nontaxable uses listed above. See Publication 378 for information about credits and refunds for fuels used for nontaxable uses not discussed in this chapter.

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You may be eligible to claim a credit or refund of excise taxes on fuel used on a farm for farming purposes. This applies if you are the owner, tenant, or operator of a farm. You can claim only a credit for the tax on gasoline, gasohol, and aviation gasoline used on a farm for farming purposes. You can claim either a credit or refund for the tax on aviation fuel used on a farm for farming purposes. You cannot claim a credit or refund for the tax on undyed diesel fuel or undyed kerosene used on a farm for farming purposes or for any use of dyed diesel fuel or dyed kerosene.

Fuel is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes.

Farm.

A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards for fattening cattle. It also includes structures such as greenhouses used primarily for raising agricultural or horticultural commodities. A fish farm is an area where fish are grown or raised — not merely caught or harvested.

Table 18-1. Fuel Tax Credits and Refunds at a Glance

Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed.

Fuel Used	On a Farm for Farming Purposes	Off-Highway Business Use	Household Use¹
Gasoline and gasohol	Credit only	Credit or refund	None
Aviation gasoline	Credit only	None	None
Undyed diesel fuel and undyed kerosene	Credit or refund by registered ultimate vendor only	Credit or refund ²	Credit or refund ²
Dyed diesel fuel and dyed kerosene	None	None	None
Aviation fuel	Credit or refund	None	None
¹For a use other than as fuel in a propulsion engine.
²Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending with undyed diesel fuel to be used for heating purposes.

Farming purposes.

As the owner, tenant, or operator and the ultimate purchaser of fuel that you purchased, you use the fuel on a farm for farming purposes if you use it in any of the following ways.

To cultivate the soil or to raise or harvest any agricultural or horticultural commodity.
To raise, shear, feed, care for, train, or manage livestock, bees, poultry, fur-bearing animals, or wildlife.
To operate, manage, conserve, improve, or maintain your farm and its tools and equipment.
To handle, dry, pack, grade, or store any raw agricultural or horticultural commodity. For this use to qualify, you must have produced more than half the commodity so treated during the tax year. The more-than-one-half test applies separately to each commodity. Commodity means a single raw product. For example, apples and peaches are two separate commodities.
To plant, cultivate, care for, or cut trees or to prepare (other than sawing logs into lumber, chipping, or other milling) trees for market, but only if the planting, etc., is incidental to your farming operations. Your tree operations are incidental only if they are minor in nature when compared to the total farming operations.

If any other person, such as a neighbor or custom operator, performs a service for you on your farm for any of the purposes included in list items (1) or (2), above, you are considered to be the ultimate purchaser who used the fuel on a farm for farming purposes. Therefore, you can still claim the credit or refund for the fuel so used (other than for diesel fuel or kerosene). However, see Custom application of fertilizer and pesticide, later. If the other person performs any other services for you on your farm for purposes not included in list items (1) or (2), no one can claim the credit or refund for fuel used on your farm for those other services.

Example.

Farm owner Nancy Blue hired custom operator Harry Steele to cultivate the soil on her farm. Harry used 200 gallons of gasoline that he purchased to perform the work on Nancy's farm. In addition, she hired Contractor Brown to pack and store her apple crop. Brown bought 25 gallons of gasoline to use in packing the apples. Nancy can claim the credit for the 200 gallons of gasoline used by Harry on her farm because it qualifies as fuel used on the farm for farming purposes. No one can claim a credit for the 25 gallons used by Brown because they were not used for a farming purpose included in list items (1) or (2), earlier.

Buyer of fuel (other than diesel fuel or kerosene).

If doubt exists whether the owner, tenant, or operator of the farm bought the fuel, determine who actually bore the cost of the fuel. For example, if the owner of a farm and his tenant equally share the cost of gasoline used on the farm, each can claim a credit for the tax on half the fuel used.

Undyed diesel fuel and undyed kerosene.

If undyed diesel fuel or undyed kerosene is used for any of the previously listed farming purposes, the credit or refund is allowed only to the registered ultimate vendor. You cannot claim a credit or refund for this fuel if it is used for farming purposes. See How To Buy Diesel Fuel and Kerosene Tax Free, later.

A registered ultimate vendor is the person who sells undyed diesel fuel or undyed kerosene to the user (ultimate purchaser) of the fuel for use on a farm for farming purposes. To claim a credit or refund of tax, the person must be registered with the Internal Revenue Service at the time the claim is made.

Table 18–2. Sample Waiver

	WAIVER OF RIGHT TO CREDIT OR REFUND
	I hereby waive my right as owner, tenant, or operator of a farm located at:
	Address
	to receive credit or refund for fuel used by:
	Name of Applicator
	on the farm in connection with cultivating the soil, or the raising or harvesting of any agricultural or horticultural commodity. This waiver applies to fuel used during the period:
	Both Dates Inclusive
	I understand that by signing this waiver, I give up my right to claim any credit or refund for fuel used by the aerial applicator or other applicator of fertilizer or other substances during the period indicated, and I acknowledge that I have not previously claimed any credit for that fuel.
	Signature
	Date

Custom application of fertilizer and pesticide.

Fuel used on a farm for farming purposes includes fuel used in the aerial or other application of fertilizer, pesticides, or other substances. You, as the owner, tenant, or operator, can claim the credit or refund for the fuel (other than for undyed diesel fuel or undyed kerosene). Or you can waive your right to the credit or refund and allow the applicator to make the claim. If you waive your right, the applicator is treated as having used the fuel on a farm for farming purposes and can claim the credit or refund. See How To Claim a Credit or Refund, later.

To waive your right to the credit or refund, you must take the following actions.

Before the applicator files his or her claim, sign an irrevocable agreement stating that you knowingly give up your right to the credit or refund. You can authorize an agent, such as a cooperative, to sign the waiver for you.
Identify clearly the period the waiver covers.

The applicator must retain a copy of the waiver and give you a copy. Do not send a copy to the Internal Revenue Service unless requested to do so.

The waiver can be a separate document or it can appear on an invoice or another document from the applicator. If the waiver appears on an invoice or other document, it must be printed in a section clearly set off from all other material, and it must be printed in type large enough to put you on notice that you are waiving your right to the credit or refund. If the waiver appears as part of an invoice or other document, it must be signed separately from any other item that requires your signature.

The effective period of the waiver cannot extend beyond your taxable year. When the period covered by the waiver extends beyond the applicator's tax year, the applicator can only claim a credit or refund for the part of the waiver period that includes the applicator's tax year. The applicator must wait until the next tax year to file a claim for the part of the waiver period that extends beyond the applicator's tax year.

While no specific form is required, an acceptable waiver of your right to claim a credit or refund is shown in Table 18–2.

Fuel not used for farming.

You do not use fuel on a farm for farming purposes when you use it in any of the following ways.

Off the farm, such as on the highway or in noncommercial aviation, even if the fuel is used in transporting livestock, feed, crops, or equipment.
For personal use, such as mowing the lawn.
In processing, packaging, freezing, or canning operations.
In processing crude gum into gum spirits of turpentine or gum resin or in processing maple sap into maple syrup or maple sugar.

All-terrain vehicles (ATVs).

Fuel used in ATVs on a farm for farming purposes, discussed earlier, is eligible for a credit or refund of excise taxes on the fuel. Fuel used in ATVs for nonfarming purposes is not eligible for a credit or refund of the taxes. If ATVs are used both for farming and nonfarming purposes, only that portion of the fuel used for farming purposes is eligible for the credit or refund.

You buy dyed diesel fuel and dyed kerosene excise tax free. You must use them only for a nontaxable use, including use on a farm for farming purposes. If you use the dyed fuel for a taxable use, you could be subject to the excise tax and a penalty. For example, if a truck used on a farm for farming purposes is also used on the highway (even though in connection with operating the farm), tax applies to the gallons of diesel fuel used (or sold for use) in operating the truck on the highways.

You can buy undyed diesel fuel and undyed kerosene tax free from a registered ultimate vendor for use on a farm for farming purposes. This applies to fuel bought by any of the following persons.

You must give the vendor a signed certificate, which should be substantially the same as the sample certificate shown in Table 18–3. You can include the certificate as part of any business records you normally keep to document a sale and purchase.

Farmers cannot claim a credit or refund for the tax on undyed kerosene used for an off-highway business use or for household use (discussed below). This is use of undyed kerosene that was sold from a blocked pump or blended with diesel fuel in an area described in an IRS declaration of extreme cold if the blended fuel is used for heating purposes. Only the registered ultimate vendor that sold the undyed kerosene can claim the credit or refund under these circumstances. For more information, see Publication 378.

You may be eligible to claim a credit or refund for the excise tax on fuel used in an off-highway business use.

Off-highway business use.

This is any use of fuel in a trade or business or in an income-producing activity. The use must not be in a highway vehicle registered or required to be registered for use on public highways. Off-highway business use generally does not include any use in a motorboat.

Examples.

Off-highway business use includes the use of fuels in any of the following ways.

In stationary machines such as generators, compressors, power saws, and similar equipment.
For cleaning purposes.
In forklift trucks, bulldozers, and earthmovers.

Generally, it does not include nonbusiness, off-highway use of fuel, such as use by minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment.

For more information, see Publication 378.

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Table 18–3

You may be eligible to claim a credit or refund for the excise tax on undyed kerosene used for home use. This applies to undyed kerosene you purchased and used in your home for heating, lighting, and cooking. Home use is considered a use other than as a fuel in a propulsion engine. It is not considered an off-highway business use (discussed earlier).

You may be able to claim a credit or refund of the excise tax on fuels you use for nontaxable uses. The basic rules for claiming credits and refunds (discussed later) are listed in Table 18–4.

Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed. You do not have to use any special form, but the records should establish the following information.

It is important that your records separately show the number of gallons used for each nontaxable use that qualifies as a claim. For more information about recordkeeping, see Publication 583, Starting a Business and Keeping Records.

Taxpayer identification number.

To file a claim for credit or refund, you must have a taxpayer identification number. See Taxpayer Identification Number in chapter 2.

Filing date on holiday or weekend.

If the last day for filing your claim falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next day that is not a Saturday, Sunday, or legal holiday.

Credit or refund.

A credit is an amount that reduces the tax on your income tax return when you file it at the end of the year. If you meet certain requirements, you may claim a refund during the year instead of waiting until you file your tax return.

Credit only.

You can claim the following taxes only as a credit.

Tax on gasoline you used on a farm for farming purposes.
Tax on fuels you used for nontaxable uses if the total for the tax year is less than $750.
Tax on fuel you did not include in any claim for refund previously filed for any quarter of the tax year.

You make a claim for a fuel tax credit on Form 4136 and attach it to your income tax return. Do not claim a credit for any excise tax for which you have filed a refund claim.

How to claim a credit.

How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, trust, or farmers' cooperative association.

Individuals.

You claim the credit on the “Other payments from” line of your 2003 Form 1040. Check box b. If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit.

Partnership.

Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc., showing each partners share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. Each partner claims the credit on his or her income tax return for the partners share of the fuel used by the partnership.

An electing large partnership can claim the credit on the “Other payments” line of Form 1065–B, U.S. Return of Income for Electing Large Partnerships.

Other entities.

Corporations, S corporations, farmers' cooperative associations, and trusts make the claim on the line for “credit for Federal tax paid on fuels” of the applicable income tax return.

When to claim a credit.

You can claim a fuel tax credit on your income tax return for the year you used the fuel.

You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. Generally you must file an amended return by the later of 3 years from the date you filed your original return or within 2 years from the date you paid the income tax. For more information, see Publication 378.

Table 18-4. Claiming a Credit or Refund of Excise Taxes

This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a nontaxable use.

	Credit	Refund
Which form to use	Form 4136, Credit for Federal Tax Paid on Fuels	Form 8849, Claim for Refund of Excise Taxes
Type of form	Annual	Quarterly
When to file	With your income tax return	By the last day of the quarter following the last quarter included in the claim
Amount of tax	Any amount	$750 or more ¹
¹You may carryover an amount less than $750 to the next quarter.

Do not claim a refund on Form 8849 for any excise tax for which you have filed or will file a claim on Schedule C (Form 720) or Form 4136.

You may file a claim for refund for any quarter of your tax year for which you can claim $750 or more. This amount is the excise tax on all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other claim has been filed) during the tax year.

If you cannot claim at least $750 at the end of a quarter, you carry the amount over to the next quarter of your tax year to determine if you can claim at least $750 for that quarter. If you cannot claim at least $750 at the end of the fourth quarter of your tax year, you must claim a credit on your income tax return using Form 4136. Only one claim can be filed for a quarter.

You cannot claim a refund for excise tax on gasoline used on a farm for farming purposes. You must claim a credit on your income tax return for the tax.

How to file a quarterly claim.

File the claim for refund by filling out Schedule 1 (Form 8849) and attaching it to Form 8849. Send it to the address shown in the instructions. If you file Form 720, you can use the Schedule C portion of Form 720 for your refund claims. (See the Form 720 instructions.)

When to file a quarterly claim.

You must file a quarterly claim by the last day of the first quarter following the last quarter included in the claim. If you do not file a timely refund claim for the fourth quarter of your tax year, you will have to claim a credit for that amount on your income tax return, as discussed earlier.

Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability.

Which year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting.

Cash method.

If you use the cash method and file a claim for refund, include the refund amount in gross income for the tax year in which you receive the refund. If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit.

Example.

Ed Brown, a cash basis farmer, filed his 2003 Form 1040 on March 3, 2004. On his Schedule F, he deducted the total cost of gasoline (including $110 of excise taxes) used on the farm for farming purposes. Then, on Form 4136, he claimed the $110 as a credit. Ed reports the $110 as other income on line 10 of his 2004 Schedule F.

Accrual method.

If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels. It does not matter whether you filed for a quarterly refund or claimed the entire amount as a credit.

Example.

Todd Green, an accrual basis farmer, files his 2003 Form 1040 on April 15, 2004. On Schedule F, he deducts the total cost of gasoline (including $155 of excise taxes) he used on the farm for farming purposes during 2003. On Form 4136, Todd claims the $155 as a credit. He reports the $155 as other income on line 10 of his 2003 Schedule F.