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

The 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 in your 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 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 in gross income for the tax year in which you receive the credit.

Example 1. Ed Brown, a cash basis farmer, filed his 2000 Form 1040 on March 1, 2001. On his Schedule F, Ed deducted the total cost of gasoline (including $110 of excise taxes) used on the farm. Then, on Form 4136, Ed claimed the $110 as a credit. Ed reports the $110 as additional income on his 2001 Schedule F.

Example 2. March Corporation uses the calendar year as its tax year. For 2000, the corporation claimed the following amounts of excise tax on gasoline it used each quarter in a nontaxable use:

The corporation deducts the entire cost of the gasoline (including the $3,100 in excise taxes) it used during the year as a business expense on its corporation income tax return, thereby reducing its corporate income tax liability for that year.

Form 8849. March Corporation files quarterly refund claims for the first two quarters (ending March 31 and June 30). It cannot file a quarterly refund claim for the third or fourth quarter because it did not meet the $750 minimum requirement.

Since March Corporation uses the cash method of accounting, the corporation includes $2,400 ($1,300 + $1,100) in its gross income for the tax year in which it receives the refunds (2000).

Form 4136. The corporation claims the remaining amounts ($400 + $300) as a credit on its 2000 income tax return by attaching Form 4136. It includes this credit ($700) in its 2001 gross income.

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

Example 3. Todd Green uses an accrual method. He files his 2000 return on April 16, 2001. On Schedule C (Form 1040) he deducts the total cost of gasoline (including $155 of excise taxes) used for an off-highway business use during 2000. On Form 4136, Todd claims the $155 as a credit. He reports the $155 as additional income on his 2000 Schedule C.

Example 4. Use the same facts as in Example 2 above, except that March Corporation uses an accrual method of accounting. Since the nontaxable use occurred in 2000, the corporation reports $3,100 as income on its 2000 income tax return. This consists of the $2,400 it claimed on Form 8849 and the $700 it claimed on Form 4136.

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