Publication 225 (2005), Farmer's Tax Guide

14. Excise Taxes

Table of Contents

What's New for 2005

Farmers must claim refunds for undyed diesel fuel and undyed kerosene. Effective for sales of undyed diesel fuel or undyed kerosene (other than kerosene for use in aviation) after September 30, 2005, refunds or credits for fuel used on a farm for farming purposes must be claimed by the farmer. See Schedule 1 of Form 8849 and Form 4136. Table 14-3, Sample Exemption Certificate, has been deleted.

Aviation-grade kerosene (before October 1, 2005) and kerosene for use in aviation (after September 30, 2005). Aviation-grade kerosene and kerosene for use in aviation are taxed and the references to aviation fuel have been eliminated. Claims for aviation-grade kerosene and kerosene used in aviation on a farm for farming purposes can only be made by the registered ultimate vendor.

Aerial applicator waiver is no longer required. Effective after September 30, 2005, the aerial applicator waiver is no longer required to be provided by the farmer. For aviation gasoline, the aerial applicator is the claimant. For kerosene used in aviation, the registered ultimate vendor is the claimant. Table 14-2, Sample Waiver, has been deleted.

LUST tax is included on sales of dyed diesel fuel and dyed kerosene. Effective after September 30, 2005, the $.001 Leaking Underground Storage Tank (LUST) tax is included on sales of dyed diesel fuel and dyed kerosene. The LUST tax cannot be refunded.

Gasoline. The reduced rates of tax that applied to gasohol and gasoline sold for the production of gasohol have been repealed. The credits and refunds for the nontaxable use of gasohol and, generally, the use of gasoline taxed at the full rate to produce gasohol have been eliminated.

Reminders

Aviation-grade kerosene and kerosene for use in aviation. A registered ultimate vendor that sells aviation-grade kerosene (kerosene for use in aviation after September 30, 2005) on a farm for farming purposes is the only person 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 those fuels.

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.

Use on a farm for farming purposes.
Off-highway business use.
Uses other than as a fuel in a propulsion engine, such as home use.

Table 14-1 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.

Topics - This chapter discusses:

Fuels used in farming
Dyed diesel fuel and dyed kerosene
Fuels used in off-highway business use
Fuels used for household use or other than as a fuel
How to claim a credit or refund
Including the credit or refund in income

Useful Items - You may want to see:

Publication

378 Fuel Tax Credits and Refunds
510 Excise Taxes for 2006

Form (and Instructions)

720
Quarterly Federal Excise Tax Return
4136
Credit for Federal Tax Paid on Fuels
8849
Claim for Refund of Excise Taxes

See chapter 17 for information about getting publications and forms.

Fuels Used in Farming

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 and aviation gasoline used on a farm for farming purposes. You cannot claim a credit or refund for the tax on undyed diesel fuel or undyed kerosene before October 1, 2005. After September 30, 2005, you are the only person that can claim a credit or refund for the tax on undyed diesel fuel or undyed kerosene. You cannot claim a credit or refund for the tax on aviation-grade kerosene or kerosene used in aviation 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 14-1. 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 Use or Use Other Than as a Fuel¹
Gasoline	Credit only	Credit or refund	None
Aviation gasoline	Credit only	None	None
Undyed diesel fuel, undyed kerosene, and aviation-grade kerosene, before October 1, 2005.	Credit or refund by registered ultimate vendor only	Credit or refund ²	Credit or refund ²
Undyed diesel fuel and undyed kerosene, after September 30, 2005.	Credit or refund by the farmer only	Credit or refund ²	Credit or refund ²
Kerosene for use in aviation, after September 30, 2005.	Credit or refund by registered ultimate vendor only	None	None
Dyed diesel fuel and dyed kerosene	None	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), earlier, 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 before October 1, 2005). 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 Haleigh Blue hired custom operator Tyler Steele to cultivate the soil on her farm. Tyler used 200 gallons of gasoline that he purchased to perform the work on Haleigh's farm. In addition, Haleigh hired Contractor Brown to pack and store her apple crop. Brown bought 25 gallons of gasoline to use in packing the apples. Haleigh can claim the credit for the 200 gallons of gasoline used by Tyler 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, including undyed diesel fuel or undyed kerosene after September 30, 2005. 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 or her 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, undyed kerosene, aviation-grade kerosene, and kerosene used in aviation. Before October 1, 2005, if undyed diesel fuel, undyed kerosene, or aviation-grade kerosene is used on a farm for 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. After September 30, 2005, the farmer is the only person that can claim a credit or refund for the tax on undyed diesel fuel or undyed kerosene used for farming purposes. See Dyed Diesel Fuel and Dyed Kerosene, later. After September 30, 2005, if kerosene is used in aviation for farming purposes, the credit or refund is allowed only to the registered ultimate vendor.

A registered ultimate vendor is the person who sells undyed diesel fuel, undyed kerosene, aviation-grade kerosene, or kerosene for use in aviation 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. After September 30, 2005, registered ultimate vendors cannot make claims for undyed diesel fuel and undyed kerosene sold for use on a farm for farming purposes.

Custom application of fertilizer and pesticide. Fuel used on a farm for farming purposes includes fuel used in the application of fertilizer, pesticides, or other substances, including aerial applications. Generally, the applicator is treated as having used the fuel on a farm for farming purposes. Effective after September 30, 2005, the aerial applicator waiver is no longer required to be provided by the farmer. For aviation gasoline, the aerial applicator is the claimant. For kerosene used in aviation, the registered ultimate vendor is the claimant. The waiver has been deleted from this chapter.

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.

Dyed Diesel Fuel and Dyed Kerosene

Before October 1, 2005, dyed diesel fuel and dyed kerosene were bought excise tax free. After September 30, 2005, the $.001 Leaking Underground Storage Tank (LUST) tax is included on sales of dyed diesel fuel and dyed kerosene and is not refundable. You must continue to use dyed diesel fuel and dyed kerosene 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.

Fuels Used in Off-Highway Business Use

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.

Fuels Used for Household Use or Other Than as a Fuel

You may be eligible to claim a credit or refund for the excise tax on undyed kerosene used for home use or used other than as a fuel. 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.

How To Claim a Credit or Refund

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 are listed in Table 14-2.

Table 14-2. 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, and Schedule 1 (Form 8849)
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.

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.

The total number of gallons bought and used during the period covered by your claim.
The dates of the purchases.
The names and addresses of suppliers and amounts bought from each during the period covered by your claim.
The nontaxable use for which you used the fuel.
The number of gallons used for each nontaxable use.

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.

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 and aviation gasoline you used on a farm for farming purposes.
Tax on fuels (including undyed diesel fuel or undyed kerosene after September 30, 2005) 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.

Claiming a Credit

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 2005 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, Deductions, Credits, 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.

Claiming a Refund

You make a claim for refund of the excise tax on fuel on Form 8849.

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 and aviation 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.

Including the Credit or Refund in Income

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.

Sharon Brown, a cash basis farmer, filed her 2005 Form 1040 on March 3, 2006. On her Schedule F, she deducted the total cost of gasoline (including $110 of excise taxes) used on the farm for farming purposes. Then, on Form 4136, she claimed the $110 as a credit. Sharon reports the $110 as other income on
line 10 of her 2006 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.

Patty Green, an accrual basis farmer, files her 2005 Form 1040 on April 15, 2006. On Schedule F, she deducts the total cost of gasoline (including $155 of excise taxes) she used on the farm for farming purposes during 2005. On Form 4136, Patty claims the $155 as a credit. She reports the $155 as other income on line 10 of her 2005 Schedule F.