Unlocking the Biodiesel and Renewable Diesel Income Tax Credit

The Inflation Reduction Act (IRA) extended the biodiesel and renewable diesel income tax credit through December 31, 2024.

The biodiesel and renewable diesel income tax credit is allowed under Section 40A, which rewards producers, mixers, or users of cleaner burning replacements for petroleum diesel fuel.

Taxpayers who create alternative fuels, or alternative fuel mixtures, with plant or animal matter that meet certain requirements are allowed a credit for that production.

Alternatively, if the producer does not claim the credit, a purchaser of the renewable fuel is eligible for a credit upon using the fuel in its business. Section 40A impacts organizations in the transportation, distribution, and logistics spaces.

Credits Under Section 40A

Section 40A is comprised of three credits:

The biodiesel mixture credit
The biodiesel credit
The small agri-biodiesel producer credit

Biodiesel Mixture Credit

The biodiesel mixture credit is a $1.00 credit for each gallon of biodiesel used to produce a qualified mixture. A qualified mixture is a mixture of biodiesel and diesel fuel sold for use as fuel or used as a fuel by the taxpayer producing the mixture.

No credit is allowed under Section 40A for using biodiesel mixtures (i.e., B99 or B20) unless the fuel’s user is also the taxpayer who produced the mixture.

Biodiesel Credit

The biodiesel credit is a $1.00 credit for each gallon of biodiesel that is not a biodiesel mixture with diesel, which is used by the taxpayer or sold at retail to a person and placed in the fuel tank of that person’s vehicle. If the biodiesel was sold at retail, only the person who sold the fuel and placed it into the vehicle’s tank is eligible for the tax credit.

In the case of biodiesel (B100), the credit is allowable to the person selling the biodiesel in a qualifying retail sale or, if it has not been sold in a qualifying retail sale, to the person using the biodiesel as a fuel in its business. A sale is a qualifying retail sale for this purpose if it is at retail and the biodiesel is placed in the fuel tank of the purchaser's vehicle at the time of the sale.

To claim either the biodiesel mixture or biodiesel credit, the taxpayer must obtain a certificate from the producer or importer of the biodiesel, which identifies the product produced and the percentage of biodiesel and agri-biodiesel in the product.

Renewable Diesel Mixture Credit

For purposes of the Section 40A credit, renewable diesel is treated in the same manner as biodiesel. Therefore, the taxpayer uses a renewable diesel mixture credit of $1.00 for each gallon of renewable diesel to produce a qualified mixture. A qualified mixture is a mixture of renewable diesel and diesel fuel sold for use as fuel or used as fuel by the taxpayer producing the mixture.

No credit is allowed under Section 40A for using renewable diesel mixtures (i.e., R99) unless the fuel’s user is also the taxpayer who produced the mixture.

Renewable Diesel Credit

There is also a renewable diesel credit of $1.00 for each gallon of renewable diesel, which is not a renewable diesel mixed with diesel, used or sold by the taxpayer at retail to a person and placed in the fuel tank of that person’s vehicle. If the renewable diesel was sold at retail, only the person who sold the fuel and placed it into the vehicle’s tank is eligible for the tax credit.

In the case of renewable diesel (R100), the credit is allowable to the person selling the renewable diesel in a qualifying retail sale or, if the renewable diesel has not been sold in a qualifying retail sale, to the person using the renewable diesel as a fuel in its business. A sale is a qualifying retail sale if it is at retail and the renewable diesel is placed in the fuel tank of the purchaser's vehicle at the time of the sale.

To claim either the renewable diesel mixture or renewable diesel credit, the taxpayer must obtain a certificate from the producer or importer identifying the product produced and the percentage of renewable diesel in the product.

Small Agri-biodiesel Producer Credit

The small agri-biodiesel producer credit is $0.10 for each gallon of qualified agri-biodiesel produced by an eligible small agri-biodiesel producer. Qualified agri-biodiesel is any agri-biodiesel that an eligible small agri-biodiesel producer makes, and that is used or sold by the producer to another person for use by that person in the production of a qualified biodiesel mixture in its trade or business for use by that person as a fuel in its trade or business, or for sale at retail and placed in the fuel tank of the buyer. The qualified agri-biodiesel production of any producer for any taxable may not exceed 15,000,000 gallons.

Certification Under Section 40A

If you qualify for the biodiesel mixture, renewable diesel mixture, biodiesel, or renewable diesel credits, you must obtain a certificate from the producer or importer of the biodiesel or renewable diesel, which identifies the fuel produced and the percentage of biodiesel or renewable diesel in the product.

This Certificate for Biodiesel must be attached to Form 8864, Biodiesel, Renewable Diesel, or Sustainable Aviation Fuels Credit.

If you receive the biodiesel or renewable diesel and later resell the biodiesel or renewable diesel without producing a mixture or claiming the biodiesel or renewable diesel credit, you must give the original Certificate for Biodiesel from the biodiesel or renewable diesel producer to the purchaser. Furthermore, the seller must provide the purchaser with a Statement of Biodiesel (Renewable Diesel) Reseller.

If you cannot obtain the original Certificate for Biodiesel from the producer and cannot obtain the statement from the reseller (where a reseller exists), then no credit is allowed.

How to Claim the Section 40A Credit

The Section 40A credit is claimed on Form 8864, Biodiesel, Renewable Diesel, or Sustainable Aviation Fuels Credit. A Certificate for Biodiesel must be attached to the form for biodiesel, renewable diesel, biodiesel mixture, and renewable diesel mixture claims. Where applicable, a Statement of Biodiesel (Renewable Diesel) Reseller must also be attached to the form.

The amount of the credits must be included in the taxpayer's gross income.

Section 40A is another way organizations can benefit from clean energy initiatives. Work alongside a team of advisors, like Eide Bailly’s energy efficiency specialists, to make the most of your energy-efficient investments.