How the Biofuel Tax Credit Works

Tax Breaks for Biofuel

Anybody who's ever thumbed through the set of tax forms that the IRS sends them every year knows that the United States tax code is extremely complicated and requires a lot of paperwork. Furthermore, those forms that most people receive in the mail are only a fraction of the tax forms that the IRS actually publishes every year. That's because most forms are for special purposes -- like, say, giving tax credits to creators, mixers, sellers and even businesses that use biofuels.

While there is no single tax credit concisely titled "biofuel tax credit," over the years there have been a number of biofuel tax credits, many of which have not been available to the consumer. The main biofuel credit at the moment is found on IRS Form 6478, "The Cellulosic Biofuel Producer Tax Credit." That's quite a mouthful. The name refers to the production of fuel made from "any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis" (in the words of the tax form itself). Translated into English, that means that if you manufacture fuel from certain forms of cellulose that come from sustainable crops, you can get as much as $1.01 per gallon back as a tax credit. And this can be passed on to the consumer. This credit had been scheduled to lapse at the end of 2012, but the Senate has approved an extension into 2013. You can see and even download a copy of Form 6478 at the IRS Web site.

Form 6478 is intended primarily for businesses that create, blend or sell biofuels. If you run a business that merely uses this fuel, you can take an easier route to get your credit. Download IRS Form 3800, "General Business Credit" and put in your biofuel expenses there instead.

This tax credit has plenty of critics. They complain that, among other things, there just isn't enough of this form of biofuel being produced to justify the credit, while the loss of this biomass to other uses simply drives up the cost of food. They point out that production of crops for biofuel can lead to deforestation and be destructive to the environment. And many feel that the government should be concentrating its incentives on other alternative fuels, ones that will ultimately be cleaner, more plentiful and have less effect on the food economy.

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