If you are a homebuilder, heavy equipment road builder, or contractor, take note: using alternative fuels may be more affordable than you thought — and send a leading edge message to your customers.

Under very newly provided IRS rules, there is now guidance on how a 50 cents/gallon income tax credit can be claimed for alternative fuel that is sold for use, or used as fuel, in a motor vehicle. For purposes of this credit, the term “alternative fuel” includes propane, and the term “motor vehicle” includes forklifts. Many forklifts are powered by the use of propane; the use of these forklifts will generate income tax credits.

In general, a claim for this refundable income tax credit has been available for the sale or use of qualified alternative fuel since September 30, 2006, but only if:

1. The claimant is registered as an “alternative fueler” (a new mandatory process);
2. The alternative fuel is sold or used in the claimant’s trade or business; and
3. A timely claim for the credit is filed on Form 4136, Credit for Federal Tax Paid on Fuels.

Registration Required

In order to claim the credit, an alternative fuel claimant must be registered by the IRS. Form 637, Application for Registration (For Certain Excise Tax Activities), must be completed and mailed to the Internal Revenue Service Center in Cincinnati, Ohio. An alternative fueler (user) must complete all sections on page 1, noting Activity Letter, “AL,” in Part II. Note that Section B, item 8 instructs the applicant to attach a copy of his of her latest income tax return and financial statement.

Upon approval, the applicant will receive a letter of registration and a registration number. The IRS will register an applicant only after a check of the applicant’s and any related person’s (including officers) filing, deposit, payment, reporting, and claim history for federal taxes. We have been told by IRS representatives that the Houston, Texas unit is responsible for conducting a review of the taxpayer’s filing record. Once completed, the Houston unit sends its recommendations and the applicant’s registration package to the Form 637 coordinator responsible for that taxpayer’s geographic region. The coordinator assigns an agent to conduct a visit to the taxpayer’s place of business. The visit is intended to confirm that the motor vehicles (fork lifts) are present and in use, that the taxpayer is using an alternative fuel (propane), and that records of use are being maintained.

Claiming the Credit

Form 4136 must be completed and attached to the claimant’s income tax return for the year in which the eligible fuel was used. As a practical matter, it may take several weeks for a taxpayer to be registered and eligible to claim the credit. Care should be taken to consider the amount of the potential credit before proceeding with the registration and making adjustments to your 2006 tax return. Note that the fuel tax claim can be made on an amended return (if filed within the statute of limitations period) after the taxpayer has completed the registration process.

Where on the tax return is the credit claimed?

• Individuals claim the credit on the “payments from” line of Form 1040 (line 70) by checking box b.
• C Corporations claim the credit on the “credits” line of Form 1120 (line 32(f)).
• S Corporations make the claim on the “credit for federal tax paid on fuels” line of Form 1120S (line 23c).
• Partnerships (and LLCs filing Form 1065) claim the credit by including a statement on Schedule K-1 showing each partner’s 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. The partner then claims the credit on his or her own return.
• Federal, state, and local governments, and certain tax-exempt organizations must use Form 8849 to claim the credit.

Credit Must Be Included in Income

The taxpayer must include the credit in gross income if the total cost of the fuel (including excise tax) was claimed as a deduction from taxable income. A cash method taxpayer includes the amount of any refund in gross income for the tax year in which the refund is received or, if claimed as a credit, includes the credit amount in gross income for the tax year in which Form 4136 is filed. Accrual method taxpayers will include the amount of the credit or refund in gross income for the tax year in which the eligible fuels are used.

Recordkeeping Requirements

IRS Publication 510 indicates that certain records should be maintained in order to support the taxpayer’s claim. The claimant should keep the following supporting information:

1. Number of gallons purchased and used during the period covered by the claim
2. Dates of the purchases
3. Names and addresses of suppliers and amounts purchased from each in the period covered by the claim
4. Nontaxable use for which the fuel was used
5. Number of gallons used for each nontaxable use