26 U.S.C. § 40 — Alcohol, etc., used as fuel

(a) General rule. Your alcohol fuels credit for the year is the sum of four possible credits: the alcohol mixture credit, the alcohol credit, the small ethanol producer credit (if you qualify), and the second generation biofuel producer credit. (b) The four credits, defined. (1) Alcohol mixture credit. You get 60 cents for every gallon of alcohol you use to make a "qualified mixture" — alcohol blended with gasoline or another special fuel — as long as you either sell that mixture to someone as fuel or use it as fuel yourself. It only counts if the sale or use happens as part of your trade or business, in the same year it happens. Casual, off-farm production does not qualify. (2) Alcohol credit. You get 60 cents for every gallon of straight alcohol (not blended with gasoline or special fuel, ignoring any denaturant) that you use as fuel in your business, or that you sell at retail and pump into someone's tank. You cannot claim both this credit and the retail-sale credit on the same gallon. (3) Smaller credit for weaker alcohol. If the alcohol's proof is at least 150 but under 190, the 60-cent rate in (1) and (2) drops to 45 cents. (4) Small ethanol producer credit. An "eligible small ethanol producer" gets 10 cents a gallon for "qualified ethanol fuel production" — ethanol it sells to someone else for blending, for business fuel use, or for retail sale into a tank, or that it uses or sells itself for those same purposes. This is capped at 15,000,000 gallons per producer per year, and it does not include alcohol the producer bought and then redistilled to raise its proof. (5) Adding a denaturant to alcohol is not treated as making a mixture. (6) Second generation biofuel producer credit. You get $1.01 per gallon of "qualified second generation biofuel production." If the biofuel is alcohol, that $1.01 is reduced by whatever alcohol mixture credit rate already applies to it, and, for ethanol, by the small producer credit rate too — so you cannot stack credits on the same gallon. "Qualified second generation biofuel production" means biofuel you sell for blending, business fuel use, or retail sale into a tank, or use or sell yourself for those purposes; it excludes alcohol you bought and redistilled to raise its proof. A "qualified second generation biofuel mixture" is second generation biofuel blended with gasoline or special fuel and sold or used as fuel. "Second generation biofuel" means liquid fuel made from a "qualified feedstock" that meets the EPA's fuel-registration rules under the Clean Air Act. It excludes alcohol under 150 proof (measured ignoring denaturants), and it excludes any fuel that is more than 4% water and sediment by weight, more than 1% ash by weight, or has an acid number over 25. A "qualified feedstock" is renewable lignocellulosic or hemicellulosic matter, or cultivated algae, cyanobacteria, or duckweed (lemna). Special rule for algae-based fuel: if you sell it to someone else who refines it into qualifying fuel, that sale counts as a qualifying sale for you, the fuel is treated as qualifying while still in your hands, and it cannot also be counted by anyone else further down the chain. A cooperative can pass this credit through to its patrons using rules like those in subsection (g)(6). No credit is allowed unless you are registered with the Secretary as a second generation biofuel producer under section 4101. This credit only applies to production between December 31, 2008 and January 1, 2025; if it stops applying, leftover credit cannot be carried forward past the limit described in subsection (e)(2). (c) Coordination with excise tax exemption. If the alcohol already got a tax break under section 4041(b)(2), 6426, or 6427(e), the Secretary must reduce this credit so you are not paid twice for the same gallon. (d) Definitions and special rules. (1) "Alcohol" includes methanol and ethanol, but not alcohol made from petroleum, natural gas, or coal (including peat), and not alcohol under 150 proof. Proof is measured without counting added denaturants. (2) "Special fuel" means any liquid fuel besides gasoline that works in an internal combustion engine. (3) Recapture tax if the fuel is not actually used as fuel. If you got a credit for alcohol in a mixture, and then someone separates the alcohol back out or uses the mixture for something other than fuel, that person owes a tax of 60 cents a gallon (45 cents if the alcohol is under 190 proof). The same tax applies if you got the retail-sale credit and someone then mixes or misuses that alcohol. If you got the small ethanol producer credit and don't use the fuel for a qualifying purpose, you owe 10 cents a gallon. If you got the second generation biofuel credit and don't use the fuel for a qualifying purpose, you owe the same applicable amount per gallon that you were credited. These recapture taxes are collected the same way as the regular excise tax under section 4081. (4) When counting gallons of alcohol for the credit, include denaturants (even gasoline) added under a Secretary-approved formula, as long as they make up no more than 2% of the alcohol's volume. (5) Estates and trusts pass the credit through under rules like those in section 52(d). (6) The second generation biofuel credit only applies if the biofuel is both produced and used as fuel in the United States (U.S. possessions count as the United States here). (7) No credit at all for alcohol that is both produced and used as fuel entirely outside the United States (again counting U.S. possessions as the United States). (e) Termination. This section — other than the second generation biofuel producer credit — does not apply after December 31, 2011, or during any earlier stretch before January 1, 2012 when the excise tax rate under section 4081(a)(2)(A) is 4.3 cents a gallon. If the section stops applying, unused credit cannot be carried forward under section 39 beyond the three tax years following the year the cutoff starts. The second generation biofuel producer credit is not subject to this termination. (f) Election out. You can choose not to have this section apply to you for a tax year. You (or a later revocation of that choice) have up to three years after your filing deadline for that year (not counting extensions) to make the election, in whatever form the Secretary requires. (g) Rules for the small ethanol producer credit. (1) An "eligible small ethanol producer" is someone whose alcohol production capacity never tops 60,000,000 gallons during the year. (2) Companies in the same controlled group, or under common majority ownership, are treated as one person for the 15-million and 60-million gallon caps. (3) For partnerships, S corporations, and other pass-through entities, both caps apply at the entity level and again at each partner's level. (4) If more than one person has a stake in a single production facility, the Secretary decides how to divide up the production capacity among them. (5) The Secretary can write regulations to stop anyone from indirectly benefiting from the credit beyond the 60-million or 15-million gallon caps. (6) A cooperative can elect to share part of its small producer credit with its patrons, split based on how much business each patron did with the co-op that year. The election must be made on a timely return, cannot be changed once made for that year, and only counts if the co-op sends written notice to patrons during the payment period. Whatever the co-op does not share stays with the co-op. Patrons claim their share in the tax year that includes the end of the payment period, or earlier if they get notice sooner. If the co-op's actual credit later turns out smaller than what it originally reported, the co-op — not its patrons — owes extra tax for the part of the shortfall beyond what it never shared; that extra tax does not count as a real tax for figuring other credits or the alternative minimum tax. (h) Reduced credit for ethanol blenders, 2001 through 2011. For ethanol sold or used in these years, the usual 60-cent and 45-cent rates are replaced with lower "blender" rates set by year: 2001–2002, 53 cents (39.26 cents for low-proof); 2003–2004, 52 cents (38.52 cents); 2005–2008, 51 cents (37.78 cents); 2009–2011, 45 cents (33.33 cents). For years after 2008, if the Secretary — working with the EPA — finds that U.S. ethanol production and imports fell short of 7,500,000,000 gallons in every year since 2007, the 2009–2011 rate goes back up from 45 cents to 51 cents.