One of the lesser known tax credits in the Construction industry is the fuel credit, which offers eligible contractors a dollar-for-dollar deduction of their company’s tax obligation.
The excise tax that is included in the cost of gasoline is used to maintain highways and roads. Everyone who purchases fuel pays the tax, but not everyone uses the fuel on the roads that are funded by it. To remedy this, the IRS offers a valuable tax credit to corporate taxpayers who purchase fuel for off-highway purposes.
The most common types of gasoline purchases that qualify for the fuel credit are:
- Fuel that is used for off-highway business use (for business use other than in a highway vehicle registered or required to be registered for highway use)
- Diesel fuel and kerosene (other than kerosene used in aviation) that is used for a purpose other than as a fuel in the propulsion engine of a train or diesel-powered highway vehicle (but not off-highway business use)
Common off-highway business uses of fuel by contractors include stationary machines (e.g. compressors, power saws, generators), bulldozers and earthmovers. The tax credit applies only to fuel used for business purposes and cannot be claimed for personal use of these vehicles or equipment.
Calculating the credit
The fuel credit is computed by the rate per gallon that the IRS allows for the type of fuel being used. For example, if a contractor purchased 10,000 gallons of undyed diesel fuel, which has a rate of .243, the credit would be $2,430. This may not seem like a large credit at one time, but its cumulative effect could be significant. Over 10 years, this example would multiply to nearly $25,000 of tax dollars saved.
These savings also yield a cost benefit because the burden on the taxpayer is light. The only things a contractor needs to do to claim the credit is to keep track of the gallons of fuel used and file Form 4136, “Credit for Federal Tax Paid on Fuels.”