Alternative Fuels Credit for CNG and LNG

1. Alternative Fuels Creditfor CNG and LNG Frank Boland IRS Chief Counsel 202-622-3130 Frank.K.Boland@irscounsel.treas.gov

2. Overview • The tax • Filing returns • The credit • Who’s eligible • How to claim • Recordkeeping • Resources

3. The Tax

4. Federal taxing regime • Title 26 United States Code – Internal Revenue Code • Federal fuel taxes • Gasoline, diesel fuel, kerosene • Alternative liquid fuels (including propane & LNG) • CNG

5. How the CNG & LNGtaxes work

6. When tax imposed • Tax imposed on taxable sale or taxable use

7. Taxable sale: direct delivery • Sale of CNG/LNG considered “taxable sale” if – • fuel delivered by seller into fuel supply tank of motor vehicle or motorboat • Seller liable for tax on these sales

8. Taxable sale: certain bulk sales • Tax imposed on sale of CNG/LNG not delivered into fuel supply tank if – • Buyer gives seller written statement that entire quantity of CNG/LNG will be used for taxable purpose - For CNG, seller gives buyer written acknowledgment • Informal statements ok – BUT must be written • Seller liable for tax on these bulk sales

9. Taxable use • Used as fuel in motor vehicle or motorboat • Bought in bulk • No written statement given to seller • User liable for tax

10. Nontaxable uses of CNG/LNG • On farm for farming purposes • Off-highway business use • Boat engaged in commercial fishing • Exclusive use by nonprofit education organization • Exclusive use by state & local governments

11. Motor vehicles • All types of vehicles propelled by motor designed for carrying or towing loads from one place to another, regardless of type of load or material carried or towed • Regardless of whether vehicle registered for highway use

12. Motor vehicles con’t. • Term does NOT include farm tractors, trench diggers, power shovels, bulldozers, road graders or rollers, and similar equipment which does not carry or tow a load; nor does it include any vehicle which moves exclusively on rails

13. Rate of tax; CNG • Before 10/1/06 • 48.54¢ per MCF • After 9/30/06 • 18.3¢ per 126.67 CF

14. Rate of tax; LNG • Before 10/1/06 • 11.9¢ per gallon • After 9/30/06 • 24.3¢ per gallon

15. Returns & Deposits • Return required if you have excise tax liability • Form 720, Quarterly Federal Excise Tax Return • Due for each quarter • 4th Quarter of 2006 – October, November & December 2006 • 4th quarter return due January 31, 2007 • Deposits due 6 times during quarter if meet $2500 threshold (tax less credits)

16. Form 720 • 4th Quarter 2006 Form 720 will reflect new tax rates • Don’t forget to file!! • Even if credit exceeds liability!!

17. Alternative Fuels CreditSAFETEA

18. Alternative fuels credit • Effective October 1, 2006 • Amount of credit: • CNG: 50¢ per 121 cubic feet • LNG: 50¢ per gallon

19. What do I do?

20. Be the proper claimant • Be registered by the IRS • Claim the credit • Maintain books & records

21. The proper claimant Two requirements • Is the alternative fueler (unmixed fuel) • Is registered as alternative fueler, or - For claims before 7/1/07, is registered for any fuel purpose

22. Alternative fueler • Alternative fueler (unmixed fuel) • Liable for tax on CNG/LNG sold for use or used as fuel in motor vehicle or motorboat OR • Would be liable for tax on delivery into fuel supply tank of vehicle or boat but for application of exemption

23. Registration • Is an alternative fueler or will be within reasonable time after registration • Has good tax history • IRS satisfied with filing, deposit, payment, reporting & claim history

24. Registration Form 637, Application for Registration (For Certain Excise Tax Activities) • Available on line – www.irs.gov • Revised form available in a few weeks • OK to use existing form

25. Activity letters for alternative fuelers • AL: Alternative fueler (not in a mixture) • Propane, CNG, LNG • AM: Alternative fuel mixture

26. Claiming the credit

27. How it works – step 1 • Any CNG/LNG credit must first be taken against all of your alternative fuel/CNG tax liability on Form 720 (Schedule C) • NOT gasoline tax liability & usually not diesel fuel tax liability • State and local govts. claim everything on Form 8849

28. How it works -- step 2 • Any excess credit claimed on your income tax return on Form 4136 • 50¢ credit for any 121 CF of CNG or one gallon of LNG

29. Claiming the credit -- Form 4136 • Allows you to claim credit against your income tax liability • Filed at the end of your tax year • If your income tax liability less than credit – IRS sends check • Since credit is refundable – factor in computing estimated tax payments during year

30. Oops! SAFETEA has a glitch… • Law doesn’t have mechanism now to refund CNG/LNG benefit in excess of excise tax liability • unless state or local gov’t or § 501(a) entity

31. Recordkeeping! • Maintain files with • Tax returns • Records • Who sold you the CNG/LNG (include EIN) • For at least 4 years after taxes became due OR you filed claim

32. Resources • www.irs.gov • Publication 510, Excise Taxes for 2006 • Notice 2006-92 • Forms 720, 637 and 4136 and Instructions • Call us • Excise Tax Branch, Office of Chief Counsel, IRS • 202-622-3130 (not a toll free number)