Overview of Section 40 Fuel Taxes on Form 720

The Section 40 tax applies if you claim the second-generation biofuel producer credit but fail to use the biofuel for its intended purpose. In essence, the producer becomes liable for an excise tax on each gallon of second-generation biofuel not used in the prescribed manner. This could involve:

• Selling the biofuel for use in producing a qualified second-generation biofuel mixture.

• Selling the fuel for use in a trade or business as a fuel.

• Selling it retail, where the buyer uses it as fuel in their vehicle.

However, qualified second-generation biofuel production does not include:

• Purchasing alcohol and increasing its proof through distillation.

• Using biofuel outside the United States or its territories.

If the second-generation biofuel is sold but not used for its qualified purposes, an excise tax is triggered. The tax rate is $1.01 per gallon of biofuel, and the taxpayer must report this tax on Form 720, under IRS Number 51.

This tax applies to each gallon of biofuel at the rate used to figure the credit when recapturing the tax. The excise tax recapture ensures that producers who benefit from the tax credits are still paying their dues if the biofuel is not put to the prescribed use.

Excise Tax Recapture:
If you claimed the second-generation biofuel producer credit but did not use the biofuel for the purposes listed above, the tax will be recaptured. This means the excise tax becomes due at the same rate used to determine the initial credit.

The process includes:

• Selling the fuel for use in producing a qualified second-generation biofuel mixture.

• Selling the fuel to another person who puts it into a retail customer’s vehicle.

• Using the fuel in a trade or business to produce or sell biofuel mixtures.

The tax rate for second-generation biofuels under this section is $1.01 per gallon.

Filing Requirements:
For taxpayers recapturing the tax, they will need to report the gallons of biofuel and the appropriate tax rate in the Rate column under IRS Number 51. An adjustment is also required using TC 29X on MFT 03.

There are two methods available for filing excise taxes under Section 40:

1. Manual Filing

• You can file your taxes manually by filling out Form 720 and submitting it to the IRS by mail. Make sure you include the appropriate details about the biofuel sold and the recapture tax.

2. IRS-Approved Online Filing

• The IRS also allows taxpayers to file excise taxes online through an IRS-approved e-file provider like Simple720. This method simplifies the process, allowing for faster processing and more accurate submissions.

Conclusion

Section 40 of Form 720 plays an essential role in regulating the taxation of second-generation biofuels, ensuring that producers comply with the correct tax obligations if their biofuels are sold but not used for their intended purposes. 

Whether filing manually or electronically, it's crucial to accurately report and pay the recaptured excise tax to avoid penalties. By understanding the ins and outs of Section 40, producers can better manage their tax liabilities and maintain compliance with IRS regulations.

The IRS requires every filer to submit Form 720 electronically. File your Section 40 Fuel Taxes Online with Simple720 Portal today!