Article
Fuel excise tax: Why it exists and how its exemptions ease fuel prices
May 2, 2024 · Authored by Dustin Hubbard
The U.S. fuel excise tax on the sale of gasoline, diesel fuel, and other fuels is a means of federally funding transportation-related projects and programs, including the construction and maintenance of highways, bridges, and other infrastructure.
In addition to funding transportation-related projects and programs, the fuel excise tax encourages fuel conservation and the use of alternative fuels. Set at 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel, the tax makes these fuels more expensive incentivizing consumers and businesses to opt for fuel-efficient vehicles and explore alternative fuel sources, such as electric or hybrid vehicles.
Understanding the exemptions and tax credits associated with the fuel excise tax can help uncover cost-saving opportunities and offset the tax’s expense.
Federal fuel excise tax exemptions
The fuel excise tax has exemptions that apply to specific industries and uses. The two most common are the agricultural and the off-road use exemptions.
The agricultural exemption allows farmers to purchase fuel without paying the fuel excise tax if the fuel is used exclusively for farming purposes. This includes fuel used to power tractors, combines, and other farm equipment. The agricultural exemption is an important benefit as it reduces farmers’ operating costs and keeps food prices affordable.
The off-road use exemption waives the fuel excise tax if the fuel is used exclusively for off-road purposes, like powering construction and landscaping equipment, generators, and other types of off-road machinery. This exemption helps businesses that rely on heavy equipment reduce operating costs and remain competitive in the marketplace.
It's important to note that these exemptions are subject to certain conditions and requirements. For example, to qualify for the agricultural exemption, the fuel must be used exclusively for farming purposes. Similarly, to qualify for the off-road use exemption, the fuel must be used exclusively for off-road purposes.
Federal alternative fuel credits
In addition to the agricultural and off-road use exemptions, the alternative fuel credit supports taxpayers who use certain types of alternative fuels, such as electricity, natural gas, and propane. The credit is designed to encourage the use of alternative fuels, which can help reduce greenhouse gas emissions and improve air quality.
The amount of the alternative fuel credit varies depending on the type of fuel and the amount used. For example, the credit for electricity used in electric vehicles is currently set at $2,500 to $7,500, depending on the size of the vehicle's battery. The credit for natural gas used in a vehicle is currently set at $0.50 per gallon of gasoline equivalent, similarly the credit for propane used in a vehicle is currently set at $0.50 per gallon.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.