Wednesday, March 13, 2013

Tax Break for Mom and Pop Diesel Refineries

Everybody loves small business, and everybody loves diesel fuel with sulfur content of less than 15 parts per million.  Internal Revenue Code section 45H provides an income tax credit of 5 cents for every gallon of low sulfur diesel fuel produced by a "small business refiner."

But no credit is allowed for low sulfur diesel produced by the bigger refineries (i.e., most refineries).

A small business refiner is defined as a refiner of crude oil with 1,500 employees or less and that did not produce more than 205,000 barrels of diesel for the specific one year period from January 1, 2002 to December 31, 2002.  Thus, a rapidly growing refiner would qualify as a small business refiner as long as it did not refine too much fuel back in 2002.

The total credit is limited to 25 percent of the capital costs incurred between 2003 and 2009 to come into compliance with EPA requirements for low sulfur diesel fuel. 

§ 45H Credit for production of low sulfur diesel fuel.
(a) In general. For purposes of section 38, the amount of the low sulfur diesel fuel production credit determined under this section with respect to any facility of a small business refiner is an amount equal to 5 cents for each gallon of low sulfur diesel fuel produced during the taxable year by such small business refiner at such facility.
(b) Maximum credit. (1) In general.  The aggregate credit determined under subsection (a) for any taxable year with respect to any facility shall not exceed—
(A) 25 percent of the qualified costs incurred by the small business refiner with respect to such facility, reduced by
(B) the aggregate credits determined under this section for all prior taxable years with respect to such facility.  ***
(c) Definitions and special rule.
For purposes of this section —

(1) Small business refiner.
The term “small business refiner” means, with respect to any taxable year, a refiner of crude oil—

(A) with respect to which not more than 1,500 individuals are engaged in the refinery operations of the business on any day during such taxable year, and
(B) the average daily domestic refinery run or average retained production of which for all facilities of the taxpayer for the 1-year period ending on December 31, 2002, did not exceed 205,000 barrels.
(2) Qualified costs.
The term “qualified costs” means, with respect to any facility, those costs paid or incurred during the applicable period for compliance with the applicable EPA regulations with respect to such facility, including expenditures for the construction of new process operation units or the dismantling and reconstruction of existing process units to be used in the production of low sulfur diesel fuel, associated adjacent or offsite equipment (including tankage, catalyst, and power supply), engineering, construction period interest, and sitework.

(3) Applicable EPA regulations.
The term “applicable EPA regulations” means the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency.

(4) Applicable period.
The term “applicable period” means, with respect to any facility, the period beginning on
January 1, 2003, and ending on the earlier of the date which is 1 year after the date on which the taxpayer must comply with the applicable EPA regulations with respect to such facility or December 31, 2009.
(5) Low sulfur diesel fuel.
The term “low sulfur diesel fuel” means diesel fuel with a sulfur content of 15 parts per million or less.  
***

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