Energy Tax Incentives Act Includes Cooperative Provisions

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Editor's note: This article does not represent official policy of USDA, the Internal Revenue Service, the U.S. Department of the Treasury or any other government agency. It is presented only to provide information to persons interested in the tax treatment of cooperatives.

On Aug. 8, 2005, President George W. Bush signed into law the Energy Tax Incentives Act (Energy Act) of 2005. The new law provides $14.5 billion in tax reductions over a 10-year period to boost conservation efforts, increase domestic energy production and expand the use of alternative energy sources, such as ethanol, biodiesel, solar, wind, hydropower and clean coal technology. Several provisions will benefit farmers, other rural residents and their cooperatives. These new tax incentives are in addition to several favorable sections in the American Jobs Creation Act of 2004 (Jobs Act) (see Legal Corner, Rural Cooperatives, Jan/Feb 2005, p. 20).

These rules are often somewhat complex. But, if understood and used effectively, they can provide significant tax savings to producer owners and their cooperatives involved in energy production.

Small ethanol producer credit extended

For several years, the tax code has provided small ethanol producers a tax credit of 10 cents per gallon on the first 15 million gallons of ethanol produced each year. A small ethanol producer had been defined as a person or entity whose ethanol production capacity did not exceed 30 million gallons per year. The Energy Act extends the credit to ethanol producers with a production capacity of 60 million gallons of ethanol per year.

The Jobs Act gave cooperatives that qualified for this credit the option to pass the credit through to their patrons, on a patronage basis. The Energy Act requires cooperatives that do pass the credit through to notify their patrons in writing of the pass-through within the 8.5-month payment period described in tax code section 1382(d).

Small agri-biodiesel producer credit and pass-through

The Energy Act creates a new small agri-biodiesel producer credit that mirrors the small ethanol producer credit. The credit is 10 cents per gallon on up to 15 million gallons of bio-diesel produced each year and a "small" producer is defined as one whose biodiesel production capacity does not exceed 60 million gallons per year. Cooperatives may pass the credit through to their patrons on a patronage basis, provided a written notice of the pass-through is mailed to the patrons within the 8.5-month payment period.

This credit is in addition to credits created in the Jobs Act for biodiesel used as fuel either in a mixture with diesel fuel or on its own. That credit is $1 per gallon for any biodiesel that is agri-biodiesel and 50 cents per gallon for other biodiesel. Agri-biodiesel is biodiesel derived solely from virgin oils from crops such as corn, soybeans and sunflower seeds, and from animal fats.

Renewable energy credit, pass-through

In 1992, Congress created a tax credit for the production of electricity from wind, organic material of plants grown exclusively for use in producing electricity and poultry waste. The Jobs Act and the Energy Act have expanded the list of qualified renewable fuels to include all livestock waste, forest products, other crop by-products and residues, geothermal energy, solar energy, small irrigation power, municipal solid waste, refined coal and Indian coal. …