LEGALCORNER
Energy Tax Incentives Act
includes cooperative provisions
By Marlis Carson
General Counsel and
Vice President, Legal,
Tax & Accounting;
National Council of Farmer Co-ops
mcarson@ncfc.org
Donald A. Frederick
Program Leader for Law,
Policy & Governance;
USDA Rural Development/
Cooperative Programs
donald.frederick@usda.gov
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.
n 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 passthrough
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.
Eligible 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. An “eligible cooperative”
means a cooperative that is more than
50 percent owned by agricultural producers
or other entities that are more
than 50 percent owned by agricultural
producers.
Deduction for costs of complying
with EPA sulfur rules, pass through
The Environmental Protection
Agency (EPA) has issued rules requiring
refiners to start producing diesel
fuel with a sulfur content of no more
than 15 parts per million beginning
June 1, 2006. The Jobs Act allows a
small business refiner to elect to
deduct 75 percent of capital costs
incurred during each tax year to comply
with the EPA sulfur rules.
The Energy Act provides that a
cooperative small business refiner may
elect to pass the deduction through to
any other cooperatives holding a direct
ownership interest in the cooperative
refiner, on the basis of the extent of
that ownership interest (not patronage).
The refiner cooperative must
provide written notice of the pass
through to its cooperative owners
before the date on which the tax return
is due, noting the pass through is due.
Equipment deduction
In an attempt to enhance this
nation’s refinery capacity, the Energy
Act allows an immediate expensing of
50 percent of the costs of constructing
new oil refineries and upgrading existing
ones located in the United States.
The resulting deduction may be taken
in the year the qualified refinery property
is placed in service.
Pass through rules similar to those
for the EPA sulfur rule deduction
apply here. A cooperative refiner may
elect to pass the deduction through to
any other cooperatives holding a direct
ownership interest in it, on the basis of
the extent of that ownership interest.
The refiner cooperative must provide a
written notice of the pass through to
its cooperative owners before the date
on which the tax return is due, noting
the pass through is due.
Renewable fuels mandate increases
Corn and other agricultural markets
should get a boost from language in
the new law that requires a doubling of
the use of renewable fuels (ethanol and
biodiesel) in gasoline, to 7.5 billion
gallons per year by 2012. This should
play a part in reducing our dependence
on foreign oil while increasing the
demand for crops that can be
processed into renewable fuel. It will
also create new opportunities for producer-
owned cooperatives to generate
income for their members and economic
development in the rural communities
where they are located.
