Off-Highway Fuel Use Credits — IRS Rejects Dual-Use Single Engines While States Take a Mixed View

Substantiating an off-road claim can be challenging. Under 26 USC 6421 (e)(2)(A), the Internal Revenue Service (IRS) requires a vehicle to be designated for off-highway transportation and used in a trade, business or income-producing activity only in order to qualify for a refund. For example, off-highway business use does not include nonbusiness use of fuel such as use by snowmobiles, power lawn mowers and other yard equipment (Publication 510). An off-highway business use credit or refund is not permitted when fuel is used from a single engine to drive the vehicle and operate a power takeoff unit even if the truck has two separate fuel tanks.

Advances in technology provide visibility into when fuel is consumed in a highway vehicle for off-highway use and on-highway use. The IRS rejects these advances in technology and still upholds Reg § 48.4041-7. This regulation states that the IRS will apply tax to all liquid fuel sold for use or in a motor used to propel a vehicle even if the motor is also used by equipment mounted to the highway vehicle that is used for purposes other than propulsion of the vehicle. This equipment includes “a mixing unit on a concrete mixer truck or a pump for discharging fuel from a tank truck, by means of a power takeoff or power transfer” as defined in 26 CFR 48.6421-1. To qualify for a credit/refund, the exempt fuel can be drawn from the same tank but must be in a separate motor.

Some states take a different stance. West Virginia, for example, relies on old guidance in Administrative Decision, No. 85-339 RG, 01/01/1985 permitting the use of an odometer reading to determine off-road use. Highway mileage obtained from an odometer may be multiplied by the consumption rate per mile to determine the on-highway consumption. The highway mileage is subtracted from the number of gallons of fuel purchased to determine the total non-highway consumption that qualifies for a refund.

Idaho takes the stance that mileage may be relied upon to determine when fuel is used for a refund claim. Idaho requires nontaxable miles to be documented for each trip using an odometer, hubometer or GPS readings (Idaho Admin. Rules 35.01.05.290).

Even if the IRS does not accept a claim, other jurisdictions may take a different approach. Weaver can assist with maximizing off-highway credits/refunds. Contact us today to find out more.

Authored by Kelly Grace and Leanne Sobel

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Off-Highway Fuel Credits and Refunds Series

Our series explores off-highway fuel credits and refunds, covering key topics like navigating IRS rules, how different states handle these credits and tips for substantiating off-road claims. Whether you’re aiming to maximize tax benefits or ensure compliance with regulations, this series will provide the guidance you need.

• Off-Highway Fuel Use Credits — Overlooked or Overpaid?
• Off-Highway Fuel Use Credits — Qualifying a Chassis as Mobile Machinery
• Off-Highway Fuel Use Credits: Qualifying a Vehicle Without a Chassis
• Off-Highway Fuel Use Credits — IRS Offers Stationary Shelter Exception
• Off-Highway Fuel Use Credits — My Vehicle Qualifies … Now What?

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Off-Highway Fuel Use Credits — Overlooked or Overpaid?