If you’ve been in business for a while you probably already know that certain business tax deductions can help you minimize the amount of taxes you owe to Uncle Sam each year. But did you know there’s another potentially very valuable, often overlooked tax benefit specific to landscaping businesses? This benefit is called a federal fuel tax credit and below we’ll explain how taking advantage of this tax credit could put an extra $700 or more back into your pocket.
Tax Deductions vs. Tax Credits Explained
A tax deduction reduces the amount of income upon which you have to pay taxes. For example, if you made $100,000 last year, and you had $20,000 in tax deductions, you would then only have to pay taxes on $80,000 ($100,000 – $20,000 = $80,000). If your overall tax rate is 10%, your $20,000 in tax deductions would save you $2,000 (you’d pay 10% on $80,000 = $8,000 in taxes vs. 10% on $100,000 = $10,000).
A tax credit, on the other hand, doesn’t reduce the amount of money you have to pay taxes on, it directly reduces the amount of tax you owe. In the previous example, if you made $100,000 and your tax rate was 10%, you would owe $10,000 in taxes. But if you had a $20,000 tax credit you wouldn’t have to pay any taxes at all. In fact, Uncle Sam would owe you $10,000 ($20,000 tax credit – $10,000 in taxes owed = $10,000 refunded to you)!
What’s even better? You don’t have to choose between one or the other. You can take advantage of both tax deductions and tax credits at the same time.
The Federal Fuel Tax Credit
The federal government and most states add a special tax to ALL fuel purchased at retail gas stations. This “fuel tax” is used to pay for the maintenance of roads, bridges and public transportation systems- the federal fuel tax is 18.4 cents on each gallon of gas and 24.4 cents on each gallon of diesel.
Businesses that use fuel for “off-highway” purposes (i.e. in equipment not meant to travel on roads or highways, such as tractors, lawnmowers, blowers, etc.) are eligible for a 100% refund of fuel taxes in the form of a fuel tax credit. Like a tax deduction, the fuel tax credit (alternatively called a fuel tax refund) can only be claimed when you file your federal income taxes, generally at the end of the year.
Federal Fuel Tax Credit Eligibility
Unless your business buys “dyed diesel” (non-taxed diesel fuel) you pay federal fuel taxes and are therefore eligible for a 100% refund of these taxes on the fuel used in your off-road equipment.
Filing for the Federal Fuel Tax Credit
The federal fuel tax credit can be claimed by using IRS Form 4136, “Credit for Fuel Tax Paid on Fuels”. More information on filing for the credit can be found here. Though fuel receipts are not required, the IRS will require you to keep a detailed log of all fuel purchased and used for off-highway, business purposes.
What This Means for You
In our experience the average amount owed to most small business landscapers is about $700. Sadly, each year about 1 billion dollars in federal fuel tax credits go unclaimed. Don’t let this be you. It’s your money- claim it!
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