LT1 & LT2 Tax Calculator
Calculate your Long-Term Fuel Tax Credit (LT1) and Alternative Fuel Credit (LT2) accurately with our premium calculator
Comprehensive Guide: How to Calculate LT1 and LT2 Tax Credits
The Long-Term Fuel Tax Credit (LT1) and Alternative Fuel Credit (LT2) are valuable tax incentives designed to promote the use of alternative fuels and reduce dependence on traditional petroleum products. These credits can provide significant tax savings for businesses and individuals who use qualifying alternative fuels in their vehicles or equipment.
Understanding LT1 and LT2 Credits
LT1 (Long-Term Fuel Tax Credit): This credit is available for fuels that are chemically identical to or derived from biomass. The most common qualifying fuel is biodiesel (B100), which must meet ASTM D6751 standards. The credit amount is typically $1.00 per gallon for biodiesel mixtures.
LT2 (Alternative Fuel Credit): This credit applies to alternative fuels including liquefied hydrogen, P-Series fuels, compressed natural gas (CNG), liquefied natural gas (LNG), liquefied petroleum gas (LPG), and other IRS-approved alternative fuels. The credit amount varies by fuel type and is adjusted annually for inflation.
Eligibility Requirements
- Fuel Type: Must use IRS-qualified alternative fuels
- Business Use: Fuel must be used in a trade or business (personal use doesn’t qualify)
- Mixture Requirements: For biodiesel, must be a mixture with diesel (B20, B100, etc.)
- Registration: Must be registered with the IRS as a fuel tax credit claimant
- Documentation: Must maintain proper records of fuel purchases and usage
Step-by-Step Calculation Process
-
Determine Your Fuel Type:
Identify which alternative fuel you’re using. Common options include:
- Biodiesel (B100) – qualifies for LT1
- Renewable diesel – qualifies for LT1
- Compressed Natural Gas (CNG) – qualifies for LT2
- Liquefied Natural Gas (LNG) – qualifies for LT2
- Liquefied Petroleum Gas (LPG/Propane) – qualifies for LT2
- Liquefied Hydrogen – qualifies for LT2
- P-Series fuels – qualifies for LT2
-
Calculate the Gallon Equivalency:
For gaseous fuels (CNG, LNG, hydrogen), you need to convert to gasoline gallon equivalents (GGE) or diesel gallon equivalents (DGE):
- 1 GGE of CNG = 121 cubic feet
- 1 DGE of LNG = 1.5 gallons of LNG
- 1 GGE of hydrogen = 1 kilogram
-
Determine the Credit Rate:
Credit rates vary by fuel type and tax year. For 2023, the rates are:
Fuel Type Credit Program 2023 Credit Rate 2022 Credit Rate Biodiesel (B100) LT1 $1.00/gallon $1.00/gallon Renewable Diesel LT1 $1.00/gallon $1.00/gallon Compressed Natural Gas (CNG) LT2 $0.50/GGE $0.50/GGE Liquefied Natural Gas (LNG) LT2 $0.50/DGE $0.50/DGE Liquefied Petroleum Gas (LPG) LT2 $0.50/gallon $0.50/gallon Liquefied Hydrogen LT2 $0.60/kg $0.60/kg P-Series Fuels LT2 $0.50/gallon $0.50/gallon -
Calculate the Mixture Percentage:
For biodiesel blends, you need to account for the percentage of alternative fuel in the mixture. For example:
- B20 (20% biodiesel, 80% petroleum diesel) – only 20% qualifies
- B100 (100% biodiesel) – 100% qualifies
-
Apply the Business Use Percentage:
Only the portion of fuel used for business purposes qualifies for the credit. If you use your vehicle 60% for business and 40% for personal use, only 60% of the fuel qualifies.
-
Complete the Calculation:
The final calculation formula is:
Total Credit = (Gallons × Credit Rate × Mixture % × Business Use %)
Common Mistakes to Avoid
- Incorrect Fuel Classification: Not all alternative fuels qualify for both LT1 and LT2. Verify your fuel type with IRS publications.
- Improper Documentation: Failing to keep receipts, invoices, or usage logs can disqualify your claim.
- Incorrect Mixture Calculations: For biodiesel blends, using the wrong percentage can lead to over or under claiming.
- Personal Use Inclusion: Claiming credits for personal use of fuel is not allowed.
- Missing Registration: Forgetting to register with the IRS as a fuel tax credit claimant (Form 637).
- Wrong Tax Year: Using credit rates from the wrong tax year can result in incorrect calculations.
IRS Forms and Filing Requirements
To claim these credits, you’ll need to file the appropriate IRS forms:
- Form 4136: Credit for Federal Tax Paid on Fuels – Used to claim both LT1 and LT2 credits
- Form 3800: General Business Credit – Used to summarize all business credits
- Form 8849: Claim for Refund of Excise Taxes – Used if you’re claiming a refund rather than a credit
- Form 637: Application for Registration (For Certain Excise Tax Activities) – Required before claiming credits
The credits are generally claimed on your annual tax return. For businesses, this would typically be Form 1120 (corporations), Form 1065 (partnerships), or Schedule C (sole proprietors). The credits can be used to reduce your tax liability dollar-for-dollar.
Recent Legislative Changes
The Inflation Reduction Act of 2022 made several important changes to alternative fuel credits:
- Extended the LT1 credit through December 31, 2024
- Modified the LT2 credit to include new fuel types and adjusted rates
- Added new sustainability requirements for some fuel types beginning in 2025
- Introduced new credit amounts for sustainable aviation fuel
- Created new credits for clean hydrogen production
These changes make it more important than ever to stay current with IRS guidance and consult with a tax professional when claiming these credits.
Recordkeeping Requirements
Proper documentation is crucial for substantiating your credit claims. The IRS requires you to maintain the following records for at least 3 years:
- Fuel purchase receipts and invoices
- Records showing the type and amount of fuel purchased
- Documentation of fuel mixture percentages (for blends)
- Vehicle or equipment usage logs showing business vs. personal use
- Odometer readings or other mileage documentation
- Records of any fuel resales or transfers
- IRS registration documentation (Form 637 approval)
For gaseous fuels, you’ll also need records showing the conversion from physical units (pounds, cubic feet) to gallon equivalents.
State-Level Incentives
In addition to federal credits, many states offer their own alternative fuel incentives. These can include:
- State income tax credits
- Sales tax exemptions on alternative fuels
- Grants for alternative fuel vehicles and infrastructure
- Reduced vehicle registration fees
- HOV lane access for alternative fuel vehicles
| State | Incentive Type | Amount | Eligible Fuels |
|---|---|---|---|
| California | Income Tax Credit | Up to $1,000 | CNG, LNG, Hydrogen, Electricity |
| Colorado | Tax Credit | $0.36 per GGE | CNG, LNG, Propane, Hydrogen |
| Texas | Sales Tax Exemption | 100% of state sales tax | CNG, LNG, Propane, Biodiesel |
| New York | Tax Credit | $0.05 per gallon equivalent | Biodiesel (B20+), CNG, LNG |
| Oregon | Tax Credit | Up to $2,500 | Electric, CNG, LNG, Propane |
Be sure to check with your state’s department of revenue or energy office for the most current incentives available in your location.
Professional Considerations
While this guide provides comprehensive information, there are several situations where consulting with a tax professional is highly recommended:
- If you’re claiming credits for the first time
- If you use multiple alternative fuel types
- If you have both business and personal use of vehicles
- If you’re claiming credits for fleet vehicles
- If you’re involved in fuel production or blending
- If you’re claiming both federal and state incentives
- If your business structure is complex (partnerships, S-corps, etc.)
A qualified tax professional can help you:
- Maximize your eligible credits
- Ensure proper documentation and recordkeeping
- Navigate IRS registration requirements
- Handle audits or IRS inquiries
- Coordinate federal and state incentives
- Plan for future tax years
Future of Alternative Fuel Credits
The landscape of alternative fuel incentives is evolving rapidly. Several trends are shaping the future of these credits:
- Increased Focus on Sustainability: Future credits may require demonstration of lifecycle greenhouse gas reductions
- Expansion to New Fuel Types: Credits for sustainable aviation fuel and marine fuels are being developed
- Technology-Neutral Approach: Potential shift to credits based on emissions reductions rather than specific fuel types
- Integration with Carbon Markets: Possible linkage between fuel credits and carbon offset programs
- Electrification Incentives: Growing emphasis on electric vehicle incentives alongside alternative fuels
Businesses investing in alternative fuels should stay informed about these developments to maximize their tax planning strategies.