New IRS Guidance: Excise Tax on Dyed Diesel and Kerosene – Robert Bell, Partner, CPA

Small business Tax

New IRS Guidance: Excise Tax on Dyed Diesel and Kerosene

If your cooperative purchases diesel fuel or kerosene and later designates that fuel for nontaxable use — such as off-road agricultural equipment — there is recent guidance from Treasury and the IRS that are applicable.

Under a new provision established by the One, Big, Beautiful Bill, cooperatives and other taxpayers now have a formal pathway to recover federal excise taxes previously paid on clear diesel or kerosene that was subsequently removed from a terminal as dyed fuel for nontaxable use. Treasury and IRS issued temporary regulations effective April 30, 2026, along with proposed rulemaking, to implement this refund mechanism.

What This Means in Plain Terms

Federal excise tax is typically assessed when diesel fuel or kerosene is removed from a terminal. Dyed fuel used for nontaxable purposes is generally exempt from that tax. The new guidance addresses situations where tax was paid upfront on clear fuel that was later dyed and removed for a nontaxable use. Prior to this guidance, recovering that tax was not straightforward.

Key Eligibility Requirements

To file a claim, your cooperative must meet all the following conditions:

  • The fuel was taxed when originally purchased, and that tax was not previously credited or refunded.
  • The fuel was subsequently indelibly dyed by mechanical injection and removed from an approved terminal for nontaxable use on or after December 31, 2025.
  • The entity filing the claim is the same taxpayer that paid the original excise tax — Treasury has specifically noted it currently lacks authority to pay refunds to anyone other than the original taxpayer.
  • The claim is filed using updated Form 8849 (Claim for Refund of Excise Taxes) and Schedule 5, with all required documentation.

What to Do Now

If your cooperative purchases significant volumes of diesel or kerosene that rotate between taxable and nontaxable uses, this is worth a closer look. The temporary regulations are effective immediately and will remain in place for up to three years while permanent regulations are developed. We will continue to monitor developments as proposed regulations move through the comment period.

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