Home / Chapter 2 - Financing Your Algae Biofuels Project / Tax Incentives and Other Tax Considerations

Tax Incentives and Other Tax Considerations

Tax considerations may play a crucial role in the overall financing of an algae biofuels project.  Like many other alternative energy sources, algae biofuels may qualify for certain tax credits and other tax incentives that, if properly utilized, can provide significant financing advantages.  Making the most out of the available tax incentives also may strongly influence choice-of-entity, debt vs. equity, and other financing decisions.  Identifying and maximizing the benefit of tax and other government incentives require careful advance planning. 

Generally, producers of certain blends of biofuels and taxable fuels may qualify for a refundable credit against the excise tax imposed on the removal of taxable fuel from a refinery or terminal, the entry of taxable fuel into the United States, or the sale of taxable fuel.  To qualify for the credit, the blender must either use the qualifying mixture in its own trade or business, or sell the qualifying mixture to a buyer for use as a fuel in the buyer’s business.  Alternatively, a producer of algae-sourced biofuels may be eligible for a credit against income tax liability with respect to alcohol or biodiesel blended, sold, or used as fuel in a trade or business.  Each of these credits currently is set to expire on a specific date, and timing is therefore very crucial.

In addition to tax credits, an algae biofuels project may qualify for bonus depreciation, accelerated depreciation, and other tax benefits.  These tax benefits can create significant tax losses that, if financing is properly structured, can provide a significant component of an investor’s overall return.

Some states also offer incentives to promote the development of biofuels and other alternative energy projects.  Whether a particular project will qualify for these programs depends on a number of factors, including the location and production timeline of the facility.

For a more detailed discussion of the federal, state, and local income tax issues associated with an algae biofuels project, please see “Law of Biofuels – Tax Issues” written by Charles S. Lewis, III, Robert T. Manicke, and Kevin T. Pearson, which is current through August 6, 2008.

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