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SYNTHETIC FUELS AND SECTION 29 TAX CREDITS
Clark D. Harrison, President CQ Inc.
The synthetic fuel tax credit was passed during the Carter administration to reduce U.S. dependence on foreign oil. The tax credit is intended to subsidize commercial projects or ventures that may otherwise be unattractive to investors. It applies not only to solid synthetic fuels produced from coal, but also to:
• Liquids and gases produced from coal
• Gas recovered from coal beds
• Gas recovered from municipal solid waste disposal facilities
• Oil derived from shale
• Oil derived from tar sands
• Coke ovens
Although a number of recent projects involve recovering coal from gob, impoundments, or silt banks, the credit pertains to synthetic fuels produced from coal, regardless of the feedstock source.
The credit is determined based on the energy content of the synthetic fuel produced compared to the energy content and price of a barrel of oil. In 2000, the value of the credit is expected to be about $1.10/MBtu and it is earned by the taxpayer according to the number of Btus of synthetic fuel sold. If additives, binders, or supplements are included in the synthetic fuel, only the Btus attributed to the coal are subject to the credit.
To qualify for the credit, the taxpayer must satisfy four criteria:
• Production of a qualified fuel
• Ownership of a qualified facility
• Status of the taxpayer
• Proper project structure
Each of these criteria is discussed below in more detail.
In the case of solid synthetic fuels, the taxpayer must demonstrate that the fuel is derived from coal. The coal source may be anywhere in the U.S. and the coal may be of any rank from lignite to anthracite. The taxpayer does not have to produce the coal or own any reserve.
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