The One Big Beautiful Bill Act (OBBBA) introduced a change to federal fuel tax rules that may benefit certain businesses in the construction industry. The new provision, Internal Revenue Code (IRC) Section 6435, addresses situations where federal excise tax was paid on diesel fuel that was later dyed and used for a tax-exempt purpose.
While the change will not affect most construction contractors, businesses involved in fuel distribution, blending or bulk fuel supply should be aware of the potential opportunity.
Understanding the Basics
Federal excise tax is generally applied to diesel fuel when it is removed from a terminal. Diesel intended for highway use is typically sold as clear diesel and is subject to the tax. Diesel used for certain off-highway purposes—such as operating construction equipment, agricultural machinery or generators—is generally dyed red and exempt from the tax.
Construction contractors that purchase taxed clear diesel and later use it in qualifying off-road equipment have generally been able to recover the federal fuel tax through Form 4136, Credit for Federal Tax Paid on Fuels, or Form 8849, Claim for Refund of Excise Taxes.
However, there was previously a gap in the rules for businesses further up the fuel supply chain.
What Was the Issue?
Before IRC Section 6435, a fuel distributor could pay federal excise tax on clear diesel and later dye that same fuel for an eligible tax-exempt use. Even though the fuel ultimately qualified for exempt use, the distributor generally had no way to recover the tax it had already paid.
The new provision addresses this issue.
What Has Changed?
For qualifying fuel dyed after December 31, 2025, IRC Section 6435 allows certain taxpayers to recover federal excise tax previously paid on diesel fuel or kerosene that is later dyed for an eligible nontaxable use.
The U.S. Department of the Treasury and IRS have issued temporary and proposed regulations explaining who qualifies and how the new provision will work.
There is one important limitation: only the taxpayer that originally paid the federal excise tax can claim the payment. A business that simply purchases the fuel later in the supply chain does not become eligible for the Section 6435 payment.
What Does This Mean for Construction Companies?
For most construction contractors, the answer is simple: very little changes.
Contractors using diesel in off-road construction equipment can continue using the existing fuel tax credit and refund procedures available through Forms 4136 and 8849, when applicable.
The new provision is more relevant to construction-related businesses that are also involved in activities such as:
- Fuel distribution
- Fuel blending
- Bulk fuel supply
- Other operations where the business pays federal excise tax on clear diesel that is later dyed for an exempt use
Businesses with these types of operations may now have an opportunity to recover taxes that previously could not be refunded.
Why Should Construction Businesses Pay Attention?
Although Section 6435 applies to a relatively small group of taxpayers, it provides a new opportunity for businesses operating within the fuel supply chain.
Construction companies with fuel distribution or supply operations should review their activities to determine whether they may qualify. Companies should also stay informed as the IRS continues to provide guidance and finalizes the regulations.
A Practical Example
Consider a construction-related fuel distributor that purchases 10,000 gallons of clear diesel and pays federal excise tax when the fuel is removed from the terminal. The distributor later dyes the fuel and sells it for use in off-highway construction equipment.
Under the previous rules: The distributor generally could not recover the federal excise tax it had already paid, even though the fuel was ultimately intended for a tax-exempt use.
Under IRC Section 6435: The distributor may now be eligible to recover the previously paid tax, provided it meets the applicable requirements. Importantly, the distributor must be the taxpayer that originally paid the tax.
If a construction contractor purchases that fuel from the distributor and uses it in off-highway equipment, the contractor does not qualify for the Section 6435 payment simply because it is the end user. Instead, the contractor would continue to use the existing Form 4136 or Form 8849 process, as applicable.
The bottom line: IRC Section 6435 primarily creates a new opportunity for businesses operating within the fuel supply chain. For the typical construction contractor purchasing fuel to operate its own equipment, the existing rules largely remain the same.
Primary Authorities
- IRC Sections 4081 and 6435
- One Big Beautiful Bill Act
- Treasury Decision 10047 (Temporary Regulations)
- REG-119294-25 (Proposed Regulations)
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