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Fuel taxes are one of the most critical aspects of federal excise tax compliance, particularly for businesses using vehicles or machinery that consume motor fuels. The Form 720, that is the Quarterly Federal Excise Tax Return, requires accurate reporting of various fuel taxes. Understanding the different types of fuel taxes will help lessen chances of incurring a penalty and also secure IRS compliance.

Gasoline and diesel excise taxes are by far the most common fuel taxes reported on Form 720. They apply to fuels used for transportation and are charged per gallon. Any business that purchases or produces gasoline or diesel for commercial use must report this tax, which probably includes kerosene for some vehicles. Incorrect reporting may trigger IRS audits.

The other taxes Form 720 accounts for are alternative fuel taxes, such as those for CNG, LNG, and LPG. Compared to conventional gasoline or diesel, the taxes that fall under these alternative fuel taxes are intended to help cleaner energy sources. Tax liability must be calculated by businesses using alternative fuels based on the fuel type used and the quantity used, ensuring proper entries under the different excise tax categories.

Another type of tax that is reported on Form 720 is taxes on aviation fuel levied on jet fuel and aviation gasoline, where the taxes are used to finance airport infrastructure and air traffic services. These special fuels are non-transportation fuels, which are used in industrially based machinery or for other off-road purposes. 

Businesses will always need to prepare detailed records, which maintain useful information regarding fuel purchases, and usage, and calculations of fuel tax liabilities. Fuel tax compliance systems, along with e-filing services, help generate, organize, and verify this information. Understanding IRS fuel tax rules helps businesses remain compliant and optimize operations.