To amend the Internal Revenue Code of 1986 to provide tax incentives for the use of biodiesel as a fuel.

Summary: Amends the Internal Revenue Code to establish a credit to promote the production and usage of biodiesel fuel. Requires a taxpayer to obtain a certification from the producer of the biodiesel which identifies the product produced in order to utilize the credit. Imposes a tax for biodiesel not used as fuel, but for which a credit was granted. Reduces motor fuel excise taxes on biodiesel mixtures.Provides for transfers of funds from the Commodity Credit Corporation to the Highway Trust Fund in amounts equivalent to the reductions that would occur but for this Act.

SECTION 1. INCENTIVES FOR BIODIESEL.

    (a) Credit for Biodiesel Used as a Fuel.--
            (1) In general.--Subpart D of part IV of subchapter A of 
        chapter 1 of the Internal Revenue Code of 1986 (relating to 
        business related credits) is amended by inserting after section 
        40 the following new section:

``SEC. 40A. BIODIESEL USED AS FUEL.

    ``(a) General Rule.--For purposes of section 38, the biodiesel 
fuels credit determined under this section for the taxable year is an 
amount equal to the biodiesel mixture credit.
    ``(b) Definition of Biodiesel Mixture Credit.--For purposes of this 
section--
            ``(1) Biodiesel mixture credit.--
                    ``(A) In general.--The biodiesel mixture credit of 
                any taxpayer for any taxable year is an amount equal to 
                the biodiesel mixture rate for each gallon of biodiesel 
                used by the taxpayer in the production of a qualified 
                biodiesel mixture.
                    ``(B) Biodiesel mixture rate.--For purposes of 
                subparagraph (A), the biodiesel mixture rate is 1 cent 
                for each whole percentage point (not exceeding 20 
                percentage points) of biodiesel in the mixture.
            ``(2) Qualified biodiesel mixture.--
                    ``(A) In general.--The term `qualified biodiesel 
                mixture' means a mixture of diesel and biodiesel 
                which--
                            ``(i) is sold by the taxpayer producing 
                        such mixture to any person for use as a fuel, 
                        or
                            ``(ii) is used as a fuel by the taxpayer 
                        producing such mixture.
                    ``(B) Sale or use must be in trade or business, 
                etc.--
                            ``(i) In general.--Biodiesel used in the 
                        production of a qualified biodiesel mixture 
                        shall be taken into account--
                                    ``(I) only if the sale or use 
                                described in subparagraph (A) is in a 
                                trade or business of the taxpayer, and
                                    ``(II) for the taxable year in 
                                which such sale or use occurs.
                            ``(ii) Certification for biodiesel.--
                        Biodiesel used in the production of a qualified 
                        biodiesel mixture shall be taken into account 
                        only if the taxpayer described in subparagraph 
                        (A) obtains a certification from the producer 
                        of the biodiesel which identifies the product 
                        produced.
                    ``(C) Casual off-farm production not eligible.--No 
                credit shall be allowed under this section with respect 
                to any casual off-farm production of a qualified 
                biodiesel mixture.
    ``(c) Coordination With Exemption From Excise Tax.--The amount of 
the credit determined under this section with respect to any biodiesel 
shall, under regulations prescribed by the Secretary, be properly 
reduced to take into account any benefit provided with respect to such 
biodiesel solely by reason of the application of section 4041(n) or 
section 4081(f).
    ``(d) Definitions and Special Rules.--For purposes of this 
section--
            ``(1) Biodiesel defined.--The term `biodiesel' means the 
        monoalkyl esters of long chain fatty acids derived solely from 
        virgin vegetable oils for use in compressional-ignition 
        (diesel) engines. Such term shall include esters derived from 
        vegetable oils from corn, soybeans, sunflower seeds, 
        cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, 
        rice bran, and mustard seeds.
            ``(2) Registration requirements.--The term `biodiesel' 
        shall only include a biodiesel which meets--
                    ``(A) the registration requirements for fuels and 
                fuel additives established by the Environmental 
                Protection Agency under section 211 of the Clean Air 
                Act (42 U.S.C. 7545), and
                    ``(B) the requirements of the American Society of 
                Testing and Materials D6751.
            ``(3) Biodiesel mixture not used as a fuel, etc.--
                    ``(A) Imposition of tax.--If--
                            ``(i) any credit was determined under this 
                        section with respect to biodiesel used in the 
                        production of any qualified biodiesel mixture, 
                        and
                            ``(ii) any person--
                                    ``(I) separates such biodiesel from 
                                the mixture, or
                                    ``(II) without separation, uses the 
                                mixture other than as a fuel,
                        then there is hereby imposed on such person a 
                        tax equal to the product of the biodiesel 
                        mixture rate applicable under subsection 
                        (b)(1)(B) and the number of gallons of the 
                        mixture.
                    ``(B) Applicable laws.--All provisions of law, 
                including penalties, shall, insofar as applicable and 
                not inconsistent with this section, apply in respect of 
                any tax imposed under subparagraph (A) as if such tax 
were imposed by section 4081 and not by this chapter.
            ``(4) Pass-thru in the case of estates and trusts.--Under 
        regulations prescribed by the Secretary, rules similar to the 
        rules of subsection (d) of section 52 shall apply.
    ``(e) Election To Have Biodiesel Fuels Credit Not Apply.--
            ``(1) In general.--A taxpayer may elect to have this 
        section not apply for any taxable year.
            ``(2) Time for making election.--An election under 
        paragraph (1) for any taxable year may be made (or revoked) at 
        any time before the expiration of the 3-year period beginning 
        on the last date prescribed by law for filing the return for 
        such taxable year (determined without regard to extensions).''
            (2) Credit treated as part of general business credit.--
        Section 38(b) of such Code is amended by redesignating 
        paragraphs (4) through (15) as paragraphs (5) through (16), 
        respectively, and by inserting after paragraph (3) the 
        following new paragraph:
            ``(4) the biodiesel fuels credit determined under section 
        40A(a),''.
            (3) Conforming amendments.--
                    (A) Section 39(d) of such Code is amended by adding 
                at the end the following new paragraph:
            ``(11) No carryback of biodiesel fuels credit before 
        january 1, 2004.--No portion of the unused business credit for 
        any taxable year which is attributable to the biodiesel fuels 
        credit determined under section 40A may be carried back to a 
        taxable year beginning before January 1, 2004.''.
                    (B) Section 196(c) of such Code is amended by 
                redesignating paragraphs (4) through (10) as paragraphs 
                (5) through (11), respectively, and by inserting after 
                paragraph (3) the following new paragraph:
            ``(4) the biodiesel fuels credit determined under section 
        40A(a),''.
                    (C) Section 6501(m) of such Code is amended by 
                inserting ``40A(e),'' after ``40(f),''.
                    (D) The table of sections for subpart D of part IV 
                of subchapter A of chapter 1 of such Code is amended by 
                inserting after the item relating to section 40 the 
                following new item:

                              ``Sec. 40A. Biodiesel used as fuel.''.
            (4) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 2003.
    (b) Reduction of Motor Fuel Excise Taxes on Biodiesel Mixtures.--
            (1) In general.--Section 4081 of such Code (relating to 
        manufacturers tax on petroleum products) is amended by adding 
        at the end the following new subsection:
    ``(f) Biodiesel Mixtures.--Under regulations prescribed by the 
Secretary--
            ``(1) In general.--In the case of the removal or entry of a 
        qualified biodiesel mixture, the rate of tax under subsection 
        (a) shall be the otherwise applicable rate reduced by the 
        biodiesel mixture rate (if any) applicable to the mixture.
            ``(2) Tax prior to mixing.--In the case of the removal or 
        entry of diesel fuel for use in producing at the time of such 
        removal or entry a qualified biodiesel mixture, the rate of tax 
        under subsection (a) shall be the rate determined under 
        paragraph (1), divided by a percentage equal to 100 percent 
        minus the percentage of biodiesel which will be in the mixture.
            ``(3) Definitions.--For purposes of this subsection, any 
        term used in this subsection which is also used in section 40A 
        shall have the meaning given such term by section 40A.
            ``(4) Certain rules to apply.--Rules similar to the rules 
        of paragraphs (6) and (7) of subsection (c) shall apply for 
        purposes of this subsection.''.
            (2) Conforming amendments.--
                    (A) Section 4041 of such Code is amended by adding 
                at the end the following new subsection:
    ``(n) Biodiesel Mixtures.--Under regulations prescribed by the 
Secretary, in the case of the sale or use of a qualified biodiesel 
mixture (as defined in section 40A(b)(2)), the rates under paragraphs 
(1) and (2) of subsection (a) shall be the otherwise applicable rates, 
reduced by any applicable biodiesel mixture rate (as defined in section 
40A(b)(1)(B)).''.
                    (B) Section 6427 of such Code is amended by 
                redesignating subsection (p) as subsection (q) and by 
                inserting after subsection (o) the following new 
                subsection:
    ``(p) Biodiesel Mixtures.--Except as provided in subsection (k), if 
any diesel fuel on which tax was imposed by section 4081 at a rate not 
determined under section 4081(f) is used by any person in producing a 
qualified biodiesel mixture (as defined in section 40A(b)(2)) which is 
sold or used in such person's trade or business, the Secretary shall 
pay (without interest) to such person an amount equal to the per gallon 
applicable biodiesel mixture rate (as defined in section 40A(b)(1)(B)) 
with respect to such fuel.''.
            (3) Effective date.--The amendments made by this subsection 
        shall apply to any fuel sold after December 31, 2003.
    (c) Highway Trust Fund Held Harmless.--There are hereby transferred 
(from time to time) from the funds of the Commodity Credit Corporation 
amounts determined by the Secretary of the Treasury to be equivalent to 
the reductions that would occur (but for this subsection) in the 
receipts of the Highway Trust Fund by reason of the amendments made by 
this section.