IRS issues final rule for 45Q tax credit

By Erin Voegele | January 07, 2021

The U.S. Treasury Department and the Internal Revenue Service on Jan. 6 issued final regulations regarding the section 45Q tax credit for qualified carbon oxide sequestration. The Carbon Capture Coalition said the final rule provides long-overdue regulatory and financial certainty.

The Bipartisan Budget Act of 2018, which became law nearly three years ago in February 2018, included language to extend and reform the 45Q tax credit. The final rule published on Jan. 6 implements those changes.

The 45Q credit aims to encourage private investment in carbon capture and storage (CCS) projects. For those in the bioenergy and biofuels industries, CCS projects may provide the opportunity to produce carbon-negative fuels and energy.

“These final regulations provide taxpayers and the American energy sector with needed clarity on utilizing the section 45Q credit,” said Treasury Secretary Steven T. Mnuchin. “These regulations are an essential step toward harnessing the entrepreneurial spirit of Americans to further modernize the American energy sector, while ensuring American energy producers maintain their competitive edge around the world.”

The newly finalized regulations provide procedures to determine adequate security measures for the geologic storage of qualified carbon oxide, exceptions to the general rule for determining to whom the credit is attributable, procedures for a taxpayer to make an election to allow third-party taxpayers to claim the credit, the definition of carbon capture equipment, and standards for measuring utilization of qualified carbon oxide.

In addition, the regulations allow smaller carbon capture facilities to be aggregated into one project for purpose of claiming the credit when certain factors are present, such as common ownership and location; as well as provide guidance on recapture, including introducing a recapture period of three years. Under the rules, credits must be repaid if previously sequestered carbon oxide leaks into the atmosphere during a three-year period after the initial storage or injection.

“The Carbon Capture Coalition welcomes the release of final rules to implement the reformed 45Q tax credit,” said Brad Crabtree, director of the Carbon Capture Coalition. “The final rule will provide long overdue regulatory and financial certainty to incentivize private investment in economywide deployment of carbon capture, removal, transport, use and geologic storage across a range of key industries. The final rule, coupled with the two-year extension of 45Q passed in December as part of the 2020 omnibus spending package, will help to unlock billions of dollars in private capital to continue moving forward on the approximately 30 publicly identified commercial carbon capture projects already under development nationwide in response to the revamped tax credit.”

Several companies active in the biofuels and bioenergy industries are participants in the Carbon Capture Coalition, including Air Liquide, Archer Daniels Midland Co., DTE Energy, LanzaTech, the National Farmers Union, NRG Energy, Pacific Ethanol, and White Energy.