On May 28, 2020, the Treasury issued Proposed Regulations to provide further guidance on how taxpayers may qualify for carbon capture tax credits under Section 45Q of the Internal Revenue Code of 1986, as amended (the “Code”)
Code Section 45Q, which was expanded by the Bipartisan Budget Act of 2018, provides a tax credit of (a) up to $50 per metric ton for carbon oxide sequestration for taxpayers who capture qualified carbon oxide at a qualified facility and dispose of it in secure geological storage, and (b) up to $35 per metric ton of qualified carbon oxide for taxpayers who capture qualified carbon oxide and use it for enhanced oil recovery purposes.
Earlier this year, the Internal Revenue Service (the “IRS”) issued IRS Notice 2020-12 to provide guidance regarding when construction has begun on a qualified facility or on carbon capture equipment that may qualify for the carbon capture credit. In conjunction with that Notice, the IRS issued Revenue Procedure 2020-12 to create a safe harbor for the allocation rules for carbon capture partnerships, which is similar to the safe harbors the IRS previously developed for partnerships claiming the wind energy production tax credit.
The Proposed Regulations provide further guidance on issues on which taxpayers have expressed uncertainty:
- Security Measures and Standards: In 2019, the IRS indicated that it would accept the “Subpart RR” quantification methodology promulgated by the Environmental Protection Agency to establish a taxpayer’s compliance with the carbon capture credit’s secure geological storage requirements. Under the Proposed Regulations, the IRS will also accept a standard known as ISO 27916:19. Both quantification methodologies require assessment and monitoring of potential leakage, quantification of inputs, losses, and storage through a mass balance approach, and thorough documentation of steps and approaches.
- Required Contract Provisions. Code Section 45Q provides that in the case of qualified carbon oxide captured using carbon capture equipment that is placed in service at a qualified facility, the credit is attributable to the person who owns the carbon capture equipment and physically or contractually ensures the capture and disposal, injection, or utilization of the qualified carbon oxide. The Proposed Regulations clarify which contract provisions are necessary for a taxpayer to establish such a contractual relationship.
- Election to Allow the Credit to Another Taxpayer. Under Code Section 45Q, a taxpayer entitled to claim the carbon capture credit may elect to allow a third-party taxpayer who disposes of the qualified carbon oxide, utilizes the qualified carbon oxide, or uses the qualified carbon oxide as a tertiary injectant to claim the credit. The Proposed Regulations enumerate procedures for a taxpayer to make such an election and the information that a taxpayer must provide.
- Credit Recapture. Code Section 45Q directs the Secretary of the Treasury to provide regulations for recapturing the benefit of any section 45Q credit allowable with respect to any qualified carbon oxide which ceases to be captured, disposed of, or used as a tertiary injectant in a manner consistent with the requirements of section 45Q. The Proposed Regulations establish such rules.
This round of guidance from the Treasury is helpful in clarifying certain aspects of Code Section 45 such as to allow taxpayers to more confidently move forward with investments in carbon capture projects.