The Treasury Department and the IRS released guidance last week on the Clean Fuels Production Credit under Section 45Z of the tax code.
Section 45Z provides a tax credit for the production of transportation fuels with lifecycle greenhouse gas (GHG) emissions below certain levels. The credit is in effect in 2025 and is for sustainable aviation fuel (SAF) and non-SAF transportation fuels.
The guidance released on Jan. 10 includes both a notice of intent to propose regulations on the Section 45Z credit and a notice providing the annual emissions rate table for Section 45Z, which refers taxpayers to the appropriate methodologies for determining the lifecycle GHG emissions of their fuel. In conjunction with the guidance released last Friday, the Department of Energy will release the 45ZCF-GREET model for use in determining emissions rates for 45Z in the coming days.
“This guidance will help put America on the cutting-edge of future innovation in aviation and renewable fuel while also lowering transportation costs for consumers,” Deputy Secretary of the Treasury Wally Adeyemo said in a statement on Jan. 10. “Decarbonizing transportation and lowering costs is a win-win for America.”
Section 45Z provides a per-gallon (or gallon-equivalent) tax credit for producers of clean transportation fuels based on the carbon intensity of production. It consolidates and replaces pre-Inflation Reduction Act credits for biodiesel, renewable diesel, and alternative fuels, and an Inflation Reduction Act credit for sustainable aviation fuel. Like several other Inflation Reduction Act credits, Section 45Z requires Treasury to establish rules for measuring carbon intensity of production, based on the Clean Air Act’s definition of “lifecycle greenhouse gas emissions.”
The guidance clarifies such issues as which entities and fuels are eligible for the credit, as well as how taxpayers determine lifecycle emissions. Specifically, the guidance outlines Treasury and the IRS’s intent to define key concepts and provide certain rules in a future rulemaking, including:
Clarifying who is eligible for a credit: Treasury and the IRS intend to provide that the producer of the eligible clean fuel is eligible to claim the Section 45Z credit. Consistent with the statute, compressors and blenders of fuel wouldn’t be eligible, Treasury said.
Clarifying what fuels are eligible for a credit: Under Section 45Z, a fuel must be “suitable for use” as a transportation fuel. Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible.
Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable, Treasury said. In addition, natural gas alternatives, such as renewable natural gas, would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel, Treasury added.
Publishing rules needed to determine lifecycle emissions required to calculate the credit amount: The guidance publishes the annual emissions rate table that directs taxpayers to the appropriate methodologies for calculating carbon intensities for types and categories of Section 45Z-eligible fuels.
The table directs taxpayers to use the 45ZCF-GREET model to determine the emissions rate of non-SAF transportation fuel, and either the 45ZCF-GREET model or methodologies from the International Civil Aviation Organization (“CORSIA Default” or “CORSIA Actual”) for SAF.
Taxpayers can use the provisional emissions rate (PER) process to obtain an emissions rate for fuel pathway and feedstock combinations not specified in the emissions rate table when guidance is published for the PER process. Guidance for the PER process is expected at a later date.
Outlining climate-smart agriculture practices
The guidance released on Jan. 10 states that Treasury intends to propose rules for incorporating the emissions benefits from climate-smart agriculture (CSA) practices for cultivating domestic corn, soybeans, and sorghum as feedstocks for SAF and non-SAF transportation fuels. These options would be available to taxpayers after Treasury and the IRS propose regulations for the Section 45Z credit, including rules for CSA, and the 45ZCF-GREET model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.
CSA practices have multiple benefits, according to the Treasury Department, including lower overall GHG emissions associated with biofuels production and increased adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health.
In April, Treasury established a first-of-its-kind pilot program to encourage CSA practices within guidance on the Section 40B SAF tax credit. Treasury has received and continues to consider substantial feedback from stakeholders on that pilot program. The Department of Agriculture invested more than $3 billion in 135 “Partnerships for Climate-Smart Commodities” projects. Combined with the investment of $19.5 billion in CSA from the Inflation Reduction Act, the department is estimated to support CSA implementation on more than 225 million acres in the next five years, as well as measurement, monitoring, reporting, and verification to better understand the climate impacts of these practices.
In addition, in June, the Agriculture Department published a request for information asking for public input on procedures for reporting and verification of CSA practices and measurement of related emissions benefits, and received substantial input from a wide array of stakeholders. The Agriculture Department is currently developing voluntary technical guidelines for CSA reporting and verification. Treasury and the IRS will consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the Section 45Z credit.
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Tags: IRS, Legislation, Taxes
