Final Carbon Capture Credit Regulations Ease Participation For Smaller Businesses

The IRS has released final regulations under Code Section 45Q. It provides for a U.S. federal income tax credit at varying rates to taxpayers participating in various aspects of sequestering carbon oxide and disposing of it in secure geologic storage, using it as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, or using it in certain processes.

The final regulations revisions focused primarily on making the credit broadly available and as flexible and useful as possible for businesses of all sizes. By tying the final regulations to industry standards and well-known and understood regulatory requirements used elsewhere in the Code and Regulations, the IRS is signaling an intent to make compliance with the requirements as straightforward and practicable as possible. In addition, certain provisions show the IRS intends to allow parties to allocate contractual and physical risk in ways that could make investment in carbon oxide sequestration projects more appealing.

Furthering the goal of simplification includes redefining carbon capture equipment to focus on functionality by reference to existing regulations. In addition, the regulations expressly permit the use of subcontractors for disposal, injection, and utilization, and tailored the measurement of relative fair market value under the 80/20 test to only carbon capture process train equipment, rather than other equipment in the larger project into which such equipment is integrated. The final regulations also clarify that carbon capture equipment may be owned by a taxpayer other than the taxpayer that owns the industrial facility at which the equipment is placed in service.

The IRS’s ability to evaluate taxpayer compliance was also a priority. For example, when an election under Code Section 45Q(f)(3)(B) is made, only the person in direct contractual privity with the person authorized to make the election will be permitted to claim the credit. While the IRS agreed to permit a taxpayer to claim a credit even if the taxpayer’s contractual counterparty fails to submit a Form 8933, the IRS will not permit the taxpayer to claim the credit when the taxpayer itself fails to file the form.

The final regulations generally incorporated guidance released in early 2020 including the single-project approach to aggregation of carbon capture equipment and express authorization for taxpayers to pool access to the credit by investing in a carbon capture venture through a partnership, subject to compliance with Rev. Proc. 2020-12. IRS also said it would interpret the 80/20 and single-project rules consistent with existing guidance on other provisions of the Code like the renewable energy tax credits authorized by Sections 45 and 48.

Other provisions clarified what types of carbon capture equipment qualify, including equipment incorporated into a co-generation facility and specific naturally occurring deposits.

IRS did not adopt an interim allowance of the 45Q credit. The credit is available for twelve years after a qualified facility is placed in service. Before a taxpayer may claim credits, the facility’s Environmental Protection Agency Monitoring, Reporting, and Verification Plan and analysis of lifecycle greenhouse gas emissions must be approved. A significant delay in receiving either of these approvals could cause the taxpayer to lose some of the twelve-year period during which the credits may be claimed.