In the midst of the headline-grabbing events of January 6, 2021, the U.S. Treasury Department issued final regulations under Code1 Section 45Q. Code Section 45Q provides a US federal tax credit at varying rates for taxpayers involved in various aspects of the process of carbon sequestration and disposal in a safe geological repository. Use as a tertiary grout in a qualified, improved oil or natural product gas recovery project, or use in specific processes.
The final rules are largely similar to the proposed regulations published in May 2020, with the primary aim of the revisions to make the loans generally available and as flexible and useful as possible to businesses of all sizes. By linking the final regulations to industry standards and known and understood government requirements used elsewhere in the Code and regulations, the IRS appears to signal an intention to make compliance with the requirements of Code Section 45Q as simple and practical as possible. In addition, certain provisions indicate that the Treasury Department wants to allow the parties to allocate contractual and physical risks in such a way that investments in carbon sequestration projects also become more attractive to risk-averse tax-equity investors.
Simplification was high on the Treasury’s list of goals. Among other things, the Treasury Department redefined “Carbon Capture Equipment” to focus on functionality rather than enumerating qualified (or excluded) components and putting them into service with reference to existing regulations issued under Code Section 168. In addition, the regulations expressly allow the use of subcontractors for disposal, injection and use, and bespoke measurement of relative market value as part of the 80/20 test, only for carbon capture tractors and not other devices in the larger project that incorporates such devices are. The final rules also clarify that carbon capture equipment may belong to a taxpayer other than the taxpayer who owns the industrial facility where the equipment is put into service. This could mean taxpayers shouldn’t worry about the rules governing restricted-use properties, but the Treasury Department has stopped making this clear.
The Internal Revenue Service’s ability to assess tax compliance was also apparently a priority for the Treasury Department. For example, if an election is made under Code Section 45Q (f) (3) (B), only the person in direct contractual privacy with the person authorized to make the election can claim the credit. While the Treasury Department has agreed to allow a taxpayer to apply for a credit even if the taxpayer’s contractual counterparty fails to submit a Form 8933 if necessary, the Treasury Department will not allow the taxpayer to apply for the credit if the taxpayer does not submit a Form 8933 himself .
The final rules generally included guidance that was published in early 2020, specifically the stand-alone approach to aggregation of carbon capture facilities and explicit permission for taxpayers to “pool” their access to credit by investing in a carbon capture company through a partnership Compliance with the procedures set out in Revenue Procedure 2020-12. In the preamble to the final provisions, the Treasury Department stated that it would interpret the 80/20 and individual project rules in line with existing guidance on other provisions of the Code, such as: B. The renewable energy tax credits approved by Sections 45 and 48 of the Code.
Certain other regulations have clarified what types of equipment are suitable for carbon capture, including equipment built into a cogeneration plant and certain naturally occurring deposits. These provisions are generally consistent with the implication in Code Section 45Q that the ultimate bound carbon oxide is produced as part of a process that creates a commercial product or uses direct air separation.
One potential area of consternation in the final rules is the decision not to issue a Provisional Allowance for Code Section 45Q credit. The credit is available twelve years after a qualified facility has been commissioned. However, before a taxpayer can apply for credits, the Environmental Protection Agency’s monitoring, reporting and review plan and life cycle greenhouse gas emissions analysis must be approved. A significant delay in obtaining any of these permits could therefore result in the taxpayer losing part of the twelve year period in which to apply for the credits. In the preamble to the final provisions, the Treasury Department stated that it is not receptive to any deviations from the placement in the standard of service or the concept of the loan allowance. However, should this prove to be a significant complication, the Treasury Department may reconsider it.
1 All references to the “Code” contained herein refer to the Internal Revenue Code of 1986, as amended.