On May 28, 2020, the U.S. Internal Revenue Service (IRS) and the Department of the Treasury (Treasury) released proposed regulations (Proposed Regulations) relating to the tax credit for sequestration of carbon oxides provided by Section 45Q of the Internal Revenue Code. The Proposed Regulations, while subject to change or revocation until finalized, provide important guidance for operators and investors considering investments in carbon capture and storage technology.
As discussed more fully below, the Proposed Regulations address several important issues on which the statute itself reserved for implementation by the IRS and Treasury or for which commenters requested additional guidance:
- Standard for “Secure Geological Storage.” The Proposed Regulations provide that “secure geological storage” generally can be demonstrated by compliance with the Environmental Protection Agency (EPA) Underground Injection Control regulations applicable to Class II or Class VI injection facilities. For Class II facilities not subject to subpart RR of such regulations, the Proposed Regulations provide an alternative standard that the International Organization for Standardization (ISO) has adopted.
- Recapture of Section 45Q Credits. The Proposed Regulations provide rules requiring the recapture of credits under Section 45Q to the extent captured carbon oxides cease to be captured, disposed of or utilized in a manner permitted by the statute. In this regard, the Proposed Regulations take an approach similar to the approach taken with respect to the recapture of certain investment tax credits.
- Election to Transfer Credits. The Proposed Regulations establish procedures through which the owner of carbon capture equipment can elect to allow one or more offtakers of qualified carbon oxides to claim the Section 45Q credits otherwise available to the owner of the carbon capture equipment.
- Standard for “Contractually Ensuring” Disposal, Injection or Utilization. For owners of carbon capture equipment that do not physically dispose of, inject or utilize the captured carbon oxides themselves, but instead contractually ensure such disposal, injection or utilization, the Proposed Regulations provide guidance regarding what is necessary to “contractually ensure” such disposal, injection or utilization.
The Proposed Regulations state that taxpayers may rely on them, until final regulations are published, for taxable years beginning on or after February 9, 2018. Comments to the Proposed Regulations may be submitted until August 3, 2020.
A brief summary of Section 45Q is included below, followed by a more detailed summary of the Proposed Regulations.