The IRS proposed a draft rule on May 28 covering the qualification for carbon capture and sequestration tax credits under Section 45Q of the Internal Revenue Code. The proposed regulations could provide financial benefits to energy projects that will enhance the spread of that technology and the reduced carbon release that it promises.
As explained in detail in our LawFlash, the proposed regulations would add Section 1.45Q to the IRS regulations and provide greater certainty for future investment in carbon capture and sequestration projects. In particular, the proposal provides a structure for taxpayers to contract for the capture, sequestration, or use of carbon oxides and to assign those credits to the counterparty. Recognizing that a taxpayer might enter into multiple contracts for these projects, the proposed rule provides the framework for allocating the tax credits among multiple counterparties. The proposed rule also provides credit recapture rules and adopts the 80/20 rule allowing the use of some used equipment in a qualifying facility. Finally, the proposed rule clarifies the standards for disposal of carbon oxides by tertiary injection and the lifecycle analysis required for disposing of carbon oxides through utilization.
For additional background and context please also see our prior LawFlash on the IRS’s release of Notice 2020-12 (provided guidance on satisfying the Start Construction Rule to qualify for the Section 45Q tax credit ) and Revenue Procedure 2020-12 (providing a safe harbor for tax equity investments using a “flip” partnership structure).