Who Can Take Advantage of the IRC Section 45Q Tax Credit?

The Inflation Reduction Act (IRA) of 2022 was passed in part to incentivize companies to invest in clean and renewable energy. As part of this, the law added and expanded a significant number of energy-related credits. Among the expanded credits is the IRC Sec. 45Q Carbon Credit, which allows companies that are involved in carbon capture efforts to claim certain credits. 

Carbon Capture Explained

Carbon capture, utilization, and storage or sequestration (CCUS) is a three-step process to reduce, separate, and store carbon emissions in an effort to reduce the impact of such emissions on climate change. Direct air capture (DAC) is another method of carbon capture, whereby the carbon dioxide (CO2) is removed directly from the atmosphere. CCUS is used to keep new amounts of CO2 from entering the atmosphere, while DAC removes existing amounts CO2 from the atmosphere. An estimated 45% of all CO2 emissions remain in the atmosphere, which are believed to significantly impact global warming. By removing and sequestrating carbon through CCUS and DAC, the hope is for companies and individuals to mitigate further negative impacts of CO2 in the atmosphere.  

History of IRC Sec. 45Q

IRC Sec. 45Q was originally created in 2008 to incentivize companies to invest in CCUS and it has since undergone several changes. The Bipartisan Budget Act of 2018 expanded the type of carbon that qualifies to include carbon oxide and lowered the minimum carbon amounts that must be captured.

The IRA extended the construction deadline for carbon capture or DAC facilities from December 31, 2025, to December 31, 2032, and significantly increased the base credit amounts for carbon capture, particularly DAC facilities. The minimum plant size eligibility requirements also decreased, which broadened the types of plants (and thus increased the investor pool) that can claim a Sec. 45Q credit.

The IRA also notably added two new Internal Revenue Code sections. The first, IRC Sec. 6417, allows certain taxpayers to elect to receive a direct payment in lieu of energy tax credits. The Sec. 45Q credit is one of the credits eligible for this direct payment. The second, IRC Sec. 6418, allows for certain taxpayers to transfer all or a portion of their credit to another taxpayer in exchange for cash. The IRS released proposed regulations (Proposed Regulations) for both sections on June 21, 2023.

What Are the Sec. 45Q Credit Amounts?

The base credit amounts allowed differ depending on the method of carbon capture and may be multiplied by five when certain prevailing wage requirements are met. These amounts are adjusted yearly by an annual inflation factor.

The current Sec. 45Q credit amounts for CCUS are:

• $17 per ton ($85 if prevailing wage requirements are met) for industrial facilities and power plants which dispose of carbon in secure geological storage, such as saline geological formations (i.e., porous formations filled with brine (saltwater) that take up large spaces deep underground, and
• $12 per ton ($60 if prevailing wage requirements are met) for utilization of captured CO2 and carbon monoxide to produce low and zero-carbon fuels, chemicals, building materials, and other products, or for enhanced oil recovery (EOR) (i.e., the injection of CO2 into oil fields).

The current Sec. 45Q credit amounts for DAC are:

• $36 per ton ($180 if prevailing wage requirements are met) for carbon stored in secure  geological storage, and
• $26 per ton ($130 if prevailing wage requirements are met) for utilization of captured CO2 and carbon monoxide or EOR.

Criteria to Claim the Credit

Facility Requirements

To be considered a qualified facility for purposes of the Sec. 45Q credit, the facility must either properly dispose of the carbon oxide in secure geological storage spaces or use the carbon oxide or carbon dioxide for certain approved uses and meet minimum plant size requirements. 

If a qualified facility uses carbon oxide or carbon dioxide, instead of storing it, it must use it in the following approved ways that are intended to enhance technological development. This includes: 

1. Fixation through photosynthesis or chemosynthesis (i.e., occurs in bacteria and other organisms and involves the use of energy released by inorganic chemical reactions that produce food);
2. Chemical conversion into a compound where such carbon oxide is stored; or
3. For other purposes where a “commercial market” exists. 

The Sec. 45Q minimum plant size (i.e., the plant size must at least equal these values below) eligibility requirement values are as follows: 

• 1,000 tons per year for DAC;
• 18,750 metric tons per taxable year for an electricity-generating facility paired with the design capacity requirement; and
• 12,500 metric tons per taxable year for any other facility.

Taxpayer Requirements

Generally, a taxpayer who owns equipment placed in service on or after February 9, 2018, and physically ensures the capture and disposal, injection, or utilization of such carbon oxide (including carbon dioxide), is eligible to receive the tax credit. A taxpayer may, though need not, personally dispose of, inject, or utilize carbon oxide. Thus, a taxpayer may hire a contractor to sequester (or separate) the carbon oxide generated by the taxpayer’s facility and that contractor may receive the credit as a result. However, the Sec. 45Q credit may not be transferred to a subcontractor of the person contracted to perform the sequestration of the captured carbon oxide. The taxpayer may enter into several contracts with several counterparties in one year. The maximum amount of Sec. 45Q credits allowable to each counterparty is proportional to the sequestered carbon oxide amount by the taxpayer. 

Credit Payment Options Under the IRA

Direct Payment of Tax Credits (Sec. 6417)

Eligible taxpayers can claim a refund for the credit amount that exceeds taxes actually paid or deemed to have been paid. In lieu of receiving the credit, Sec. 6417 and the Proposed Regulations permit “applicable entities” to elect “direct pay” of the credit and receive a cash payment equal to the amount of an applicable credit. Applicable entities include tax-exempt entities and government entities (including tribal governments), with notable exceptions. Generally, taxpayers may only elect direct pay for the first five years that they are eligible, though certain entities may be eligible for twelve years. Taxpayers are required to register prior to claiming direct payment of the credit.

Transferability of Tax Credits (Sec. 6418)

Eligible taxpayers may elect to sell their credits if they cannot benefit from the credit themselves under Sec. 6418. Buyers must pay in cash. The payment to the seller is not included in their taxable income; and the amount paid by the buyer is not deductible. The buyer cannot resell or transfer the credits.  As with Sec. 6417, there is a pre-filing registration requirement for taxpayers seeking to transfer the Sec. 45Q credit.

Effective Date of Proposed Regulations

Taxpayers may rely on the Proposed Regulations for both Sec. 6417 and Sec. 6418 for taxable years starting on January 1, 2023, and before the date that final regulations are published in the Federal Register. Taxpayers must follow the Proposed Regulations consistently and in their entirety. 

It is vital for taxpayers to work with their advisors to take full advantage of the clean energy tax credits that exist. Given the added benefits that the tax credits can bring, it is imperative that taxpayers work with advisors who are both well-versed in the rules and regulations and capable of assessing how taxpayers can make use of tax credits opportunities.