IRS Expected to Issue Multipart Carbon Capture Clarity This Year

The Internal Revenue Service is expected to release documents in at least two stages by the end of the year related to a critical tax credit for carbon capture, providing long-awaited clarity to the industry on how they can also capture tax benefits for their work. 

The releases would begin to close an almost two-year period since the Feb. 9, 2018, enactment of the enhanced and extended 45Q carbon sequestration tax credit — a critical incentive for the nascent domestic carbon capture, storage and utilization community, with implications for both business and the climate.

Based on informal feedback from Carbon Capture Coalition participants who have spoken with the administration, CCUS advocates anticipate that the IRS around Thanksgiving could release something other than a proposed rule, such as guidance, followed by a proposed rule by the end of the year, said Brad Crabtree, vice president for carbon management at the Great Plains Institute and director of the coalition.  

Crabtree cautioned that the Treasury Department and IRS will make the ultimate decision on what to issue and when. But the first document the agency releases is expected to include information that companies need for the current tax year. 

The coalition’s regulatory subgroup met Oct. 29 to discuss the IRS issue, among other matters. 

Occidental Petroleum Corp., a coalition participant, has also heard the releases are likely to be separated into multiple parts, with a proposed rule likely by year’s end.

The previous iteration of the 45Q tax credit “was not investable” for third parties, said Anthony Cottone, senior director of Oxy Low Carbon Ventures, a subsidiary of Occidental. “When the IRS provides clarity on the structure and technical aspects,” the market will open up for investors more than ever before.

Advocates are encouraged that the IRS has been receptive and integrated industry suggestions in its requests for feedback related to 45Q. 

The agency has an open Notice of Proposed Rulemaking project on the issue, according to IRS spokesperson Robyn Walker. 

“The typical public comment period is 90 days after the publication of the NPRM, which is followed by a public hearing if one is requested,” Walker said in an Oct. 29 email. “We have no anticipated date for the release of guidance at this time.”

The Energy Department did not respond to questions regarding the timing and content of the IRS releases.

The issuance of multiple clarifying documents may be due in part to handling the technical and pass-through aspects of the 45Q credit across two IRS branches, Cottone said.

Occidental hopes and expects to receive clarity on what could constitute an investable tax equity partnership under 45Q and how construction commencement is defined.

The more comprehensive issues at hand — such as how demonstrators of secure geologic storage can claim the credit and how the IRS will define credit recapture — are more likely to be handled later in a proposed rule, Crabtree said. Under the enacted 45Q law, companies may lose their claimed credits if they have not stored the carbon, and an IRS interpretation will reduce companies’ investment risk.

The proposed rule is expected to guide immediate CCUS efforts, providing long-term certainty for near-term projects, while subsequent projects would adhere to any final rule, Crabtree said.

The amended 45Q credit enacted in 2018 made several changes to the original incentive, including increasing the carbon usage credit from $10 to $35 per metric ton of carbon dioxide and the storage credit from $20 to $50 per ton. 

Carbon capture advocates hope to see the credit eventually extended past its current statutory start-of-construction deadline of Jan. 1, 2024, as well as the potential removal of the credit’s minimum eligibility thresholds.    

Pressure is highest on companies that soon want to make financial decisions on CCUS, and they could benefit from the ability to rely on the upcoming IRS proposal.

The lack of clarity from IRS to date has been “an impediment,” Crabtree said. Once the IRS releases its materials, “the interest in the tax credit and the desire to move forward with projects is going to be unleashed.”