IRS to Seek Comment on Key Issues to Be Interpreted in Section 45Q Tax Credit

(Hunton Andrews Kurth) The Department of Treasury (“Treasury”) and Internal Revenue Service (“IRS”) have released Notice 2019-32 (the “Notice”) seeking comment on key issues to be interpreted in the Section 45Q carbon oxide
sequestration tax credit.

Congress significantly enhanced the Section 45Q tax credit in the Bipartisan Budget Act of 2018 (“BBA”),
increasing the credit from $10/ton for CO2 used as a tertiary injectant (i.e., to produce oil or gas) to $35/ton;
and increasing the credit for CO2 geologically stored but not used as a tertiary injectant from $20/ton to
$50/ton. See our previous blog post here for additional details on the applicable credit amounts for projects
before and after enactment of the BBA, and other credit amount details.

The BBA also enhanced the credit by establishing a 12-year credit term, making it easier to transfer the
credit, expanding the credit to cover sequestration of emissions of other carbon oxides in addition to CO2,
and extending the credit to “utilization” of carbon oxides in ways that keep them out of the atmosphere, other
than geological sequestration (e.g., fixation of carbon oxides in building materials, or use for growth of algae
or bacteria). “Utilization” requires the IRS to apply a lifecycle analysis, which may reduce the credit amount if
some of the utilized carbon oxides return to the atmosphere.

The IRS Notice does not provide any substantive guidance but seeks comments from interested parties on a
full range of questions on key issues in the Section 45Q tax credit. Those comments will be considered by
Treasury and the IRS in drafting regulations or other guidance. The issues on which comments are
requested include:

• What requirements should apply to demonstrate that carbon oxides have been securely geologically
stored;
• What rules should apply for the government to recapture the credit should carbon oxides no longer
be stored;
• Is guidance needed to clarify terms such as “carbon capture equipment,” “qualified carbon oxide,”
“qualified facility” and others;
• What types of “utilization” should qualify for the credit;
• What are the boundaries for determining lifecycle emissions of carbon oxides that are “utilized”;
• What are common types of contractual arrangements between investors and parties who capture
and dispose of carbon oxides, and what are some of the common terms of contracts specifically
when the carbon oxides are used as a tertiary injectant;
• What issues should be considered regarding transfer of the Section 45Q tax credit;

What should constitute the beginning of construction for purposes of the credit;
• Is guidance needed regarding partnership structures between project developers and investors; and
• What issues may arise in determining the amount of carbon oxides utilized by the taxpayer, based
on a lifecycle analysis.

Comments will be due 45 days after the Notice is published in the Federal Register. READ MORE

Excerpt from Politico's Morning Energy: SENATORS ASK FOR CARBON TAX CREDIT GUIDANCE: Senate Environment and Public Works Chairman John Barrasso (R-Wyo.), Sheldon Whitehouse (D-R.I.) and Shelley Moore Capito (R-W.Va.) led a bipartisan letter to Treasury Secretary Steven Mnuchin on Monday calling for interim guidance on implementing the carbon capture utilization and storage tax credit program. Signers of the letter sponsored a law, the FUTURE Act, S. 1535 (115), that amended the Internal Revenue Code to expand the so-called 45Q tax credit for carbon dioxide sequestration.
The senators write that it has been well over a year since the law's passage, but "taxpayers remain unable to claim the revised credit." The IRS in early May requested comment on how it should write the rules to implement tax credits for carbon capture.
— Speaking of: The Carbon Capture Coalition unveiled its policy blueprint Monday for the deployment of carbon capture technologies. On the list of priorities: ensuring effective implementation of the 45Q tax credit by Treasury. READ MORE

Excerpt from Politico's Morning Energy: MAIL CALL! The Carbon Capture Coalition sent a letter to the Senate Finance Committee's energy task force Monday with recommendations for reforming the so-called 45Q tax credit for carbon dioxide sequestration. In the letter, the coalition recommends that Congress amend the Internal Revenue Code to prevent disallowance of 45Q under the Base Erosion and Anti-Abuse Tax, among other recommendations. READ MORE

Excerpt from Politico's Morning Energy: MAIL CALL: CONGRESS TO IRS, LET'S GET THAT 45Q GUIDANCE GOING! Republican Rep. Mike Conaway and 30 other members of Congress from both parties are calling on the IRS to speed up its process of giving guidance for accessing the 45Q tax credit for carbon capture. Industry faces a ticking clock to commence construction on projects and needs guidance and rules from the IRS on what qualifies for the program, the lawmakers argue. Projects require long lead times, and "it is imperative" that the IRS provide guidance quickly, the letter says. READ MORE