IRS Publishes Proposed Regs on Carbon Oxide Sequestration Credit

IRS Publishes Proposed Regs on Carbon Oxide Sequestration Credit

Internal Revenue Service

The IRS has published proposed regulations (REG-112339-19) on the credit for carbon oxide sequestration under <a href="/research/federal/usc26/45Q" resolve="/lr/resolve/section-45q/cpwr" title="section 45Q">section 45Q</a> for those tasked with determining adequate security measures for geological storage and standards for recapture of credits and for carbon oxide use. The proposed regs provide guidance on two new credits for carbon oxide captured using equipment originally placed in service on or after February 9, 2018, allowing up to $50 per metric ton of qualified carbon oxide for permanent sequestration, and up to $35 for enhanced oil recovery purposes.  Before the release of the proposed regs, the IRS received scores of comments in response to <a href="/lr/resolve//29g0t">Notice 2019-32</a>, which resulted in guidance (<a href="/lr/resolve//2c66x">Rev. Proc. 2020-12</a>) that provides a safe harbor under which the IRS will treat partnerships as properly allocating the <a href="/research/federal/usc26/45Q" resolve="/lr/resolve/section-45q/cpwr" title="section 45Q">section 45Q</a> credit in accordance with <a href="/research/federal/usc26/704#cpfs-0000003" resolve="/lr/resolve/section-704b/cpfs#cpfs-0000003" title="section 704(b)">section 704(b)</a>. The revenue procedure also provided guidance on the determination of when construction has begun on a qualified facility or on carbon capture equipment that may be eligible for the <a href="/research/federal/usc26/45Q" resolve="/lr/resolve/section-45q/cpwr" title="section 45Q">section 45Q</a> credit. The proposed regs are designed to ensure proper allocation under <a href="/research/federal/usc26/45Q#cpwr-0000002" resolve="/lr/resolve/section-45qa/cpwr#cpwr-0000002" title="section 45Q(a)">section 45Q(a)</a> for qualified carbon oxide captured by a taxpayer during the tax year ending after the date of the enactment of the Bipartisan Budget Act of 2018, and to determine whether a facility satisfies the requirements under <a href="/research/federal/usc26/45Q#cpwr-0000020" resolve="/lr/resolve/section-45qd1/cpwr#cpwr-0000020" title="section 45Q(d)(1)">section 45Q(d)(1)</a>. In response to comments, the proposed regs provide a framework for the types of contracts, terms, and reporting requirements that will demonstrate the contractual assurance of the capture and disposal, injection, or use of qualified carbon oxide. The proposed regs also provide guidance on who may make the election to allow the credit to go to another taxpayer and the time and manner for making the election. The regs direct taxpayers to claim <a href="/research/federal/usc26/45Q" resolve="/lr/resolve/section-45q/cpwr" title="section 45Q">section 45Q</a> credits on an amended federal income tax return, an amended Form 1065, or an administrative adjustment request, as applicable, for tax years beginning on or after February 9, 2018, provided that the relevant requirements are satisfied. The proposed regs clarify the meaning of several terms, including qualified carbon oxide, carbon capture equipment, and industrial facility, and address the determination of adequate security measures for the geological storage of qualified carbon oxide under <a href="/research/federal/usc26/45Q#cpwr-0000002" resolve="/lr/resolve/section-45qa/cpwr#cpwr-0000002" title="section 45Q(a)">section 45Q(a)</a>. Treasury and the IRS considered three options for defining standards for secure geological storage and agreed on an alternative quantification method. Lastly, the proposed regs address commentators' concerns about the method for measuring the amount of leaked qualified carbon oxide subject to recapture (recapture amount), the method for calculating recapture, and the open period during which a recapture event may occur (recapture period). The proposed regs provide guidance on when the recapture period begins and address commentators’ request for a recapture safe harbor. The proposed regs don't provide the safe harbor but do limit the recapture period similar to the recapture provisions for investment credit property under <a href="/research/federal/usc26/50#cp69-0000003" resolve="/lr/resolve/section-50a1/cp69#cp69-0000003" title="section 50(a)(1)">section 50(a)(1)</a>. Specifically, the regs provide that any recapture amount will be accounted for in the tax year that it is identified and reported. The regulations are generally proposed to apply to tax years beginning on or after the date that final regs are published. Comments and hearing requests are due by August 3, 2020.

The IRS has published proposed regulations (REG-112339-19) on the credit for carbon oxide sequestration under section 45Q for those tasked with determining adequate security measures for geological storage and standards for recapture of credits and for carbon oxide use.

The IRS has published proposed regulations (REG-112339-19) on the credit for carbon oxide sequestration under section 45Q for those tasked with determining adequate security measures for geological storage and standards for recapture of credits and for carbon oxide use. The proposed regs provide guidance on two new credits for carbon oxide captured using equipment originally placed in service on or after February 9, 2018, allowing up to $50 per metric ton of qualified carbon oxide for permanent sequestration, and up to $35 for enhanced oil recovery purposes.  Before the release of the proposed regs, the IRS received scores of comments in response to Notice 2019-32, which resulted in guidance (Rev. Proc. 2020-12) that provides a safe harbor under which the IRS will treat partnerships as properly allocating the section 45Q credit in accordance with section 704(b). The revenue procedure also provided guidance on the determination of when construction has begun on a qualified facility or on carbon capture equipment that may be eligible for the section 45Q credit. The proposed regs are designed to ensure proper allocation under section 45Q(a) for qualified carbon oxide captured by a taxpayer during the tax year ending after the date of the enactment of the Bipartisan Budget Act of 2018, and to determine whether a facility satisfies the requirements under section 45Q(d)(1). In response to comments, the proposed regs provide a framework for the types of contracts, terms, and reporting requirements that will demonstrate the contractual assurance of the capture and disposal, injection, or use of qualified carbon oxide. The proposed regs also provide guidance on who may make the election to allow the credit to go to another taxpayer and the time and manner for making the election. The regs direct taxpayers to claim section 45Q credits on an amended federal income tax return, an amended Form 1065, or an administrative adjustment request, as applicable, for tax years beginning on or after February 9, 2018, provided that the relevant requirements are satisfied. The proposed regs clarify the meaning of several terms, including qualified carbon oxide, carbon capture equipment, and industrial facility, and address the determination of adequate security measures for the geological storage of qualified carbon oxide under section 45Q(a). Treasury and the IRS considered three options for defining standards for secure geological storage and agreed on an alternative quantification method. Lastly, the proposed regs address commentators' concerns about the method for measuring the amount of leaked qualified carbon oxide subject to recapture (recapture amount), the method for calculating recapture, and the open period during which a recapture event may occur (recapture period). The proposed regs provide guidance on when the recapture period begins and address commentators’ request for a recapture safe harbor. The proposed regs don't provide the safe harbor but do limit the recapture period similar to the recapture provisions for investment credit property under section 50(a)(1). Specifically, the regs provide that any recapture amount will be accounted for in the tax year that it is identified and reported. The regulations are generally proposed to apply to tax years beginning on or after the date that final regs are published. Comments and hearing requests are due by August 3, 2020.

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IRS Publishes Proposed Regs on Carbon Oxide Sequestration Credit