AndreTaxCo, PLLC

Background 

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Internal Revenue Code (IRC) § 45Q was enacted by § 115 of the Energy Improvement and Extension Act of 2008, Division B of Pub. L. No. 110-343, 122 Stat. 3765, 3829 (October 3, 2008), to provide a credit for the sequestration of carbon dioxide. IRC § 45Q was amended by § 1131 of the American Recovery and Reinvestment Tax Act of 2009, Division B of Pub. L. 111-5, 123 Stat 115 (February 17, 2009), section 41119 of the Bipartisan Budget Act of 2018 (BBA), Pub. L. No. 115-123 (February 9, 2018) and more recently Section 13104 of the Inflation Reduction Act of 2022 (IRA), Pub. L. 117-169 (August 16, 2022), further extending the IRC § 45Q credit.

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In general, the IRA of 2022 further expanded and extended the IRC § 45Q tax credit for carbon capture, utilization, and sequestration (CCUS) pursuant to permitted end uses within the United States. The IRA also adds an enhanced credit for direct air capture (DAC), lowers the carbon capture threshold requirements for certain facilities, and may be claimed for 12 years after a facility is placed in service (must be placed in service before January 1, 2023). 

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The IRA allows certain taxpayers to elect to have the 12-year credit term begin on the first day of the first tax year in which an IRC § 45Q tax credit is claimed if certain conditions are met. This applies to carbon capture equipment that is originally placed in service at a qualified facility on or after the date the Bipartisan Budget Act of 2018 was enacted if

• (1) no taxpayer has claimed a credit under IRC § 45Q for the equipment for any prior year,

• (2) the facility where the equipment is placed in service is located in an area affected by a federally-declared disaster after the capture equipment was originally placed in service and

• (3) the disaster resulted in the facility or equipment ceasing to operate after it was originally placed in service.

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The IRC § 45Q credit benefit is also expanded under the IRA to entities that generally do not benefit from income tax credits, such as state, local, and Tribal governments and other tax-exempt entities and may elect to receive these tax credits in the form of direct payments. Certain businesses also can elect to receive the IRC § 45Q tax credits in the form of direct payments.

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Lastly, the IRA also includes modified provisions tying the credit amounts to meeting prevailing wage and registered apprenticeship requirements. Facilities meeting prevailing wage and registered apprenticeship requirements can further qualify for bonus credits.

 

The IRC § 45Q credit further supports funding in the Bipartisan Infrastructure law for carbon capture utilization storage (CCUS) and direct air capture (DAC), including the Carbon Capture Demonstration Projects Program ($2.5B), Carbon Capture Large-Scale Pilot Programs, ($937M), and Regional Clean Direct Air Capture Hubs ($3.5B).  

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Note, the IRC § 45Q credit may be reduced for tax-exempt bonds with similar rules as IRC § 45(b)(3) (Production Tax Credit) and IRC § 48 (Investment Tax Credit), the revised IRC § 45Q has comparable rules reducing the credit when tax-exempt bonds are used in financing the facility. The amendments may generally apply, with specified exceptions, to facilities or equipment placed in service after December 31, 2022. Projects financed with tax-exempt bonds may have the credit amount reduced by the lesser of (1) 15%; or (2) the fraction of the proceeds of a tax-exempt obligation used to finance the project over the aggregate amount of the project’s financing costs.  

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Credit Benefits & Summary 

Under prior law [Bipartisan Budget Act of 2018 (BBA), Pub. L. No. 115-123 (February 9, 2018)], eligible carbon oxide sequestration credit projects must begin construction before January 1, 2026. This tax credit can be claimed for carbon oxide captured during the 12-year period following a qualifying facility’s being placed in service. 

 

However, the recent IRA extends that beginning-of-construction-deadline to January 1, 2033. Currently, the per metric ton tax credit for geologically sequestered carbon oxide is set to increase to $50 per ton by 2026 ($35 per ton for carbon oxide that is reused (i.e., "enhanced oil recovery") and adjusted for inflation thereafter. This provision would extend the start of construction deadline to December 31, 2032.

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Further, the annual capture requirements for eligibility decrease to the following:

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• For direct air capture (DAC) facilities, at least 1,000 metric tons of qualified carbon oxide

• For an electricity-generating facility, (1) at least 18,750 metric tons of qualified carbon oxide, and (2) with respect to any carbon capture equipment for the applicable electric generating unit at such facility, has a capture design capacity of at least 75% of the baseline carbon oxide production of such unit (the IRA contains detailed definitions of the applicable electric generating unit, the baseline carbon oxide production, the capacity factor and others); or

• For all other facilities, at least 12,500 metric tons of qualified carbon oxide.

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Credit Amount:

The IRC § 45Q carbon oxide sequestration tax credit is subject to the two-tiered credit regime, with a lower base rate and a higher bonus rate (if the prevailing wage and apprenticeship requirements are met; see "Bonus Credit Amount" below). Under the IRA, the applicable credit rates are as follows:

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• Base Credit Amounts (see also "Bonus Credit Amount" below)

  • Permanent sequestration: $17 per metric ton for carbon oxide that is captured and geologically sequestered and and not used.

    • Increases to $85 per tonne of CO2 permanently stored,​ provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. See "Bonus Credit Amount" below.

  • Utilization or enhanced oil or natural gas recovery (EOR): For qualified carbon oxides that are captured and either (1) utilized in an approved manner, or (2) used as a tertiary injectant in a qualified EOR project and disposed of by the taxpayer, the base rate is $12 per metric ton of qualified carbon oxide.

    • Increases to $60 per tonne of CO2 used for enhanced oil recovery (EOR) or other industrial uses of CO2, provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. See "Bonus Credit Amount" below.

  • Direct Air Capture (DAC) facilities: 

    • ​For projects that (1) use DAC facilities to capture carbon oxides and (2) dispose of the qualified carbon oxides in secure geological storage (and do not use them), the base rate is $36 per metric ton of qualified carbon oxide.

      • Increases to $180 per tonne of CO2, provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. See "Bonus Credit Amount" below.

    • For taxpayers that either (1) "utilize" the carbon oxides in an approved manner or (2) use the carbon oxides in an approved EOR project and dispose of them properly, the base rate is $26 per metric ton of qualified carbon oxides.

      • Increases to $130 per tonne of CO2, provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. See "Bonus Credit Amount" below.​

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• Bonus Credit Amount: 5 times the base credit amounts, may be available if the facility meets prevailing wage and registered apprenticeship requirements. See initial guidance on the labor provisions.​

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Credit for Carbon Oxide Sequestration (45Q) eligibility for Direct Pay: Section 13801 of the Inflation Reduction Act, adding Section 6417 of the Internal Revenue Code, extends numerous tax incentives, including the IRC § 45Q credit, to entities that generally do not benefit from income tax credits, such as state, local, and Tribal governments and other tax-exempt entities. Specifically, these entities can elect to receive these tax credits in the form of direct payments. Certain businesses also can elect to receive the IRC § 45Q tax credits in the form of direct payments, subject to additional limitations.

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Direct Pay Eligibility:

• Tax-exempt organizations, states, political subdivisions, the Tennessee Valley Authority, Indian Tribal governments, Alaska Native Corporations, and rural electricity co-ops (applicable entities) may be eligible for direct pay.

• Entities other than applicable entities (see above) may be eligible for up to 5 years of direct pay (less than the full credit period; expires at the end of 2032) if they make an election.

• In general, this applies to carbon capture equipment (CCE) that is originally placed in service after December 31, 2022.

• Applies separately with respect to CCE placed in service during a taxable year.

45Q tax credit also is Transferable: Section 13801 adds Section 6418 of the Internal Revenue Code (IRC) and makes certain tax credits transferable. Taxpayers that are generally ineligible for direct payment of credits may transfer all or a portion of certain credits to an unrelated party in exchange for cash.