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IRS Issues Proposed Regulations Relating to Credits for Carbon Oxide Sequestration

June 2, 2020

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On May 28, 2020 the Internal Revenue Service (“IRS”) issued proposed regulations providing details for companies that may qualify for carbon oxide sequestration tax credits for qualified carbon oxide that has been securely captured, stored, or disposed of pursuant to Section 45Q of the Internal Revenue Code (the “Code”). 

Code Section 45Q provides a tax credit on a per-ton basis for CO2 that is sequestered. From 2008–2018, an incentive of $20 per metric ton for CO2 geologic storage and $10 per metric ton for CO2 used for enhanced oil recovery or enhanced natural gas recovery was available.  Following the 2016 tax year, the tax credit increases yearly, starting at $22.66 in 2017 to a maximum of $50 in 2026. After the 2026 tax year, the tax credit will continue to increase based upon the inflation adjustment factor provided under Code Section 43(b)(3)(B). The tax credit included a cap once a total of 75,000,000 metric tons of qualified carbon oxide was reached. A qualified carbon oxide is generally defined as a carbon oxide which is captured from an industrial source by carbon capture equipment which would otherwise be released into the atmosphere and measured at the source of capture and verified at the point of disposal, injection, or utilization. The tax credit applies only to those qualified carbon oxides captured in the United States.

The Bipartisan Budget Act of 2018 (the “Act”) expanded Section 45Q of the Code for post-2017 carbon oxide sequestration activity, increasing the tax credit cap amount, providing a  starting date for the commencement of construction of a qualified facility, and allowing the use of the qualified carbon oxide as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and properly disposing it in a secure geological storage. Following the Act, on February 19, 2020, the IRS published Notice 2020-12 to address questions and clarify the starting date of construction on qualified facilities or carbon capture equipment required to capture qualified carbon oxide. On the same date, the IRS issued Revenue Ruling 2020-12, which provided additional guidance related to the allocation rules of carbon capture partnerships able to claim the tax credit.

Taxpayers can apply the proposed regulations in their entirety for tax years beginning on or after February 28, 2018.  The proposed regulations provides two new credits available to taxpayers. The first being a tax credit of $50 per metric ton of qualified carbon oxide permanently sequestered, and the second being a tax credit up to $35 for enhanced oil recovery purposes. Neither of these credits are subject to the previous 75,000,000 metric ton cap. The proposed regulations provide that  qualified carbon oxide must be captured using one of three methods: i) qualified carbon oxide must be disposed of in a secure geological storage, ii) qualified carbon oxide must be used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of in a secure geological storage, or iii) utilization of the qualified carbon oxide. The amount of the credit claimed fluctuates based on a number of factors, including when the carbon capture equipment is placed in service, and whether the qualified carbon oxide is disposed of, injected, or utilized in certain fashions. The taxpayer is required to measure the amount of qualified carbon oxide captured through a combination of methods, which must be performed by an independent third party. In certain situations where qualified carbon oxide ceases to be captured, disposed of, or used as a tertiary injection, the tax credits associated with the capture, disposal, or use as a tertiary injection may be recaptured by the Secretary.

The 2020 proposed regulations also contain details for the procedures for companies to allow third parties to claim the credit as well as the types of contracts, terms, and reporting requirements required for contracts demonstrating assurances for the capture and disposal, injection, or utilization of qualified carbon oxide. Parties may enter into contracts with one another for the disposal, injection, or utilization of qualified carbon oxide, and the existence of such contracts must be stated on Form 8933, Carbon Oxide Sequestration Credit. The proposed regulations further clarify certain terms related to the sequestration of qualified carbon oxides that were not clearly or previously defined under Section 45Q of the Code.

If you have any questions about the information in this alert, please contact Scott Kocienski (248-203-0868 or SKocienski@dykema.com), Nardeen Dalli (248-203-0793 or NDalli@dykema.com), or your Dykema relationship attorney.

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