September 20, 2021

Volume XI, Number 263


September 17, 2021

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IRS Releases Initial Section 45Q Carbon Sequestration Credit Guidance

Treasury and the IRS released initial guidance on the amended Section 45Q carbon oxide sequestration credit on February 19, 2020. Notice 2020-12 and Revenue Procedure 2020-12 provide guidance relating to the beginning of construction and tax equity partnership allocations.

This is the first Section 45Q guidance since Treasury issued a request for comments in Notice 2019-32 last year. That Notice sought input on a number of issues raised by amendments to Section 45Q that expanded the scope and enhanced the amount of the Section 45Q credit pursuant to the Bipartisan Budget Act of 2018, P.L. 115-123. The new guidance in Notice 2020-12 and Revenue Procedure 2020-12 is effective March 9, 2020.

Notice 2020-12 closely follows the beginning of construction guidance for the Investment Tax Credit (ITC) in Notice 2018-59 and the Production Tax Credit (PTC) in Notice 2013-29 (as clarified and modified by subsequent notices). Like the ITC and PTC guidance, taxpayers can demonstrate construction has begun for purposes of Section 45Q by beginning significant physical work or incurring at least five percent of the total project cost. The guidance provides a six-year continuity safe-harbor period, which is an increase from the four-year safe harbor for the ITC and PTC. Perhaps in acknowledgment of the technical challenges of implementing carbon capture technology, certain front-end engineering and design costs are eligible for the five-percent safe harbor.

Revenue Procedure 2020-12 creates a safe harbor for partnership allocations of the Section 45Q credit, similar to the safe harbor in Rev. Proc. 2007-65 applicable to PTC-eligible wind facilities. The new guidance applies a 50 percent contingent consideration requirement, rather than the 75 percent requirement under the previous guidance. The safe harbor guidelines are otherwise very similar to the existing PTC guidance in Rev. Proc. 2007-65 as to minimum unconditional investment, purchase and sale rights, and limitations on guarantees and loans.

A number of issues specific to the carbon sequestration credit were not addressed in Notice 2020-12 and Revenue Procedure 2020-12. In particular, the new guidance does not define “secure geological storage” and does not delineate what uses of sequestered carbon are eligible for the credit. IRS and Treasury are expected to issue additional guidance on these questions in the near future.

We will be issuing a more detailed analysis of the new guidance in the coming days.

© 2021 McDermott Will & EmeryNational Law Review, Volume X, Number 52

About this Author

Philip Tingle Tax Attorney McDermott Will & Emery

Philip (Phil) Tingle represents energy companies such as utilities, independent power producers and financial institutions on a wide range of energy tax-related matters. He is the global head of the Firm's Energy Advisory Practice Group.

Phil provides advice regarding all aspects of renewable-energy projects, including tax equity structures, refinancings, acquisitions and dispositions, restructurings and workouts. He has extensive experience with the production tax credit and with the application of renewable credits to new technologies....

Martha Groves Pugh, Federal Income Tax Attorney, McDermott Will Emery Law Firm

Martha Groves Pugh is counsel in the law firm of McDermott Will & Emery LLP and is based in its Washington, D.C., office.  She focuses her practice on federal income tax issues with a particular emphasis on the nuclear and energy industries.  Marty has helped clients seek and receive many private letter rulings and has extensive experience in drafting legislative language for tax proposals. Her practice also includes tax planning for proposed transactions and advising clients on audits, appeals and litigation issues...

Heather Cooper, Energy Attorney, McDermott Will & Emery Law Firm

Heather Cooper is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Miami office.  She works on federal income tax matters, with a focus on energy tax issues. She represents clients in restructurings, mergers and acquisitions, and other transactional energy related matters. Her national practice includes advising on renewable energy transactions, such as solar and wind projects.

Brian Moore Associate Washington, DC Tax  Federal Taxation  State & Local Tax  Tax Structuring

Brian Moore focuses his practice on US and international tax matters. While in law school, Brian served as an AmeriCorps JD Veterans Legal Assistance Intern for Legal Assistance of Western New York and he was an articles editor for the Yale Law and Policy Review. Prior to attending law school, he served as a research assistant for the White House Council of Economic Advisors where he assisted the chairman and members of the council in advising the president on tax policy and other public finance matters. Additionally, he was a research analyst for a global think tank and a research...