The Internal Revenue Service and the Treasury Department have issued proposed regulations to help businesses navigate new carbon capture credits.

The proposed regulations provide guidance on two new credits for carbon oxide that is captured using equipment originally placed in service on or after Feb. 9, 2018, and allows up to:

• $50 per metric ton of qualified carbon oxide for permanent sequestration, and
• up to $35 for Enhanced Oil Recovery purposes.

Neither of these new credits limits the number of metric tons of qualified carbon oxide that can be captured. Before the new legislation, carbon capture was limited to a total of 75 million metric tons of qualified carbon oxide captured.

The new law, which was passed in 2018, also widened the definition of what qualifies for the credit to “qualified carbon oxide,” which is a broader term than the original “qualified carbon dioxide.”

In addition, the new proposed regulations attempt to address issues raised by taxpayers on a number of fronts, including: procedures to determine adequate security measures for the geological storage of qualified carbon oxide, exceptions to the general rule for determining who the credit is attributable to, procedures for a taxpayer to make an election to allow third-party taxpayers to claim the credit, standards for measuring utilization of qualified carbon oxide, and rules for credit recapture.

Early IRS guidance has been revisited.

The IRS issued Notice 2019-32 in 2018, after passage of the Bipartisan Budget Agreement. The agency requested comments from taxpayers on the changes made to the carbon capture credit.

The IRS says it has carefully considered the comments, and is issuing these new proposed regulations in order to provide more clarity.

Other guidance was issued earlier this year on the definition of “beginning of construction,” and providing a safe harbor for partnerships.

In Notice 2020-12, the IRS provides guidance to help businesses determine when construction has begun on a qualified facility or on carbon capture equipment that could be eligible for the credits. Notice 2020-12 was issued so that taxpayers didn’t have to request a private letter ruling in these areas.

Revenue Procedure 2020-12 outlines the IRS safe harbor for the allocation rules for carbon capture partnerships. These are similar to the safe harbors developed for partnerships that receive the wind energy tax credits for production and rehabilitation. The safe harbor simplifies the application of carbon capture credit rules to partnerships that are able to claim the credit.

Source: IR-2020-108