Section 45Q of the Internal Revenue Code was first enacted into law in 2008 to provide tax credits for capturing and storing or using carbon oxide/dioxide. Statutory constraints limited the original section 45Q credit’s application and consequently many taxpayers did not focus on the credit.
However, the Bipartisan Budget Act of 2018 amended section 45Q to further incentivize investment in carbon capture and usage, storage/sequestration projects (CCUS projects), causing project developers and investors take a fresh look at CCUS projects. Here’s what you need to know about the section 45Q credit and how you can use it.
Who is Eligible to Claim the Section 45Q Credit?
Taxpayers owning and placing into service carbon capture equipment can be eligible to claim the section 45Q credit. The section 45Q credit is generally claimed over a 12-year period beginning when the carbon capture equipment is placed into service.
Projects placed into service before February 9, 2018 are only eligible for a lower-value credit. However, regulations can allow post February 9, 2018 modifications to equipment placed into service before this date to qualify for an enhanced credit (provided, generally, the fair market value of the enhancements comprises at least 80% of the CCUS project’s total value). Under current law, eligible projects must begin construction before January 1, 2026.
How Do You Claim the section 45Q Credit?
To claim the credit, regulations require a taxpayer to:
- Physically or contractually ensure the capture and disposal of qualified carbon oxide/dioxide.
- Use qualified carbon oxide/dioxide as a tertiary injectant in a qualified enhanced oil or natural gas recovery project.
- Utilize qualified carbon oxide/dioxide in a manner qualifying for the credit.
Taxpayers can elect to allow the section 45Q credit to be claimed by another person if the other person entered into the contract with the taxpayer to dispose of the qualified carbon oxide/dioxide (disposer), utilize the qualified carbon oxide/dioxide (utilizer), or use the qualified carbon oxide/dioxide as a tertiary injectant (injector). However, a taxpayer cannot elect or otherwise allow the section 45Q credit to be claimed by a contractor or subcontractor that physically captures carbon oxide/dioxide on behalf of the taxpayer.
For partnerships, IRS Rev. Proc. 2020-12 generally (and subject to certain limitations) permits the section 45Q credit to be allocated in the same manner as partnership income or in accordance with the partners’ interests in the partnership. This guidance can allow project developers to finance a CCUS project by raising investor equity and then allocating the section 45Q credit to the investors along with the investors’ distributive share of other items.
Watch our Inspired Perspectives Webinar on the section 45Q credit.
What is the amount of the section 45Q Credit?
The section 45Q credit is generally based upon the quantity of captured carbon oxide/dioxide. The credit amount also depends upon how the carbon oxide/dioxide is used after it is captured. Currently, the section 45Q credit is $50 per metric ton if sequestered and $35 per metric ton if utilized.
The section 45Q credit can be recaptured (meaning a tax liability) if a “recapture event” occurs during the “recapture period.” IRS regulations provide that a recapture event occurs when qualified carbon oxide/dioxide for which a section 45Q credit has been previously claimed ceases to be disposed of in a “secure geological storage” or used as a “tertiary injectant”.
The recapture period begins on the date of first injection of qualified carbon oxide/dioxide for disposal in secure geological storage or use as a tertiary injectant for which a section 45Q credit was claimed. The recapture period ends on the earlier of three years after the last taxable year in which the taxpayer claimed a section 45Q credit (or was eligible to claim a credit that it elected to carry forward) or the date monitoring ends under the applicable standards.
What Incentives Were Introduced in 2018 to the section 45Q Credit?
Incentives introduced in 2018 include:
- Larger credit amount
- 12-year claim period instead of the 75 million metric ton cap in place before 2018
- Allowing the credit for CO2 utilization in addition to enhanced oil recovery and for direct air capture
- Smaller facilities can be eligible (minimum eligibility thresholds reduced)
- Permitting owners of carbon capture equipment to claim tax credits instead of the person capturing the CO2
How Eide Bailly Can Help
Eide Bailly’s Business Credits & Incentives (BC&I) group is composed of nationally recognized industry specialists backed by accounting professionals, CPAs, lawyers, Professional Engineers and energy modelers.
We will assess your business and dashboard eligible credits and incentives available to you. Once identified we help you claim, monitor, report and verify each credit (including the section 45Q credit) and incentive on an annual basis.
- Research & Development Credit
- Employee Retention Credit
- Cost Segregation Analysis
- Commercial Buildings Energy-Efficiency Tax Deduction (Section 179D)
- New Energy Efficient Home Credit (Section 45L)
- Historical Tax Credit
- Carbon Oxide Sequestration Credit (Section 45Q)
- Mortgage Insurance Premium Reduction for Green Buildings
- Residential/Commercial Property Assessed Clean Energy Incentive (R-PACE and C-PACE)
Ready to learn more about what the 45Q credit means for you?