Key OBBBA provisions for clean fuel producers
With respect to clean fuels, the key OBBBA amendments relate to the following credits:
- Section 45Z: Clean fuel production credit
- Section 40B and 6426(k): Sustainable aviation fuel credits
- Section 45Q: Carbon oxide and sequestration credit
- Section 45V: Clean hydrogen production credit
- Section 40A: Small biodiesel production credit
Below is a detailed analysis of each, as well as analyses of changed FEOC rules and credit transferability limitations.
Section 45Z: Clean fuel production credit
Section 45Z provides a nonrefundable income tax per-gallon credit for the production and sale of certain transportation fuels. The 45Z credit is effective for transportation fuel produced and sold beginning Jan. 1, 2025.
Credit rates for qualifying fuels are based in part on lifecycle greenhouse gas (GHG) emissions scores. Enhanced credit rates apply if claimants comply with certain labor requirements (prevailing wage and apprenticeship (PWA)). The clean fuel producer has the option to transfer (i.e., sell the credit for cash) to an unrelated party under the monetization provisions.
The OBBBA preserves the structural framework of section 45Z as enacted under the IRA but contains a range of material amendments that significantly impact eligibility, credit value, and the administration of the credit.
Extension of credit through 2029: The OBBBA extends the section 45Z credit for transportation fuel produced and sold through Dec. 31, 2029. While prior iterations of the bill extended the credit through 2031, ultimately the compromise was for the shorter period; however, it is noteworthy that the section 45Z credit is the only clean energy credit that was extended beyond its initial expiration date.
Exclusion of foreign feedstocks: Effective for transportation fuel produced after Dec. 31, 2025, the OBBBA requires transportation fuel to be exclusively derived from feedstocks produced or grown in the United States, Canada or Mexico. This restriction is expected to significantly affect producers relying on foreign feedstocks, such as biodiesel producers using imported fats, greases, or oils, as well as sustainable aviation fuel producers using imported sugarcane ethanol.
Affected producers will need to assess procurement strategies and possible restructuring of global supply chains in order to continue to produce fuel that qualifies for a section 45Z credit.
Modifications to emissions rates: Effective for emissions rates published for transportation fuel produced after Dec. 31, 2025, the OBBBA makes several modifications to determination of emissions rates, which will ultimately affect the value of the section 45Z credit to be claimed.
- Negative CI scores: The OBBBA prohibits negative emissions rates, except in the case of transportation fuel derived from animal manure. With respect to transportation fuel derived from animal manure, the OBBBA directs the secretary of the U.S. Department of the Treasury to provide distinct emissions rate for dairy, swine and poultry manure, and any other sources determined appropriate. This emissions rate may be below zero. This clarification supports producers of renewable natural gas, such as those derived from anaerobic digestion from manure; however, it remains to be seen whether Treasury’s future guidance will change the current emissions rates to provide more favorable rates for these feedstocks.
- Removal of ILUC penalty. The OBBBA excludes emissions attributed to indirect land use change (ILUC) in determining the emissions rate. The OBBBA directs the secretary of the Treasury to adjust emissions rates by regulations or methodologies it determines. This provision is expected to lower the CI score of certain crop-based biofuels by a few points and potentially allow certain facilities to qualify for the credit that previously did not.
Preventing double credit. The OBBBA adds two provisions under the heading “preventing double credits.”
- The OBBBA amends the definition of transportation fuel to eliminate the credit for fuel produced from a fuel for which another section 45Z credit is “allowable”. It further directs the secretary of the Treasury to issue regulations to carry out the purposes of this section.
- The OBBBA expands the definition of “related persons” to allow the secretary of the Treasury to prescribe additional rules for additional entities not listed, including rules for related persons where the taxpayer has reason to believe the related person will sell the fuel to an unrelated person.
Restrictions relating to prohibited foreign entities: As discussed more fully below, the OBBBA amends section 45Z to require application of certain FEOC rules effective for taxable years beginning after date of enactment.
Sustainable aviation fuel (SAF) amendments
The OBBBA makes certain amendments to the credits for SAF:
- Reinstatement and extension of excise tax credits: The OBBBA extends the SAF excise tax blender’s credit and complementary income tax credit under section 40B through Sept. 30, 2025. It further provides coordinating rules such that a credit under section 6426 or section 40B is not applicable for any gallon of SAF for which a credit under section 45Z is “allowable”.
- Modifications to section 45Z: Effective for fuel produced after Dec. 31, 2025, the OBBBA reduces the credit rate for sustainable aviation fuel to a maximum amount of $1.00 per gallon.
Section 45Q: Carbon capture and sequestration credit
Section 45Q generally provides a nonrefundable income tax credit for each metric ton of qualified carbon oxide captured and either stored securely in geological storage, or put to qualifying use.
Captured carbon oxide may qualify for the credit if it meets any of the following criteria:
- Securely stored in geological formations (without reuse)
- Used as a tertiary injectant in enhanced oil or natural gas recovery
- Disposed of in secure geological storage
- Utilized at a direct air capture facility in accordance with section 45Q(f)(5) (e.g., through chemical conversion or mineralization)
The OBBBA preserves the core structure of section 45Q but makes key changes to applicable credit amounts and credit eligibility.
Credit rate parity for different carbon oxide utilization and disposition methods: The OBBBA modifies the section 45Q credit rates for some technologies.
It modifies the credit rate for facilities and equipment placed in service after enactment. For taxable years beginning after 2024 and before 2027, the applicable dollar amount is standardized at $17 per metric ton of qualified carbon oxide, regardless of whether it is stored or utilized. Beginning in 2026, the $17 amount will be adjusted for inflation.
These rates increase by fivefold to $85 per metric ton if the prevailing wage and apprenticeship requirements are met. This replaces the prior law, which varied the credit amount based on capture method and disposition:
- $36 per ton for direct air capture facilities
- $17 per ton for industrial capture and geological storage without use as a tertiary injectant or reuse
- $12 per ton for carbon used as a tertiary injectant or utilized in other ways.
The new rate provision applies to facilities and equipment placed in service after enactment. Prior to the OBBBA, the beginning of construction for these facilities had to occur prior to Jan 1, 2033.
Restrictions relating to prohibited foreign entities: As discussed more fully below, the OBBBA amends section 45Q to require application of certain FEOC rules effective for taxable years beginning after date of enactment.
Foreign entities of concern (FEOC) rules
Applicable to taxable years beginning after July 4, 2025, the OBBBA adds complex restrictions to sections 45Z and 45Q relating to prohibited foreign entities. The OBBBA generally prohibits taxpayers from claiming energy credits if they receive material assistance from or have certain ties to certain foreign entities. In particular, the amendments prohibit credits is the taxpayer is a foreign entity or if the taxpayer is a foreign-influenced entity.
Prohibits credit if the taxpayer is a specified foreign entity. In general, this term includes:
- Any entity that meets the definition of foreign entity of concern under certain U.S. rules, which includes China, Russia, North Korea, and Iran
- Chinese military companies
- Entities designated by the U.S. Secretary of State as a foreign terrorist organization under applicable authorities
- Entities appearing on the Treasury Department’s Office of Foreign Assets Control (OFAC) list of specially designated nationals and blocked persons
- Entities listed pursuant to the Uyghur Forced Labor Prevention Act
- Foreign-controlled entity as defined by U.S. rules
Prohibits credit for any taxable year beginning after July 4, 2027, if the taxpayer is a foreign-influenced entity. This term in general means any entity to which any of the following apply during the taxable year:
- A specified foreign entity has the direct authority to appoint a covered officer of the taxpayer
- A single specified foreign entity owns at least 25% of the taxpayer
- One or more specified foreign entities collectively own at least 40% of the taxpayer
- One or more specified foreign entities hold, in the aggregate, at least 15% of the taxpayer’s outstanding debt
These ownership and governance thresholds are intended to identify entities with substantial foreign influence and exclude them from eligibility for the section 45Z clean fuel production credit.
Section 45V: Clean hydrogen production credit
The OBBBA accelerates the termination of the section 45V clean hydrogen production credit by requiring construction on facility to commence before Jan. 1, 2028, for the facility to be eligible for such credits. The OBBBA does not apply the FEOC rules to section 45V.
Section 40A: Small agri-biodiesel producer credit extension and increased credit rate
Effective for qualifying fuel sold or used after June 30, 2025, the OBBBA makes several amendments to the small agri-biodiesel producer credit. This credit is generally permitted for producers with productive capacity for agri-biodiesel not in excess of 60,000,000 gallons and the credit is limited to 15,000,000 gallons. The OBBBA:
- Increases the credit to a rate of $.20 per gallon
- Extends the credit for sales or uses through Dec. 31, 2026
- Provides coordinating rules with sec. 45Z to allow both the small agri-biodiesel producer credit and the section 45Z credit for qualifying gallons
- Permits the credit to be eligible for the transferability rules under section 6418
Transferability of tax credits
The OBBBA preserves the core framework of credit transferability of tax credits so that taxpayers generating credits may transfer (i.e., sell) clean energy tax credits to unrelated parties. However, the new bill introduces targeted limitations that may affect how and to whom credits can be transferred.
Effective for taxable years beginning after the date of enactment, the OBBBA prohibits transfers involving entities that are classified as FEOCs. This restriction bars both the purchase and sale of credits if a FEOC is a party to the transaction, increasing the need for enhanced due diligence on counterparties. With the OBBBA now enacted, stakeholders should assess their transfer strategies, particularly where FEOC risk or reliance on external financing is a concern.
Influential business tax provisions in the OBBBA
General business tax provisions in the OBBBA of interest to clean fuel producers include:
- Capital expenditures and investments: The OBBBA reinstates 100% expensing of qualified assets in the year they were put into service—also known as bonus depreciation—for property acquired beginning Jan. 20, 2025. The provision is permanent. Another provision expands the scope of qualified assets to cover manufacturing buildings, but only for buildings placed in service before Jan. 1, 2031.
- Business interest: The OBBBA restores a more favorable EBITDA-type calculation of the business interest deduction limit for tax years beginning in 2025. The provision is permanent. It also provides specific rules for how the business interest expense limitation interacts with other tax provisions that capitalize interest.
- Innovation and research and development: The OBBBA allows for immediate expensing of domestic research costs, while providing an ability to accelerate the remaining unamortized amounts of previously capitalized research costs incurred in 2022 through 2024. The provision is permanent.
- Eligible income for publicly traded partnerships: Effective for taxable years beginning after December 31, 2025, the OBBBA modifies the publicly traded partnership rules to permit as qualifying certain income and gains derived from:
- Transportation or storage of fuels, including:
- Alcohol and biodiesel
- Alcohol fuel mixtures, alternative fuel mixtures and biodiesel mixtures
- Alternative fuels such as propane, liquefied petroleum gas (LPG), compressed natural gas (CNG), coal-derived liquids, and biomass
- Sustainable aviation fuel
- Liquefied or compressed hydrogen
- Qualified electric power generation and storage carbon capture facilities where not less than 50 percent of the total carbon oxide production is qualified carbon oxide
- Production of electricity from advanced nuclear facilities
- Production of electricity or thermal energy exclusively from hydropower or geothermal energy
- Operation of geothermal energy and energy storage technology
What’s not in the final OBBBA
Notably, several provisions were not adopted in the OBBBA. First, the law does not amend the PWA requirements originally enacted under the IRA. As a result, clean fuel producers must continue to comply with labor requirements and documentation to support the full credit rate. Projects failing to meet these labor standards will remain subject to significant credit reductions.
Further, the OBBBA does not incorporate any statutory expansion of the “qualified sale” rule under section 45Z. Multiple stakeholders in the clean fuels industry lobbied for clarification that sales of transportation fuel to marketers would qualify for section 45Z. Regardless of the omission of this amendment, it is expected that Treasury will provide additional guidance to clarify this seemingly unintended restriction.
RSM Washington National Tax takeaways
Industry implications
Much of the clean fuels industry has fared well with the OBBBA. Since enactment of the IRA—which scheduled the section 45Z credit to sunset at the end of 2027—efforts by the industry to extend the credit have been underway. So the OBBBA’s 45Z extension through 2029 and additional extensions for 40A, 40B and 6426(k) are wins for the industry, especially considering the OBBBA accelerated the phaseout of many other clean energy credits.
Additional positive implications for the industry include the removal of the ILUC penalty and provision for negative emissions for animal manure. Also, we expect that small agri-biodiesel producers whose facilities have been closed will be incentivized to restart production, as they may be eligible to claim both a 45Z credit and a 40A credit for the same gallon of fuel.
Further, the oil and gas industry scored wins through the increased section 45Q credit rate for enhanced oil recovery operations and additional income sources for publicly traded partnerships.
While the credit was extended, rapid scaling of SAF will be a challenge with the reduced credit rate and restrictions placed on foreign feedstocks and limitations on double credits.
Additionally, the foreign entity of concern rules add additional complexities for producers.
Treasury guidance
Now that the OBBBA has passed, Treasury rulemaking will further define eligibility and compliance standards. The OBBBA directs Treasury to issue guidance on a number of areas, including:
- The implementation of the FEOC restrictions
- The emissions rate calculations under section 45Z, including treatment of animal manure and exclusion of ILUC
- Related party sale rules for section 45Z
By executive order issued July 7, 2025, the president directed the secretary of Treasury to implement the enhanced FEOC restrictions within 45 days of enactment.
Next steps for producers
Clean fuel stakeholders should take the following immediate steps to assess the impact of the OBBBA:
Update carbon intensity (CI) score
Taxpayers relying on GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) life cycle analysis should verify that their pathways remain eligible under the new framework and assess how adjustments (such as the removal of the ILUC penalty) may affect their CI scores and corresponding credit values.
For taxpayers that expect the changes will permit them to pursue 45Z credits beginning in 2026, planning should begin now to prepare for PWA compliance and other required documentation. The purchase of energy attribute certificates (EACs) should also be considered in light of new CI scoring.
Evaluate supply chain, foreign feedstocks and application of the FEOC rules
Producers should evaluate ownership structures with respect to the FEOC rules. Further, procurement teams should examine current feedstock sourcing contracts for exposure to foreign materials, as the exclusion of nondomestic feedstock eligibility beginning in 2026 could materially affect project economics. Where feasible, shifting to domestically sourced inputs may mitigate this risk.
For producers intending to sell tax credits generated, it is important to review credit transfer structures to ensure that counterparties are not classified as FEOCs. Internal organizational structures should also be reviewed to maintain eligibility for credit transfers under section 6418.
Model 45Q credits with new rates and FEOC restrictions
Production facilities that employ carbon capture technologies should evaluate whether the FEOC rules or changes to credit rates will affect eligibility or credit values.
Consider future value of 45Z and 45Q credits under transferability rules
With the quicker phasedown of tax credits for other clean energy technologies, such as wind and solar, it is possible that the value of section 45Z and 45Q credits for transferability may increase with reduced future supply of tax credits on the market.
Evaluate impact of key business tax provisions
Business tax relief related to bonus depreciation, interest capitalization, and R&D expensing could affect cash flows and tax obligations. Modeling the effects of those provisions will help you understand them and how they are interconnected.
Work with your tax advisor to model and assess how the OBBBA affects your clean fuel facility and corresponding tax profile.
