Executive summary: Guidance for the new sustainable aviation fuel credit
The Inflation Reduction Act of 2022 added a new incentive for the production of sustainable aviation fuel mixtures. This provision is effective Jan. 1, 2023. In advance of the effective date, the Treasury Department has released comprehensive guidance for implementing the rules related to this tax incentive.
Treasury issues rules implementing sustainable aviation fuel blender’s credit
Notice 2023-06, released Dec. 19, 2022, provides rules on the new sustainable aviation fuel (SAF) credits added to the Internal Revenue Code under sections 40B and 6426(k). For qualifying mixtures of SAF, the credit is $1.25 per gallon and can increase up to $1.75 per gallon if certain requirements are met related to the production of the fuel and the lifecycle greenhouse gas emissions rating of the fuel. The lower the carbon intensity of the SAF, the higher the potential credit amount per gallon.
The notice provides detailed guidance on several issues, including:
- Definitions of key terms
- Excise taxation of SAF
- Methods for determining lifecycle greenhouse gas emissions reduction percentage for determining credit amounts
- Excise tax registration requirements
- Claim requirements
- Model certificates for substantiating claims
Definition of key terms
The notice provides key explanations for various technical terms. It adds new terms beyond the statutory definitions to implement the provisions of this credit. Definitions include:
- Sustainable aviation fuel (referenced to ASTM D7566 Annexes or ASTM D1655 Annex A1)
- SAF synthetic blending component
- Fischer Tropsch process SAF (FT hydrocarbons; SAF co-processed qualified mixture)
- Lifecycle greenhouse gas emissions reduction percentage
- Qualified mixture; SAF qualified mixture
Taxation of SAF
The notice reminds taxpayers of the excise tax rules under section 4081 related to taxation, including rules related to taxation upon removal at the rack and of blended taxable fuel outside the terminal.
The notice also provides that a SAF synthetic blend component in unmixed form is taxed upon delivery into the fuel supply tank of the aircraft for use in aviation. Mixtures and co-processed SAF will be taxed upstream, either upon removal from the bulk transfer/terminal system or, if created outside the system, upon the creation of a qualified mixture.
Calculation of the credit: Lifecycle greenhouse gas emissions reduction percentage and applicable supplementary amount
Of key importance to the industry is the Treasury determination of the reduction percentage and applicable supplementary amounts, as these rules form the basis for determining the potential credit amount for SAF produced. In the notice, Treasury specifies that petroleum-based jet fuel will be treated as having a lifecycle greenhouse gas emissions of 89 grams of carbon dioxide equivalent per megajoule of energy (89 gCO2e/MJ) as a baseline. Treasury provides a formula and credit calculation example showing how to calculate the reduction percentage and applicable supplementary amount.
Treasury is currently accepting two models for calculating the reduction percentage under a safe harbor. Both models are from the Carbon Offsetting and Reduction Scheme for International Aviation, known as CORSIA, that has been adopted by the International Civil Aviation Organization. Notably absent is any other methodology, such as the Argonne National Laboratory Greenhouse Gases, Regulated Emissions and Energy Use in Transportation (GREET) model or the Environmental Protection Agency’s renewable fuel standards.
Excise tax registration requirements
The statute requires that all producers and importers of SAF be registered by the IRS under the excise tax rules. Registration is required to claim the credit and to avoid a penalty for failure to register when required. The notice provides the procedures for implementing the registration processes. This includes the information on who must register, how to apply and the detailed information the registrant must provide to the IRS. Producers cannot apply unless they can provide a certificate of analysis of the SAF they have produced that is independently verified.
Claim procedures
The notice provides the specific procedural rules, requirements and applicable IRS forms to claim the SAF credit. The credit must first be claimed against fuel excise tax liability; the balance may be claimed as an excise tax payment, refundable income tax credit or nonrefundable income tax credit.
Taxpayers are reminded of the government’s position that for federal income tax purposes, a claimant’s expense for the section 4081 excise tax is reduced by the amount of the excise tax credit under section 6426(k) under recent litigation.
SAF certificates and documentation
Similar to the biodiesel mixture credit, in order to claim the SAF blender’s tax credit, certain documentation related to the SAF from the producer must be submitted to the IRS with the claim. The notice provides model certificates for SAF producers and resellers.
Washington National Tax takeaways
Issuance of the SAF guidance is an important first step in implementing the SAF blender’s tax credit. This notice is a safe harbor that sets forth the rules and registration requirements in order to claim the credit.
Treasury is expected to issue additional guidance on this SAF incentive. It has requested general comments from the public and has asked for responses to seven specific questions. These include requests on other methodologies beyond CORSIA that may be applicable to determine emissions reductions, including the Argonne National Laboratory GREET model or the EPA’s Renewable Fuel Standards. This is of the highest importance to the SAF industry, as there are multiple pathways for the production of SAF, and the various methods produce different emissions reduction percentages.
Other questions relate to documentation and substantiation of the claim, including tracking of the fuel and establishing it is delivered into an aircraft.
The SAF credit is effective Jan. 1, 2023, through Dec. 31, 2024. In 2025, the section 45Z clean fuel producer credit will become effective, providing a new set of rules and a nonrefundable income tax credit to the producer (not the blender) of the SAF.
The section 45Z fuel credit, while not an excise tax incentive, can be monetized under transferability rules that allow the section 45Z credit to be sold for cash. While Treasury has not yet issued guidance on section 45Z, Notice 2023-6 provides insight into how Treasury may treat SAF under 45Z.
