Executive summary
Section 40B sustainable aviation fuel guidance
The Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) recently issued Notice 2024-6 (new notice or notice) containing additional guidance for the sections 40B and 6426(k) sustainable aviation fuel credits. The new notice provides additional rules and modifies a model certificate previously issued in Notice 2023-6 (initial notice). RSM US LLP previously covered the initial notice that requested public comment to aid the Treasury and IRS in developing the additional guidance.
Treasury issues updated guidance on the sustainable aviation fuel credit
The Inflation Reduction Act of 2022 (IRA) enacted the new sustainable aviation fuel (SAF) excise tax credit under section 40B of the Internal Revenue Code (Code), for each gallon of SAF sold or used between Dec. 31, 2022 and Jan. 1, 2025, as part of a qualified fuel mixture. The SAF credit is $1.25 per gallon of SAF in a qualified mixture sold or used during the year, along with a possible additional supplementary amount with respect to the sustainable aviation fuel. To qualify for the credit, the SAF must have a minimum reduction of 50% in lifecycle greenhouse gas emissions. Additionally, there is a supplemental credit of one cent for each percent that the reduction exceeds 50%. As such, assuming all necessary requirements related to the production of fuel are met, a maximum credit of $1.75 per gallon is allowed.
Notice 2024-6 provides detailed additional guidance on several SAF issues, including:
- Safe harbors for calculating the lifecycle greenhouse gas emissions reduction percentage and unrelated party certification of sustainability requirements
- Claim certificate requirements
- Methods for determining lifecycle greenhouse gas emissions reduction percentage for determining credit amounts
Safe harbors
To qualify for the section 40B credit, the SAF must have a minimum reduction of 50% in lifecycle greenhouse gas emissions. The emissions reduction percentage is statutorily defined as the percentage by which the lifecycle greenhouse gas emissions of the fuel are reduced compared to petroleum-based jet fuel. This comparison is based on either the most recent Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) or any similar methodology meeting the criteria of the Clean Air Act (CAA). The IRA requires an unrelated party to certify specific aspects of each method.
Notice 2024-6 offers additional approved safe harbor methods for calculating the reduction in emissions percentage through certain renewable fuel standard (RFS) program determinations. For SAF mixtures produced under ASTM International (ASTM) D7566, the IRS will accept the emissions reduction percentage of the SAF synthetic blending component if it qualifies as renewable fuel under the RFS program. Treasury and IRS have deemed it reasonable to utilize the RFS program's diesel fuel baseline for the safe harbor.
The notice also links to a webpage containing a table with a list of the generally applicable fuel pathways and the D-codes under the RFS program for jet fuel. The notice also provides the Environmental Protection Agency (EPA) facility-specific determinations for renewable jet fuel pathways under the RFS program via the EPA’s Completed Pathway Assessments table. SAF synthetic blending components that generate a renewable identification number (RIN) under D-code 4 (biomass based diesel) or D-code 5 (advanced biofuel) and verified under a quality assurance plan (QAP) will be allocated a 50% emissions reduction percentage. SAF synthetic blending components that generate a D-code 3 (cellulosic biofuel) or D-code 7 (cellulosic diesel) RINs under the RFS program and verified under a QAP will be allocated a 60 percent emissions reduction percentage.
The notice specifies that emissions reduction percentages different from the 50% or 60% outlined in the notice’s safe harbor will not be accepted. The EPA released specific lifecycle analysis ranges and estimates for certain fuel pathways to determine compliance with the 50% or 60% thresholds in the RFS program. However, using these estimates to calculate emissions reduction percentages beyond these thresholds goes beyond their intended purpose. Consequently, the IRS will not consider these estimates for the provided safe harbor.
The SAF credit requires the producer or importer of the fuel to provide certain documentation evidencing the production of the SAF has complied with the required methodologies and has been certified by an unrelated party. The new notice outlines a safe harbor for meeting this requirement.
Claim Certificates
The initial notice included a model certificate required to claim a tax credit for SAF synthetic blending components. The new notice provides an updated model certificate for SAF credit claimants that must be submitted in conjunction with claims filed after Dec.15, 2023 that reflects the additional safe harbor.
Methods for determining lifecycle greenhouse gas emissions reduction percentage
Treasury and IRS clarify in the new notice that although the existing Greenhouse gases, Regulated Emissions and Energy use in Transportation (GREET) model from the Argonne National Laboratory provides a comparable value for lifecycle greenhouse gas emissions, including those of petroleum-based fuels like jet fuel, it does not sufficiently calculate lifecycle greenhouse gas emissions within the context of the EPA’s RFS program.
As such, the new notice announces that the Department of Energy (DOE) is working with other federal agencies in a Sustainable Aviation Fuels Lifecycle Analysis Working Group to create a modified GREET model specifically for calculating emissions reduction percentages. This initiative is expected to be completed by early 2024. Once the modified GREET model is released, pending additional guidance from Treasury and the IRS, taxpayers are expected to be able to use it for calculating emissions reduction percentages in SAF transactions from Dec. 31, 2022, to Jan. 1, 2025. However, those that choose to utilize the new model must also comply with all statutory obligations under section 40B, including registration, sustainability, traceability and certification by an unrelated party.
Washington National Tax Takeaways
Notice 2024-6 is welcomed guidance for SAF industry stakeholders. The new RFS safe harbor provides certainty for existing SAF producers. Further, the announcement to provide a modified GREET model will help in providing answers to remaining questions for feedstock and SAF producers such as those in the ethanol industry.
In an interagency statement released by the agencies participating in the Sustainable Aviation Fuels Lifecycle Analysis Working Group (IWG), the group committed to releasing the modified GREET by March 1, 2024. The revised GREET model will encompass broader indirect emissions categories incorporating factors like crop production and livestock activity, alongside land-use change emissions influenced by GTAP-BIO and/or GCAM. Furthermore, the revised GREET model will integrate essential strategies for reducing greenhouse gas emissions, including Carbon Capture and Storage (CCS), Renewable Natural Gas (RNG), Renewable Electricity and Climate-Smart Agriculture practices.
The EPA also released a letter to Treasury on Dec. 13, 2023 outlining the reasons for and goals in developing the modified GREET model for determining lifecycle greenhouse gas emissions reduction percentage. EPA have pledged to work closely with the IWG and non-government sustainable aviation fuel stakeholders from the agricultural industry, SAF production and various sectors to ensure a comprehensive understanding of all pertinent viewpoints regarding the IWG’s endeavors.
As stated in the new notice, Treasury is expected to issue additional guidance on the modified GREET model for SAF. The development and completion of the modified GREET model is significant for the SAF industry given the diverse pathways for SAF production and the various methods that yield different emissions reduction percentages. The statements by the IWG and the EPA indicate that the modified GREET model will give more weight for carbon capture and storage, renewable natural gas, renewable electricity and environmentally sustainable agricultural practices.
For the time being, the safe harbor provisions offer various pathways towards credit eligibility for those who currently qualify under the RFS program. The SAF credit is applicable from Jan. 1, 2023, to Dec. 31, 2024. However, in 2025, the section 45Z clean fuel producer credit will take effect, introducing new regulations and offering a nonrefundable income tax credit to SAF producers (not blenders). Given the similar language in section 45Z regarding methods for determining lifecycle greenhouse gas emissions reduction percentages, it is expected that the positions taken by Treasury and the IRS related to the section 40B credit will also be applicable for the new clean fuel producer credit under section 45Z.
