Treasury issues guidance on the clean fuel production tax credit
The Inflation Reduction Act of 2022 (IRA) added the clean fuel production tax credit under section 45Z of the Internal Revenue Code (Code). Section 45Z provides a nonrefundable income tax credit for producing certain clean transportation fuels at a qualified facility in the United States or a U.S. possession. Known as the clean fuel production tax credit, this incentive applies to qualified transportation fuels produced after Dec. 31, 2024, and sold to an unrelated party before Dec. 31, 2027. In general, the credit amount for nonaviation fuels is $0.20 per gallon, multiplied by a specified emissions factor. This credit can increase to $1.00 per gallon (five times the base amount) if the fuel is produced in facilities that meet the prevailing wage and apprenticeship requirements specified in the IRA. For sustainable aviation fuel, the base credit amount is $0.35 per gallon increasing to $1.75 per gallon if the qualified facility satisfies the prevailing wage and apprenticeship requirements.
Notice 2024-49 provides detailed guidance on several clean fuel production tax credit issues, including:
- Definitions
- General registration requirements
- Registration application and timing
- Registration specific requirements for producers of non-SAF clean transportation fuels
- Registration specific requirements for producers of sustainable aviation fuel (SAF)
- Primary feedstocks used to make transportation fuels that may be eligible for section 45Z
- Information about other fuel registrations
Definitions
The notice provides new definitions for certain types of clean fuels. The Department of Energy (DOE), Treasury, and the IRS expect that certain low-GHG fuels may qualify as non-SAF transportation fuel, subject to the emissions rate threshold. The notice defines the following for purposes of section 45Z:
- Low-GHG biodiesel
- Low-GHG butanol
- Low-GHG diesel fuel
- Low-GHG dimethyl ether
- Low-GHG ethanol
- Low-GHG gasoline
- Low-GHG hydrogen
- Low-GHG LPG
- Low-GHG methanol
- Low-GHG natural gas
- Sustainable aviation fuel
The notice also states that fuels derived from palm fatty acid distillates, petroleum, natural gas and coal are unlikely to meet the emissions rate threshold and therefore are not expected to qualify as non-SAF transportation fuel.
Appendix A provided in the notice identifies the primary feedstocks used to produce fuels that may be eligible for the Section 45Z credit for purposes of applications for registration.
General registration requirements and process
Section 45Z provides that a taxpayer cannot claim the Clean Fuel Production Credit for any transportation fuel unless they are registered as a producer of clean fuel at the time of production. To apply for registration, the taxpayer must file Form 637, Application for Registration (for Certain Excise Tax Activities) with the IRS. The notice provides two new Activity Letters – CN (for producer of non-SAF transportation fuel) and CA (for a producer of SAF)
Once the completed Form 637 application is received, the IRS will determine if the applicant is engaged as a clean fuel producer or is likely to become so engaged within a reasonable time after being registered. The IRS will also examine if the applicant has satisfied the filing, deposit, payment, reporting and claim requirements for all federal taxes of the applicant and any related person.
Registration application and timing
A clean fuel producer is considered registered only if the IRS has issued a registration letter to them, and the registration remains valid (i.e., not revoked or suspended). To be eligible to claim the section 45Z credit for production beginning Jan. 1, 2025, taxpayers must have a signed registration letter dated on or before this date. The notice provides an example of a taxpayer receiving a registration letter dated June 30, 2025, they cannot claim the section 45Z credit for any transportation fuel produced and sold prior to June 30, 2025, even if all other statutory requirements are met before that date. The taxpayer will only be able to claim the credit for fuel produced and sold on or after June 30, 2025.
Due to this requirement, the notice encourages taxpayers to apply for their registration as soon as possible to allow the IRS adequate time to process their applications. The IRS aims to process completed 637 registration applications received by Jul 15, 2024, in time for eligible taxpayers to receive their registration letters by Jan. 1, 2025. Applications received after July 15, 2024, will be processed quickly, however the notice cautions that it is less likely these applicants will receive their registration by Jan 1, 2025. The IRS cannot guarantee processing by a specific date.
A registration letter does not guarantee eligibility for the credit. The notice reminds taxpayers that registration is only one requirement for claiming the section 45Z credit. Taxpayers and the fuels that they produce must meet the other rules in section 45Z. For instance, a registration for a biodiesel producer does not confirm that the biodiesel qualifies as transportation fuel or that the production facility meets the definition of a qualified facility.
Registration specific requirements for producers of sustainable aviation fuel (SAF)
The notice provides that for SAF produced by co-processing petroleum with SAF FT hydrocarbons, the co-processor is the party that will apply for registration. Similar to the requirements for non-SAF registrations, the IRS will determine if the applicant is engaged as a producer of SAF that may be eligible for the section 45Z credit or is likely to become so engaged within a reasonable time after being registered. The IRS will also assess whether the applicant has met the filing, deposit, payment, reporting and claim obligations for all federal taxes of both the applicant and any associated individuals or entities.
Penalty for failure to register
The notice reminds taxpayers that the IRA legislation provides that “every person producing a fuel eligible for the clean fuel production credit” must be registered with the IRS. Persons not registered when required may be subject to a failure to register penalty in the amount of $10,000 for the initial failure to register plus $1,000 per day for each day thereafter where the person fails to register when required.
Washington National Tax takeaways
Notice 2024-49 is the first piece of section 45Z clean fuel producer credit guidance. It provides initial definitions of the types of fuel that may qualify as well as setting forth the rules for required registrations. Appendix A is insightful as it identifies an extensive list of feedstocks that Treasury considers for production of clean fuels. Based on the Appendix, Treasury and Department of Energy (DOE) are conveying that fuels such as corn kernel fiber ethanol and CNG from renewable natural gas may qualify for section 45Z tax credits. Additionally, biodiesel produced from most oilseeds and ethanol produced from starch and sugar crops are also listed in the Appendix, although it is unknown at this time how Treasury and DOE will determine whether these fuels are at or below the 50 kg of CO2e per million metric British thermal units (mmBTU) threshold.
It is important for a facility that may be producing clean fuel to submit its Form 637 registration prior to July 15, 2025. While the government did not guarantee that registrations filed by July 15 would be processed before Jan. 1, 2025, filing by this date is recommended to preserve any potential section 45Z credit generated beginning on Jan. 1, 2025, as well as to avoid a potential penalty. IRS excise tax registration is often a slow, two-step process – first taxpayers are subject to a compliance check and then they are assigned to an excise tax agent to review the activity. Applicants must be diligent in responding to the IRS or risk having the applications summarily denied.
The industry is awaiting further substantive guidance on implementation of the section 45Z provisions. As stated in the notice, Treasury is expected to issue additional guidance on the section 45Z clean fuel production tax credit at a later date. The coming guidance is expected to offer clarification on emissions tables and provide concepts into the 45Z credit similar to those that have been incorporated into the 40B sustainable aviation fuel credit guidance.
For more detailed information clean fuel producers should consult with their tax advisor.
