What is the 45Z Clean Fuel Product Credit?

The 45Z Clean Fuel Production Credit, established by the Inflation Reduction Act (IRA), is a tax credit program designed to encourage the production of clean transportation fuels.

The Section 45Z Clean Fuel Production Credit, also known as the CFPC, is a significant initiative under the Inflation Reduction Act (IRA), P.L. 117-169. This tax credit is designed to encourage the production of clean transportation fuels, with a focus on reducing greenhouse gas (GHG) emissions. Here's an overview of its key aspects:

1. Effective Period: The CFPC is applicable for qualifying transportation fuels produced after 2024 and sold on or before December 31, 2027. This timeframe provides a clear window for producers to plan and implement strategies to benefit from the credit.

2. Consolidation of Previous Credits: The CFPC replaces several fuel-related credits scheduled to expire at the end of 2024. These include credits for biodiesel, agribiodiesel, renewable diesel, second-generation biofuel, sustainable aviation fuel, alternative fuels, and alternative fuel mixtures.

3. Technology-Neutral Approach: Unlike the previous credits that focused on specific types of low-GHG emission fuels, the CFPC adopts a technology-neutral stance. This means it subsidizes the production of any transportation fuel, provided it has zero or low GHG emissions. This broad approach encourages innovation and the development of various clean fuel technologies.

4. Eligibility and Credit Amounts: The CFPC sets specific eligibility requirements and credit amounts, guiding producers on how to qualify and benefit from the program. These details are crucial for companies in the energy sector to align their production methods with the credit's requirements.

5. Implementation and Guidance: The Department of the Treasury and the Internal Revenue Service (IRS) are tasked with implementing the CFPC. They requested a comment on November 3, 2022, to gather input from stakeholders. While the initial deadline for comments was December 3, 2022, the IRS indicated a willingness to consider comments submitted after this date, provided they do not delay the issuance of guidance. This flexibility suggests an openness to diverse inputs and a commitment to developing well-informed regulations.

Credit Eligibility Criteria

1. IRS Registration: Producers seeking to claim the CFPC must be registered with the Internal Revenue Service (IRS). This registration is a basic compliance requirement.

2. Location of Production Facilities: All facilities used to claim the credit must be located within the United States or its possessions, which includes territories such as Puerto Rico, Guam, the U.S. Virgin Islands, and others. This requirement ensures that the benefits of the credit support domestic production.

3. Emission Standards for Clean Fuel: To qualify as "clean," fuel produced must emit no more than 50 kilograms of CO2 (or CO2 equivalent) per 1 million British Thermal Units (mmBTU). This sets a clear benchmark for environmental sustainability in fuel production.

4. Definition of "Transportation Fuel": For a fuel to meet the credit's definition of "transportation fuel," it must be suitable for use in highway vehicles or aircraft. This aligns the credit with its goal of supporting cleaner transportation options.

5. Sale to Unrelated Persons: Fuel qualifying for the credit must be sold to "unrelated persons," as defined in Section 52(b) of the IRC. This provision is likely intended to prevent abuse of the credit through internal or related-party transactions.

Elective Pay and Transferability

1. Elective Pay: This allows certain organizations, generally nonprofits, states, localities, and other tax-exempt entities, to receive tax credits as direct payments, even if they do not owe federal taxes. This provision makes the credit accessible to a broader range of entities, including those without a traditional tax credit.

2. Transferability: Entities not eligible for elective pay can sell or transfer their credits to other entities. This can be advantageous for organizations whose tax credits exceed their tax liabilities. It also creates a market for tax credits, potentially increasing the overall efficiency of the credit system.

Financial Implications

• Tax Exemption for Sold Credits: Payments received from the sale of tax credits are not subject to income taxation. This makes selling credits more financially attractive.
• Non-deductibility of Credit Purchases: Purchases of credits cannot be deducted from income. This maintains the integrity of the tax system by preventing double benefits.

Conclusion

These requirements and restrictions are designed to ensure that the CFPC effectively promotes the production of clean transportation fuels while maintaining fairness and preventing abuse of the credit system. By setting clear standards and offering flexible options like elective pay and transferability, the CFPC aims to be an accessible and impactful tool in the transition to cleaner energy.