Wolters Kluwer Looks at Tax Credits Implemented to Help Reduce Carbon Footprint

IRS guidance regarding carbon oxide sequestration regulations analyzed

The enactment of a credit for carbon oxide sequestration in 2008 was the first step in the efforts to encourage the recapture of carbon oxide from the atmosphere. Significantly enhanced in 2018, it helped jumpstart the carbon recapture industry, but several areas left it up to the US Treasury to provide the details on how to qualify. Those details finally started to come in 2020 with final regulations not adopted until January 6, 2021. Because the delay caused some projects to bump up against the statutory required beginning date of before January 1, 2024, the Consolidated Appropriations Act, 2021 extended the required beginning date by two years.

Regulations and adjustments summary

While final regulations largely followed original proposals, including several adjustments favorable to taxpayers, some hurdles that the carbon recapture industry must jump over in order to qualify for the credit remain.

  • The current credit is up to $50 per metric ton for carbon oxide captured in secure geological storage and up to $35 per metric ton for carbon oxide used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and then disposed in secure geological storage, with the credit available over a twelve-year period
  • There is a provision for recapture of the credit if there is leakage from the storage site
  • Notice 2020-12 provides guidance on what it means to begin construction, with a physical work test, a five percent safe harbor, and a six-year continuity requirement
  • Revenue Procedure 2020-12 addresses, in a partnership situation, who qualifies as a partner and the allocation of the credit among the partners
  • The proposed regulations further refine the many definitions in the statute and provide some additional ones
  • The final regulations provide a more general and descriptive definition of carbon recapture equipment than listed in the proposed regulations, also addressing ownership of the equipment
  • The final regulations shorten the tax credit recapture period from five years to three years
  • It remains an issue for the industry that a lifecycle analysis and an Environmental Protection Agency (EPA) Monitoring, Reporting, and Verification Plan must be approved before the credit can be claimed, perhaps limiting the twelve-year period available for credit utilization
  • There are now over 100 carbon capture projects either being planned, constructed, or in operation in the United States, with 62 having been initiated since 2018

Wolters Kluwer offers expertise on topic

Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help discuss the carbon recapture credit and related issues.

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Media Contact

To arrange an interview with Mark Luscombe or other federal and state tax experts from Wolters Kluwer Tax & Accounting on this or any other tax-related topics, please contact Bart Lipinski.



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