• IRS requests comments on section 45Q carbon sequestration credit in Notice 2019-32
  • May 6, 2019 | Authors: Wes Sheumaker; Amish M. Shah; Bradley M. Seltzer; H. Karl Zeswitz
  • Law Firms: Eversheds Sutherland (US) LLP - Washington Office ; Eversheds Sutherland (US) LLP - Washington Office
  • On May 2, 2019, the Internal Revenue Service (IRS) released Notice 2019-32 (Notice) requesting comments on anticipated regulations and other guidance under section 45Q of the Internal Revenue Code. Section 45Q was originally enacted in 2008 to provide a tax credit to taxpayers that sequester carbon dioxide. Significant changes were made to section 45Q by the Bipartisan Budget Act of 2018 (BBA), including:

    • Increasing the credit amount for both carbon captured and disposed of as well as carbon captured and used as a tertiary injectant or otherwise utilized;
    • Attributing the credit to the owner of the carbon capture equipment and providing for transferability;
    • Expanding credit to include all captured carbon oxides, not just carbon dioxide;
    • Decreasing the threshold to qualify for the credit;
    • Replacing the existing cap with a 12-year credit period; and
    • Adding additional methods to utilize captured carbon oxide.

    Notice 2009-83, which was modified by Notice 2011-25, provided some guidance as to the section 45Q credit. Notice 2019-32 provides that taxpayers may rely on Notice 2009-83, as modified, until additional guidance is issued. This limited existing guidance, however, leaves open many important questions.

    Notice 2019-32 specifically requests comments on the following:

    • What rules should apply to demonstrate secure geological storage and measurement of qualified carbon oxide (CO)?
    • What reporting requirements should be put into place?
    • What standard should trigger recapture and how should any recapture be measured?
    • Should terms including carbon capture equipment, qualified CO, direct air capture facility, qualified facility, tertiary injectant, utilization, and lifecycles greenhouse gas emissions be clarified?
    • Is guidance necessary on what types of utilization qualifies as fixation of qualified CO through photosynthesis or chemosynthesis, such as through the growing of algae or bacteria?
    • Is guidance necessary to establish boundaries for lifecycle emissions for CO utilization to determine how much qualified CO is displaced from being emitted to the atmosphere?
    • What type of contractual arrangements do investors anticipate with parties that capture or dispose of qualified CO and what would be common terms of ensuring disposal, utilization, or use?
    • What factors should be considered in determining the time and manner of the election to transfer the section 45Q credit and what other issues should be considered?
    • What constitutes the beginning of construction for a qualified facility?
    • Is guidance needed around respecting project developers and investors as partners in a partnership and the allocation of the section 45Q credit and recapture among partners in a partnership?
    • What issues may arise in the measurement of qualified CO utilization?

    Comments to Notice 2019-32 are due to the IRS 45 days after publication of the Notice in the Internal Revenue Bulletin.