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 Section 45Q was originally enacted in 2008 to provide a tax credit to taxpayers that sequester carbon dioxide.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.
Eversheds Sutherland Observation: The Notice indicates that Treasury and the IRS “anticipate issuing regulations and other guidance to implement the provisions of § 45Q.” The reference to issuing guidance in the form of regulations raises concerns that the guidance needed for taxpayers to fully utilize the benefits of section 45Q may be delayed. We urge Treasury and the IRS to issue at least the more pressing guidance more expeditiously through further Notices and other sub-regulatory guidance.