In early 2018, to accelerate the develop- ment of carbon capture facilities that reduce the amount of carbon oxide released into the atmosphere, Congress significantly changed and expanded section 45Q of the Internal Revenue Code of 1986, as amended (the Code), which provides a federal income tax credit (the 45Q Credit) to certain taxpayers that capture carbon oxides.1 The Internal Revenue Service (the IRS) has requested and received comments from the public and members of Congress on the implementation of the expanded tax credit regime. Industrial participants and tax equity investors are eagerly awaiting published guidance from the US Department of Treasury (Treasury) and the IRS addressing key details relevant for claiming these credits, so they can confidently arrange financing and begin construction of carbon capture facilities.


The Bipartisan Budget Act of 2018 amended and expanded section 45Q of the Code to provide for a federal income tax credit for each ton of “quali- fied carbon oxide” (expanded from just carbon oxide) that is captured at a “qualified facility” and either (1) disposed of (sequestered) by the taxpayer in secure geological storage, (2) used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of by the taxpayer in secure geological storage (EOR), or (3) used by the taxpayer in a manner either described in the Code or for which Treasury determines that a commercial market exists (together, an alternative use).2

Under the new section 45Q Credit regime, the amount of the 45Q Credit increases annually through 2026 and, thereafter, is indexed for inflation. A taxpayer who sequesters carbon oxide receives more 45Q Credits per ton of carbon oxide compared to a taxpayer that uses the carbon oxide in EOR or in an alternative use. As there is no cash flow associated with sequestering carbon oxide, a taxpayer’s return is dependent almost entirely on the 45Q Credit. In cases of EOR or an alternative use, however, a taxpayer will have revenue from the EOR activity or alternative use in addition to the 45Q Credit.

The 45Q Credit is available with respect to a qualified facility for 12 years from the date the qualified facility is placed in service. For a facility to be a qualified facility, generally, the construction of the facility must begin before January 1, 2024 and the facility must be placed in service on or after February 9, 2018.


Commencing Construction: Guidance issued for commencing the construc- tion of carbon capture facilities is expected to be similar to the guidance on wind and solar projects. That is, construction of a carbon capture facility is expected to begin by starting physical construction of a significant nature or by paying or incurring at least 5% of the costs to build the qualified facility, and the developer must satisfy a continuity requirement once construction has started. For carbon capture facilities, however, it is not clear how the IRS will address differences between these facilities and wind and solar facilities.

A key question is, once construction of a carbon capture facility commences, how long it will be “deemed” continuous without the developer needing to prove that the construction was continuous. Construction of a wind or solar facility satisfies deemed continuity requirements if the wind or solar facility is completed by the end of the fourth calendar year following the year construction commenced. Some carbon capture facilities (or the plants to which they will be attached) may require longer lead times to complete, and therefore, it may be appropriate for a longer continuous construction “safe harbor” (e.g., 6 years).

It is equally important to know what activities the IRS identifies as sufficient to demonstrate that construction has begun. For wind and solar facilities, the IRS has provided taxpayers with a list of activities it views as being sufficient to demonstrate construction has commenced, such as beginning work on a custom designed transformer.

Carbon Capture and Storage TechnologyDeal structure: The structure of carbon capture investments is expected to follow other production tax credit transactions (e.g., wind “partnership flip” structures). Features that will likely be adopted by the IRS for purposes of carbon capture will likely look similar to the features set forth in Revenue Procedure 2007-65 (the wind safe harbor) or AM-2018-002 (the refined coal guidance).3

Assuming favorable guidance is issued by the IRS and Treasury, as the wind and solar tax credits phase- out, the carbon capture sector will likely benefit from significant investment from tax equity investors.

Additionally, unlike the production tax credit for wind, section 45Q allows owners of a qualified carbon capture facility to elect to pass the 45Q Credits to the person that sequesters or uses the captured carbon oxide in EOR (or uses in an alternative use). Unfortunately, the Code is short on details as to how this election is to operate. As such, more guidance is necessary before taxpayers can confidently structure transactions that pass through the 45Q Credit.

Recapture: The 45Q Credit is similar to production-based tax credits that are not subject to recapture (i.e., unlike an investment tax credit, production based tax credits are calculated based upon “production,” and therefore, are generally outside the realm of recapture). Qualification for the 45Q Credit relies on “permanent” storage of carbon oxide, however, thereby necessitating regulations that address circumstances in which carbon oxide is later released.

Comments provided to the Treasury and the IRS suggest taxpayers favor a shorter recapture period than solar (5 years) and a simple determination (e.g., 45Q Credits will be calculated on the “net” amount of carbon oxide captured and secured in a year and recapture will follow a LIFO regime).

Reporting: Open questions remain regarding the reporting requirements for demonstrating that carbon oxide has been disposed of in secure geological storage. The outstanding IRS guidance requires taxpayers to comply with existing EPA standards for reporting and demonstrating capture. The IRS is seeking public comments as to whether there are other viable methods for demonstrating the secure disposal of carbon oxides.

Once guidance is published, it will be interesting to see how the tax equity market will react to the opportunity to invest in carbon capture facilities in the near term considering the current pipeline of in-development wind and solar projects. Long term, assuming favorable guidance is issued by the IRS and Treasury, as the wind and solar tax credits phase-out, the carbon capture sector will likely benefit from significant investment from tax equity investors.

The carbon capture credit regime is complicated, including nuanced laws and developing technologies. IRS guidance should be helpful in getting this market kick-started.

1. The 45Q Credits have broad based market and political support, including from the oil and gas industry (which uses carbon dioxide to enhance oil recovery from depleted wells) and the renewable industry.

2. To date, Treasury has not identified alternative commercial markets.

3. For example, there will likely be some requirement for a fixed upfront investment that is not contingent. The amount of such upfront investment (i.e., 75% (wind); 50% (refined coal) or some other percentage) should be addressed in the forthcoming guidance.