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IRS Carbon Capture Rules Likely to Include Definitions, Uses (1)

March 16, 2020, 4:24 PMUpdated: March 16, 2020, 10:50 PM

Businesses looking to take advantage of a newly expanded tax credit for capturing carbon dioxide before it enters the atmosphere should soon get a third and likely more substantial set of IRS guidance.

The proposed rules are expected to clarify the activities that qualify for the credit, as well as measurement and reporting requirements. The package arrived at the White House’s regulatory review office on Friday, according to its website, bringing it one step closer to public release.

The IRS in February released two pieces of guidance under tax code Section 45Q, about two years after a 2018 budget law expanded the credit. One (Rev. Proc. 2020-12) outlined how firms financing the projects can receive the credit, and the other defined the start date for construction of carbon capture projects (Notice 2020-12). Companies must begin project construction before 2024 to qualify.

The forthcoming rules are likely to address language in the 2018 budget law (Pub. Law. No. 115-123) that said the expanded credit applies to uses of carbon oxides “for any other purpose for which a commercial market exists”—beyond several stated uses, such as chemical conversion—“as determined by the Secretary.” The proposals will also include standards for measuring and reporting the captured carbon to the government, and companies and trade groups have asked the IRS to follow existing EPA guidelines.

While the previous IRS guidance for the carbon capture credits generally mirrored existing guidance for other renewable tax credits for wind and solar energy, some issues specific to carbon capture still need some clarification, such as the definition of “secure geological storage,” said Amish Shah, a partner at Eversheds Sutherland LLP.

The transfer of the rule package to the White House is a sign that the IRS and Treasury Department are still working hard amid the coronavirus outbreak, but depending on how severe the outbreak’s damage is to the economy, the industry could see some relief from Congress or Treasury, Shah said.

It wouldn’t be unprecedented. In the aftermath of the 2008 financial collapse, the firms that normally finance renewable energy projects had fewer resources with which to do so, making credits for wind, solar, and other renewables much less useful. The number of tax equity investors that would funnel money into new projects fell to five from nearly 20 during the crisis, according to a 2012 National Renewable Energy Laboratory report.

As part of a 2009 stimulus package, Congress enacted a green energy grant program that allowed developers to recoup their costs right away, rather than getting funding from financial firms and transferring credits to those investors.

“Here we could end up in a similar situation where there’s not enough tax equity,” Shah said, adding that relief could also manifest itself in more business-friendly IRS rules.

The economic fallout could provide more impetus for an already-proposed deadline extension for the expanded credit, as well as a “direct pay provision” for developers that would essentially mirror the grant enacted in 2009, said Brad Crabtree, vice president of carbon management at the Great Plains Institute, a nonprofit, and director of the Carbon Capture Coalition. Still, this kind of relief should be a lower priority than the more urgent benefits needed for people who can’t go into work amid the outbreak, he said.

“In the past week we have followed up with staff of members on the tax committees to talk about these priorities and what might come later on after some of the immediate needs have been addressed in the current legislation that’s moving,” Crabtree said.

(Updates with comments from Brad Crabtree.)

To contact the reporter on this story: Lydia O'Neal in Washington at loneal@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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