Highlights
- The IRS on July 24, 2024, released Notice 2024-60, which provides Internal Revenue Code Section 45Q guidance for utilization of carbon dioxide and other carbon oxides.
- The Notice addresses the information that must be included in the required life cycle analysis report (LCA Report), procedures for submitting the LCA Report and supporting information required to be provided to the IRS and U.S. Department of Energy (DOE) for review.
- The long-awaited Notice comes more than six years after Section 45Q was amended to allow for utilization.
The IRS on July 24, 2024, released Notice 2024-60, which provides Internal Revenue Code Section 45Q guidance for utilization of carbon dioxide and other carbon oxides. The Notice addresses the information that must be included in the required life cycle analysis report (LCA Report), procedures for submitting the LCA Report and supporting information required to be provided to the IRS and U.S. Department of Energy (DOE) for review. The long-awaited Notice comes more than six years after Section 45Q was amended to allow for utilization.
Background
Section 45Q provides a tax credit for capturing and sequestering, disposing or utilizing qualified carbon oxide. Section 45Q(f)(5)(A) provides that "utilization of qualified carbon oxide" means 1) the fixation of such qualified carbon oxide through photosynthesis or chemosynthesis, 2) the chemical conversion of such qualified carbon oxide to a material or chemical compound in which such qualified carbon oxide is securely stored or 3) the use of such qualified carbon oxide for any other purpose for which a commercial market exists.
Section 45Q(f)(5)(B)(i) provides that the amount of qualified carbon oxide utilized is equal to the metric tons of qualified carbon oxide that the taxpayer demonstrates, based upon an LCA of greenhouse gas (GHG) emissions and subject to such requirements as the U.S. Department of the Treasury Secretary, in consultation with the DOE, determines appropriate, were 1) captured and permanently isolated from the atmosphere or 2) displaced from being emitted into the atmosphere. The term "life cycle greenhouse gas emissions" has the same meaning given such term under Section 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)), as in effect on Feb. 9, 2018, substituting "product" for "fuel." An LCA is not required for qualified carbon oxide that is sequestered or disposed.
For taxpayers seeking to utilize captured carbon, Treas. Reg. § 1.45Q-4(c)(6) requires the IRS to approve an LCA of GHG emissions with respect to the carbon capture equipment placed in service on or after Feb. 9, 2018. Importantly, under that Treasury Department regulation provision, the LCA Report must be approved before the taxpayer may claim any credit under Section 45Q for utilization.
LCA Report
The taxpayer must submit a separate LCA Report for each qualified facility. An LCA Approval Request must include:
- an LCA Report
- supplemental information that supports the LCA Report data (i.e., all necessary details supporting the LCA Report data, calculations and conclusions)
- an independent third-party statement
- an LCA model if an independent third party has performed the LCA analysis and prepared the LCA Report
The LCA Report requires a taxpayer to rely on direct, or primary, data to address the actual operation performance of the taxpayer's system to utilize carbon. Therefore, a taxpayer will not be able to obtain a preauthorization based on hypothetical or test data to determine whether the IRS will approve their utilization method.
The LCA Report must be prepared in conformity with the most current revision (as of the beginning of the year in which the LCA is submitted) of the DOE's National Energy Technology Laboratory's (NETL) Carbon Dioxide Utilization (CO2U) LCA Guidance for the U.S. DOE Office of Fossil Energy and Carbon Management, along with the 45Q addendum to the CO2U LCA Guidance document. The Notice provides for the required contents of the LCA Report.
The LCA Report must be performed or verified by an independent third party. If an independent third-party review is conducted, then it must include an assessment of an LCA model and supporting data and be performed in accordance with ISO 14071:2014 – Environmental management – Life cycle assessment – Critical review processes and reviewer competencies: additional requirements and guidelines to ISO 14044:2006.
LCA Report Review
The Notice provides that the LCA Approval Request Review generally will be completed within four months of the date of receipt of a complete LCA Approval Request. If the LCA Approval Request is incomplete or either the DOE or IRS need to request any additional or clarifying information from the taxpayer, then the IRS will contact the taxpayer directly, and the taxpayer will have 45 calendar days from the date of the request by the IRS to provide the required information. If the taxpayer does not furnish the supplemental information within 45 calendar days, then the IRS generally will deny the taxpayer's LCA Approval Request. The IRS may grant an extension to the 45-day response period on a case-by-case basis if a taxpayer experienced a force majeure event.
After review by the IRS, which generally includes a completeness review, the DOE will conduct a Technical Review, which may be a Conformance Review or a Critical Review. The Notice does not provide a timeline for the DOE's review process.
Conformance Review
A Conformance Review ensures that an LCA conforms to applicable ISO 14040:2006 and ISO 14044:2006 standards and the latest revision. The DOE will perform a Conformance Review if a taxpayer's LCA Approval Request includes an LCA Report that has been verified by an independent third party as adhering to applicable standards and best practices. After completing a Conformance Review, the DOE may determine that a Critical Review is warranted.
Critical Review
A Critical Review ensures that an LCA Approval Request conforms to applicable ISO 14040:2006 and ISO 14044:2006 standards. The scope of the Critical Review is expanded beyond the scope of the Conformance Review to include a detailed technical assessment of the LCA model and supporting data. The DOE will perform a Critical Review if a taxpayer's LCA Approval Request includes an LCA Report that has not been verified by an independent third party. Additionally, the DOE may perform a Critical Review if the DOE determines that further review is warranted after performing a Conformance Review.
The DOE will contact the taxpayer if additional or clarifying information is needed to complete the Technical Review, which the taxpayer will have 45 days to respond to unless an extension is provided. The DOE will not otherwise communicate with taxpayers about the status of a pending LCA Approval Request.
If an LCA is denied and the deficiencies in the LCA can be cured, then the taxpayer may revise the taxpayer's LCA Approval Request and resubmit it to the IRS and DOE.
LCA Effective Period
An approved LCA can be treated as "approved" for purposes of Section 45Q for the taxable year for which the LCA Report was submitted and the following two taxable years (i.e., a three-year approval period). Alternatively, a taxpayer may choose to submit a new LCA Approval Request to the IRS and DOE for any taxable year.
A taxpayer wishing to claim Section 45Q for utilization after the three-year period must submit a new LCA Approval Request to the IRS and DOE. If the IRS approves the new LCA, then a new three-year approval period will apply (unless the LCA analyzes a period of less than six months or there is a material change in the LCA, as defined by the Notice).
Holland & Knight Insight
Although this Notice is very much welcomed as a starting
point for taxpayers seeking LCA utilization guidance, significant
challenges remain for taxpayers seeking the Section 45Q credit for
utilization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.