IRS Proposes Changes to Section 45V of Internal Revenue Code

TL/DR –

The Internal Revenue Service (IRS) has proposed a regulation regarding clean hydrogen production credits under the Inflation Reduction Act. The proposal clarifies credit amounts, provides definitions, and details the model for determining greenhouse gas emissions, among other things. The proposal also specifies that producers intending to use the clean hydrogen credit and the carbon sequestration credit cannot utilize both, and invites written comments on the regulation until February 26th, 2024.

Overview

• The Internal Revenue Service (IRS) released a Proposed Regulation related to Section 45V of the Internal Revenue Code on December 22, 2023, in light of the Inflation Reduction Act.
• Section 45V includes credits for clean hydrogen production, with the Proposed Regulation detailing the model for calculating lifecycle greenhouse gas emissions.
• Producers looking to take advantage of both the clean hydrogen credit under Section 45V and the carbon sequestration credit under Section 45Q will be unable to do so.

On December 22, 2023, the IRS unveiled a Proposed Regulation linked to Section 45V of the Internal Revenue Code, per the Inflation Reduction Act. The Proposed Regulation clarifies clean hydrogen production credit amounts, defines key terms, describes the model for determining lifecycle greenhouse gas emissions, and outlines the required verification process under Section 45V. The IRS is accepting written comments on the Proposed Regulation until February 26, 2024.

Credit Calculation

The Inflation Reduction Act establishes that tax credits for clean hydrogen depend on the lifecycle greenhouse gas emissions rate of the production process at a qualified facility during the tax year. Prevailing wage and apprenticeship requirements can significantly impact the final credit amount. The credit is available for a 10-year period, starting from when the qualified property is deployed. To be eligible, construction must begin by January 1, 2033.

Defining ‘Facility’

The Proposed Regulation specifies a “facility” under Section 45V as a “single production line” for the production of clean hydrogen. It doesn’t include equipment used for transporting or conditioning clean hydrogen past the production phase or electricity production equipment powering the hydrogen production process.

Lifecycle Greenhouse Gas Model

The IRS will use a model developed by the Department of Energy, the 45VH2-GREET Model, for quantifying emissions. The model may be updated throughout the lifespan of a qualified facility. Producers can’t claim both the Section 45V hydrogen credit and the Section 45Q carbon capture credit.

Verification of Processes

To verify the use of renewable energy in clean hydrogen production, the IRS will require Energy Attribute Certificates (EACs), including Renewable Energy Certificates (RECs). The Proposed Regulation specifies three criteria that must be met: incrementality, deliverability and temporal matching.

Service Date of Retrofitted Facilities

Existing facilities not producing clean hydrogen before modification will be considered as newly placed in service when modifications are deployed. The “80/20 rule,” which allows facilities to be seen as new even if they contain some existing property, will be applicable.

Use of Renewable Natural Gas (RNG) in Hydrogen Production

The Proposed Regulation includes criteria for facilities producing clean hydrogen using RNG, such as biogas, but seeks comments on how to incorporate them. The Regulation clarifies the credit amounts and how to claim the highest amount, with a clear preference for “green” hydrogen over “blue” hydrogen.

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