IRS, Treasury Propose Clean Fuel Production Credit Rules
TL/DR –
The Internal Revenue Service (IRS) and the Department of the Treasury have proposed regulations regarding clean fuel production tax credits under section 45Z. The new regulations permit a taxpayer to be treated as engaging in a qualified sale of fuel to an unrelated person if that related intermediary ultimately sells the fuel to an unrelated person. The regulations also provide various clarifications and examples that illustrate the application of anti-stacking rules, allowing for greater certainty among taxpayers.
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IRS and Treasury Department Propose Regulations on Clean Fuel Production Tax Credits
The Internal Revenue Service (IRS) and the Department of the Treasury have released proposed rules on clean fuel production tax credits under section 45Z. This section, appended to the code by the Inflation Reduction Act of 2022 and later adjusted by the One Big Beautiful Bill Act, offers a tax credit for eligible fuels produced after December 31, 2024, and sold before January 1, 2030. The full text of the proposed rules can be found here.
Pivotal Aspects of the Proposed Regulations
The Proposed Regulations are exhaustive and complex, addressing a wide range of topics. Here, we spotlight five key issues and developments.
1. Qualified Sale: No Need to Cut out the Middleman
The proposed rules confirm that a “qualified sale” includes the sale of transport fuel to a reseller, such as an intermediary wholesaler and distributor. This clarification removes concerns about a more restrictive interpretation provided in the January 2025 Notice. The regulations also introduce a broad look-through rule for sales made through related intermediaries, allowing a taxpayer to be treated as engaging in a qualified sale of fuel to an unrelated person if that related intermediary ultimately sells the fuel to an unrelated person.
2. Be Aware of Stacking Pitfalls
Section 45Z credits cannot be combined with some other credits, such as section 45V credits (clean hydrogen production), section 48 credits claimed in place of 45V credits, and section 45Q credits (carbon capture, sequestration, and utilization). The proposed rules provide numerous clarifications and examples that illustrate how anti-stacking rules are applied, offering greater certainty to taxpayers.
3. Mind Your Feedstock
Section 45Z credits are not permitted for fuel produced from another fuel eligible for a 45Z Credit. The preamble to the Proposed Regulations also makes clear that a fuel can still qualify for the 45Z Credit even if its production process uses a 45Z Credit-eligible transport fuel solely as a process fuel or another non-primary-feedstock input, but not as a primary feedstock.
4. “Suitable for Use” Doesn’t Mean Actual Use
45Z credits are only available if a fuel is “suitable for use” as fuel in a road vehicle or aircraft. Section 45Z doesn’t define “suitable for use,” and the Proposed Regulations confirm guidance from the January 2025 Notice that fuel is “suitable for use” if it has practical and commercial fitness for use in a road vehicle or aircraft. Actual use as fuel in a road vehicle or aircraft isn’t necessary.
5. Being a Producer (of Alternative Natural Gas) is Advantageous
The Proposed Regulations clarify that the person eligible for 45Z credits in connection with the production of alternative natural gas (including renewable natural gas) is the individual that processes untreated sources of alternative natural gas to remove water, carbon dioxide, and other impurities.
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