Treasury Suggests Guidance for Clean Fuel Production Credit
TL/DR –
The US Department of the Treasury and the Internal Revenue Service have released proposed regulations for the implementation of the Section 45Z Clean Fuel Production Tax Credit. The regulations provide clarity on eligibility rules, emissions rate determinations, and certification and registration requirements, with a public hearing slated for 28 May 2026. Major changes from the draft regulations include an expanded qualifying sale definition that includes sales to intermediaries, increased scope of the look-through rule, detailed recordkeeping requirements with safe harbors for validating emissions rates and qualified sales, and clarification on ASTM International standards for determining fuel qualification.
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Recently, the US Department of the Treasury and the Internal Revenue Service (IRS) pushed forward with the release of eagerly awaited proposed regulations for implementing the Section 45Z Clean Fuel Production Tax Credit (Section 45Z). The regulations are aimed at clarifying rules related to eligibility, emissions rate calculations, and certification and registration. The Treasury and IRS have also included examples to assist taxpayers in understanding the text of the regulations.
The public is invited to participate in a hearing that will take place on 28 May 2026. Any written comments on the proposed regulations must be submitted by 6 April 2026.
The newly proposed regulations are largely similar to the draft regulations released in January 2025. However, they’ve been updated to reflect feedback from stakeholders and to incorporate statutory changes brought by the One Big Beautiful Bill Act (OBBBA) (Pub. L. 119-21).
Understanding Legislative Developments
Tax credits for biofuel production have long been supported by Congress and have played a significant role in promoting domestic production. In 2022, Congress passed Section 45Z under the Inflation Reduction Act (Pub. L. 117-169). This legislation aimed to replace a host of fuel-specific tax credits with a single, technology-neutral credit. Originally, this credit was available for fuel produced after 31 December 2024 and sold before 31 December 2027.
In 2025, Treasury announced its plans to propose regulations to implement Section 45Z. The public was invited to provide comments on the draft regulations. Along with this announcement, the Treasury also provided initial guidance on methodologies for determining emissions rates under Section 45Z, as well as the 2025 emissions rate table.
Key Changes to Section 45Z
Congress introduced six major changes to Section 45Z in July 2025 as a part of the OBBBA. These changes include extending Section 45Z by two years, modifying the emissions rate calculation, adding an anti-abuse provision, enforcing the use of locally produced feedstocks after December 2025, adding restrictions for foreign entities, and repealing the bonus incentive for sustainable aviation fuel (SAF).
What Do the New Regulations Mean?
According to the proposed regulations, taxpayers hoping to qualify for the Section 45Z credit must meet specific requirements. These include producing the fuel at a qualified facility in the US, selling the fuel to an unrelated person during the taxable year, and, after 31 December 2025, using feedstocks exclusively grown or produced in the US, Mexico, or Canada.
Highlights from the Regulations
Transportation Fuel
The regulations define transportation fuel as fuel that may be mixed into a fuel mixture and is suitable for use in highway vehicles or aircraft. However, the fuel doesn’t necessarily need to be used as such.
Qualified Facility
The regulations define a qualified facility as a single production line with interdependent components that produces transportation fuel, excluding any facility already receiving an anti-stacking credit. Further, taxpayers don’t need to own the facility to qualify.
Registration Process
The proposed regulations also lay out the process for registering with Section 4101. This includes approval, denial, revocation, suspension, re-registration, and separate entity treatment procedures.
Qualified Sale Requirements
The regulations outline the types of sales that qualify for the credit. These include sales for use in the production of a fuel mixture, for use in a trade or business, or at retail with placement in the fuel tank. The regulations also make changes to sales requirements, expanding commercial flexibility.
Claiming the Credit
To claim the credit, taxpayers will use Form 7218, establishing a comprehensive framework for claiming the credit.
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