Clean Fuel Credits: Navigating the New IRS Regulations
The IRS and Treasury Department recently issued proposed regulations regarding clean fuel production tax credits under Section 45Z, a key component of the Inflation Reduction Act of 2022 and further refined by the One Huge Beautiful Bill Act. These rules, released on February 3, 2026, aim to clarify how businesses can claim credits for eligible fuels produced after December 31, 2024 and sold before January 1, 2030. The regulations are complex, but several key developments offer significant benefits and address previous uncertainties.
Expanding the Definition of a ‘Qualified Sale’
A crucial clarification centers around what constitutes a “qualified sale.” Previously, a January 2025 notice suggested a sale only qualified if the purchaser intended to use the fuel “as a fuel.” The proposed regulations remove this restriction. Now, a sale to a reseller – like a wholesaler or distributor – does qualify, alleviating concerns for businesses operating through intermediaries. This broadened scope is a welcome change for many in the industry.
Further streamlining the process, the IRS is offering a broader glance-through rule for sales through related intermediaries. If a related entity ultimately sells the fuel to an unrelated party, the initial sale can still be considered a qualified sale, expanding on previous rules limited to consolidated corporate groups.
Avoiding Credit Stacking Pitfalls
Section 45Z credits cannot be combined with other credits like those for clean hydrogen production (45V), carbon capture (45Q), or certain alternatives to 45V. The proposed regulations provide detailed examples to illustrate these anti-stacking rules, offering taxpayers greater certainty. For instance, if a 45Q credit is claimed in one year but not the next, a 45Z credit could be claimed in the subsequent year.
Feedstock Considerations: What’s Allowed?
The regulations clarify rules around feedstock. The amended Section 45Z prohibits claiming credits for fuel produced from another fuel already eligible for a 45Z credit. However, the IRS clarifies that using an eligible fuel as a process input – not a primary feedstock – is permissible.
fuels derived from animal manure (dairy, swine, and poultry) may qualify for an enhanced credit. The IRS is considering expanding this to include other animal manure sources, but has not yet done so in these proposed regulations.
“Suitable for Use” Doesn’t Mean “Actually Used”
To qualify for the 45Z credit, fuel must be “suitable for use” in a highway vehicle or aircraft. The proposed regulations confirm that actual use isn’t required. If the fuel meets the practical and commercial standards for use, even if ultimately used as marine diesel, it can still qualify for the credit.
Alternative Natural Gas Producers Benefit
The regulations clarify that the producer of alternative natural gas – including renewable natural gas – eligible for the 45Z credit is the entity that processes the untreated source to remove impurities like water and carbon dioxide. This means a producer delivering gas to a pipeline can claim the credit, even if further compression or processing occurs downstream.
Did you know?
Taxpayers can rely on these proposed regulations until final regulations are published, provided they follow the guidelines consistently and in their entirety.
Frequently Asked Questions
- What is Section 45Z? Section 45Z provides a tax credit for eligible fuels produced after December 31, 2024, and sold before January 1, 2030.
- Can I stack 45Z credits with other clean energy credits? No, 45Z credits cannot be stacked with certain other credits, including 45V, 48, and 45Q.
- What qualifies as a “qualified sale”? A qualified sale now includes sales to resellers, such as wholesalers and distributors.
- Does the fuel actually need to be used in a vehicle to qualify for the credit? No, the fuel only needs to be “suitable for use” in a vehicle or aircraft.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these proposed regulations. Contact the firm’s Tax and Tax Controversy and Litigation practice groups for more information.
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