Carbon capture tax credit claims face long delays and rejections

Companies claiming tax credits for carbon capture technology have been confronting heavy compliance requirements, prolonged waits and uncertainty about being rewarded, according to a new report.

The report, released Thursday by the Government Accountability Office, examined the Carbon Oxide Sequestration Credit, also known as the 45Q credit after that section of the Internal Revenue Code. The tax credit is offered for certain carbon oxides that are captured at emission sources or directly from the air and either stored underground or used to manufacture products. The tax credit dates back to 2008 and has been extended and amended a number of times in various laws, including the Inflation Reduction Act of 2022, which added new enhancements. More recently, the One Big Beautiful Bill Act created parity in credit values across various uses of captured carbon. As of March 2026, there were 33 carbon capture facilities in the U.S., with more facilities planned. The number of 45Q credit claims more than tripled from 2019 to 2023, according to data from the Internal Revenue Service.

The IRS has taken several actions to administer the 45Q tax credit and avoid potential noncompliance. However, taxpayers using carbon to create products face compliance burdens, delays and uncertainty in claiming the credit, according to the report.

According to stakeholders who talked to the GAO, one problem involves a requirement for pre-approval of a lifecycle analysis combined with the requirement to use direct data through the end of the tax year creates considerable timing challenges that can delay taxpayers from claiming the credit. For example, to claim the credit, a project needs to be in operation and the taxpayer must wait until the end of their tax year, after which the taxpayer will develop the lifecycle analysis report with prior-year production data, submit the LCA report to the Department of Energy and the IRS, and wait for their review and pre-approval. 

"The requirement for direct data through the end of the tax year applies regardless of when in the year a facility is placed in service," said the report. "While waiting for pre-approval, taxpayers and their investors must continue to fund years of project development, construction, and operation of their carbon capture and utilization projects. Meanwhile, delays caused by direct data requirements make it difficult to secure investors in developing Carbon Capture Utilization and Sequestration facilities, according to stakeholders we interviewed. The timing of LCA pre-approvals can also prevent taxpayers from benefitting from another 45Q feature, transferability, through which they transfer all or a portion of their credit to an unrelated taxpayer. Transfer elections cannot be made for the first time on an amended return.However, because of the pre-approval timing challenges, many businesses cannot claim the 45Q credit on their originally filed tax return, especially if their initial LCA submission was not approved; instead, they need to submit an amended return."

The GAO identified other areas in the approval process for carbon utilization where the IRS and the Department of Energy may be able to minimize the compliance burden and improve certainty for taxpayers. 

"Pursuing such opportunities — for example, streamlining certain processes, or clarifying acceptable datasets that can be used to calculate carbon displaced — could improve the process and help minimize delays for both agencies and taxpayers," said the report. "Multiple potential goals, the lack of a designated agency to evaluate the effectiveness of the credit, and data limitations complicate Congress's ability to understand the performance of the 45Q credit. Even so, periodic reviews of tax expenditures are crucial for informed oversight."

The GAO pointed out it has previously recommended various actions Congress and agencies could take to improve oversight for other tax expenditures, such as identifying what should be analyzed and by whom. In the report, the GAO identified several questions for Congress to consider directing agencies to analyze to help determine the performance of the credit. The key questions are: (1) how well the credit is working to achieve its goals, (2) how efficiently the credit is performing and (3) how the credit compares to other policy tools.

The GAO also made four recommendations to the IRS and two recommendations to the Department of Energy to improve the review process for carbon utilization, by reducing taxpayers' burden while still mitigating potential noncompliance. These include determining a time period of carbon capture data needed to begin claiming the credit, and clarifying datasets acceptable for calculating carbon displaced. The IRS partially agreed with one recommendation; but the IRS and DOE disagreed with the other five. The GAO maintained its recommendations are nevertheless warranted.

"Congress has revised the statute on several recent occasions," wrote IRS CEO Frank Bisignano in response to the report. "Each time, the IRS solicited feedback from taxpayers and other stakeholders and thoughtfully considered their comments when publishing guidance to help taxpayers understand how to meet the requirements to claim the 45Q credit."

Most recently, he noted, the Treasury and the IRS provided a safe harbor for alternative compliance methods to mitigate the effects of anticipated changes in the Environmental Protection Agency's Greenhouse Gas Reporting Program in response to taxpayer concerns that they might potentially lose access to the tax credit because regulations were still tied to the EPA's current reporting regime.

Carbon capture and storage technology also faces other problems. A recent report from ProPublica found that worldwide such facilities are permanently capturing and burying less carbon dioxide than a single large power plant can emit in a year.