IRS proposes rules for clean fuel production tax credit

The Internal Revenue Service and the Treasury Department released proposed regulations Tuesday on the clean fuel production credit under the One Big Beautiful Bill Act to help domestic producers of clean transportation fuels such as biodiesel.

The clean fuel production credit, also known as the 45Z credit, provides businesses an income tax credit for clean transportation fuel produced domestically after Dec. 31, 2024, and sold by Dec. 31, 2029.

The OBBBA made a number of changes to the tax credit, which was originally part of the Inflation Reduction Act of 2022, including:

• Extending the credit until Dec. 31, 2029;
• Limiting feedstocks to those grown or produced in the U.S., Mexico, or Canada;
• Adding prohibited foreign entity restrictions;
• Broadening sale attribution for fuel sold through related intermediaries;
• Eliminating the special rate for sustainable aviation fuel;
• Adding an anti-abuse provision to prevent double crediting;
• Prohibiting negative emissions rates except for fuels derived from animal manure;
• Requiring feedstock-specific emissions rates for fuels derived from animal manure; and,
• Excluding indirect land use changes from emissions rates.

To claim the credit, taxpayers need to be registered with the IRS using Form 637, "Application for Registration (For Certain Excise Tax Activities)" at the time of production.

The tax credit will continue U.S. leadership in the transportation and aviation industries while lowering costs for consumers, according to a Treasury official who asked not to be identified. It was extended by the OBBBA, so it now ends for fuel sold after 2029. The amount of the credit is based on the amount of fuel produced. The guidance directs taxpayers to use the Department of Energy's 45ZCF-GREET model to determine emissions rates for non-sustainable aviation fuel. That model is also available for determining emissions rates for sustainable aviation fuel. The guidance proposes definitions and clarifications of key concepts related to the section 40z tax credit.

While they maintain many of the definitions and clarifications provided in last year's guidance, the new guidance proposes revisions to some aspects of that guidance in response to stakeholder feedback and amendments made to the credit by the OBBBA. The guidance will be open for public comment for 60 days. The guidance specifies that no credit is allowed if for tax years starting after July 4, 2025, the taxpayer is a specified foreign entity, and for taxable years starting after July 4, 2027, the taxpayer is a foreign-influenced entity. The Treasury and the IRS are actively working on foreign entity guidance, and expect to issue that as part of a separate guidance project.

The Treasury and the IRS are asking for comments and requests to speak at the public hearing on these proposed regulations. They're encouraging commenters to use the Federal e-Rulemaking portal to submit comments (indicate "IRS" and "REG-121244-23"). A public hearing has been scheduled as described in the "Comments and Public Hearing" section. Paper submissions should be sent to: CC:PA:01:PR (REG-121244-23), Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.