[co-author: Michael Palmer*]

On July 1, 2021, the IRS released Revenue Ruling 2021-13 (Rev. Rul. 2021-13). That ruling (i) provided an example of the functionality-based definition of carbon capture equipment found in final Section 45Q Treasury Regulations; (ii) held that an investor must own at least one component (and is not necessarily required to own all components) of carbon capture equipment in the “single process train” of carbon capture equipment at a facility in order to claim a Section 45Q tax credit; (iii) clarified that when one or more components of a single process train are placed into service prior to the single process train being placed into a state of readiness and availability for the capture, processing and preparation of carbon oxide for transport for disposal, injection or utilization, the applicable placed-in-service date is that of the single process train and not the component; and (iv) ruled that a different placed-in-service date applies for tax depreciation purposes as compared to Section 45Q tax credit purposes.

Background on the Section 45Q Tax Credit

The focus of the ruling is on “equipment” because the tax credit generally is for the benefit of owners of carbon capture equipment. This equipment must be originally placed in service at a “qualified facility.” To be eligible for the Section 45Q tax credit, carbon capture equipment at a qualified facility must capture qualified carbon oxide,[1] and the qualified carbon oxide must be (a) disposed of in secure geological storage; (b) used as a tertiary injectant in an enhanced oil or gas recovery project, such as enhanced oil recovery (EOR), and then disposed of in secure geological storage; or (c) “utilized” in another qualified manner.[2]

Qualified facilities are industrial or direct air capture (DAC) facilities for which construction begins before Jan. 1, 2026. Qualified facilities must capture a minimum volume of qualified carbon oxide per year;[3] however, there is no maximum amount that may be captured and still qualify for the Section 45Q tax credit.[4]

The Section 45Q tax credit is available for a 12-year period, beginning when carbon capture equipment is originally placed in service. The applicable dollar amount of the credit depends on how developers use the carbon oxide after capture. For carbon capture equipment originally placed in service on or after Feb. 9, 2018, the Section 45Q credit increases yearly from (i) $34.81 per metric ton in 2021 up to $50 per metric ton in 2026 (adjusted for inflation afterward) for disposal in secure geological storage, and (ii) $22.68 per metric ton in 2021 up to $35 per metric ton in 2026 (adjusted for inflation afterward) for EOR, enhanced gas recovery or other qualified utilization.[5]

Under Rev. Rul. 2021-13, additional assistance to claim the credit was provided to developers and others by the IRS providing guidance that at least one component (and not all components) in a single process train must be owned by a single developer and providing helpful guidance as to how to calculate the placed-in-service date for purposes of the Section 45Q tax credit when a single process train includes multiple components, each of which are placed in service at different times.

*BakerHostetler thanks Michael Palmer, a second-year student attending the Northwestern University Pritzker School of Law, for research and drafting support.

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[1] Carbon oxides are a class of organic compounds that contain only carbon and oxygen. See Carbon Oxides and Carbonates, Lumen Learning, available at https://courses.lumenlearning.com/introchem/chapter/carbon-oxides-and-carbonates/#:~:text=Carbon%20oxides%2C%20or%20oxocarbons%2C%20are,known%20but%20are%20rarely%20encountered (last visited July 7, 2021). The definition of “qualified carbon oxides” for purposes of the Section 45Q credit includes carbon dioxide and, on or after Feb. 9, 2018, was expanded to include other carbon oxides. In general, qualified carbon oxides include carbon dioxide and other carbon oxides that (i) are captured from an industrial source by equipment originally placed in service by an applicable in-service date; (ii) would otherwise be released into the atmosphere as greenhouse gas emissions or lead to such release; and (iii) are measured at the source of capture and verified at the source of disposal, injection or utilization. Sections 45Q(c)(1)(A)-(B).
[2] Section 45Q(a). For other qualifying uses, see Section 45Q(f)(5)(A).
[3] Power plants must capture at least 500,000 metric tons of qualified carbon oxide per year, facilities that emit less than 500,000 metric tons of qualified carbon oxide per year must capture at least 25,000 metric tons per year, and all other facilities and DAC facilities must capture at least 100,000 metric tons per year of qualified carbon oxide. Sections 45Q(d)(2)(A)-(C).
[4] The Section 45Q credit is available for carbon capture equipment placed in service before Feb. 9, 2018, but only until 75 million tons of carbon oxide have been captured and sequestered. Section 45Q(g). For equipment placed in service on or after Feb. 9, 2018, the credit is limited only by how much the taxpayer can capture and sequester in the 12-year period beginning when the equipment is put into service. Sections 45Q(a)(3), (4). See also The Tax Credit for Carbon Sequestration (Section 45Q), Congressional Research Service, tbl.1 (June 8, 2021), available at https://fas.org/sgp/crs/misc/IF11455.pdf (last visited July 7, 2021).
[5] Section 45Q(b)(1).