On February 3, 2026, the Treasury Department (the “Treasury”) and the Internal Revenue Service (the “Service”) issued much-anticipated Proposed 45Z Regulations (the “Proposed 45Z Regulations”) on the clean fuel production credit available under section 45Z of the Internal Revenue Code of 1986, as amended (the “Code,” and such credit, the “45Z Credit”), for certain clean fuels produced domestically and sold between January 1, 2025 and December 31, 2029.1
As background, the amount of the 45Z Credit available per gallon of transportation fuel (or gallon-equivalent of non-liquid fuels) depends on the well-to-wheel emissions rate (“Emissions Rate”) of the transportation fuel and compliance with certain prevailing wage and apprenticeship (“PWA”) requirements. Following changes made by the One Big Beautiful Bill Act, the maximum 45Z Credit generally available per gallon or gallon equivalent is $1.00 (subject to an inflation adjustment), but the 45Z Credit for Renewable Natural Gas (“RNG”) derived from animal manure can exceed $1.00 per gallon equivalent.2
As discussed in more detail below, although the Proposed 45Z Regulations provided welcomed clarification – including in respect of the “qualified sale” requirement – taxpayers should continue engaging and educating Treasury on the clean fuel sector via the submission of comment letters and upcoming public hearing to create a workable 45Z Credit regime for all clean fuel categories.3
Qualifying Sales
To be eligible for the 45Z Credit, taxpayers must produce and sell transportation fuel to an unrelated person (i) for use in the production of a fuel mixture by such person, (ii) for use in a trade or business by such person, or (iii) for sale by the unrelated person at retail to another person provided the unrelated person places such fuel in the fuel tank of such other person (collectively, a “qualifying sale”).
Prior to the Proposed 45Z Regulations, many taxpayers were concerned that selling transportation fuels to an intermediary party who resells the transportation fuel would not qualify as a sale “for use in a trade or business;” and prior IRS Notices4 further magnified that concern by interpreting “for use in a trade or business” to mean “for use in a trade or business as a fuel.” This would have rendered many clean fuel producers ineligible for the 45Z Credit or would have required significant changes to offtake and sales arrangements. Fortunately, the Proposed 45Z Regulations broadly interpreted the statute and clarified that “for use in a trade or business” includes “fuel sold to an unrelated person that subsequently resells the fuel in its trade or business.”
Furthermore, the Proposed 45Z Regulations expand the chain of related-person sales to include qualified sales made by entities under common control (as prescribed under section 52(b) of the Code) and by members of a consolidated corporate group. In these chains, the taxpayer is treated as selling a transportation fuel to an unrelated person if it sells transportation fuel to a related person who in turn sells the transportation fuel to an unrelated person.
The Proposed 45Z Regulations also provided a safe harbor for substantiating a “qualified sale” through certificates from fuel purchasers.5 The certificates are prospective rather than retrospective: (i) for single purchases, the certificate must be obtained prior to or at the time of sale and (ii) for certificates covering purchases made over a period of time, the producer must obtain the certificate prior to or at the time of the first of the sales to which the certificate relates. The Proposed 45Z Regulations did not provide a transition rule for the qualifying sale safe harbor for 2025 sales or January 2026 sales. Nevertheless, the certificate provides a useful template for taxpayers looking to substantiate their qualifying sales for fuel produced and sold prior to the publication of the Proposed 45Z Regulations.
Taken together, these clarifications in the Proposed 45Z Regulations in respect of “qualifying sales” offer welcome relief for taxpayers and a more realistic interpretation of the business realities of the transportation fuel market.6
Registration / Ownership
To be eligible for the 45Z Credit, fuel producers must be registered under section 4101 of the Code at the time of fuel production. The Proposed 45Z Regulations provided useful clarity on the appropriate registrant under section 4101 and reregistration requirements and the appropriate registrant under section 6418. The Proposed 45Z Regulations also modified the sections 6147 and 6418 regulations to clarify that a taxpayer need not own the underlying eligible credit property to qualify for the 45Z Credit as long as the taxpayer (who is also the taxpayer registered under section 4101 of the Code) conducts the activities giving rise to the 45Z Credit.
Anti-Stacking
In order to prevent stacking 45Z Credits (e.g., an ethanol producer claims a 45Z credit on ethanol sold to a SAF producer who uses such ethanol for the production of alcohol-to-jet SAF and also claims a 45Z credit on such SAF), the OBBBA amended section 45Z to provide that the 45Z Credit is not available for transportation fuels that are “produced from a fuel for which a section 45Z credit is allowable.” Surprisingly, the Proposed 45Z Regulations take a very broad interpretation of this provision: “If a primary feedstock of the fuel meets the definition of a transportation fuel” then the fuel is not eligible for the 45Z Credit. It does not matter whether a 45Z Credit was, in fact claimed, by the feedstock fuel producer (or another taxpayer). However, the 45Z Credit would still be available for fuels that use other transportation fuels as a “process fuel or other non-primary feedstock input.” Given these nuances, taxpayers will need to analyze the extent to which fuel is a “primary feedstock input” or merely a “process fuel or other non-primary feedstock input” (which may be distinctions without a difference).
Section 45Z also includes an anti-stacking rule that prohibits taxpayers from claiming the 45Z credit for fuel produced at facilities for which the carbon oxide sequestration credit under section 45Q, the clean hydrogen production credit under section 45V, or the investment tax credit election under section 48(a)(15) is made in lieu of section 45V are claimed. The Proposed 45Z Regulations clarified that carbon capture equipment is included in the facility if carbon sequestration contributes to the lifecycle GHG Emissions Rate of the transportation fuel for which the credit is determined. As such, taxpayers should confirm whether it is more valuable to claim a moderate 45Z credit and the 45Q credit or to claim a higher 45Z credit by considering carbon sequestration in the emissions rate of the fuel.7
Qualified Facility
The Proposed 45Z Regulations narrow the definition of a “facility,” aligning it with the definition of “facility” in relation to other credits and confirm that a 45Z facility may be co-located with another credit‑eligible facility without triggering anti-stacking rules.
Under the Proposed 45Z Regulations, the 45Z “facility” means a single production line including all components that function interdependently to produce a transportation fuel through a process that results in the emissions rate used to determine the 45Z credit. That includes all steps from processing the feedstock through to the transportation of the fuel that the taxpayer sells in a qualified sale. However, the definition of a single production line excludes certain indirect production and post‑production equipment (e.g., feedstock related equipment, including production, purification, recovery, transportation, or transmission equipment). These rules are relevant for the anti-stacking rules described above in respect to section 45Q and 45V facilities.
Feedstock
The Proposed 45Z Regulations also provided clarity on the feedstock origin requirements added by the OBBBA by providing that a feedstock is treated as “foreign” if it originates from a source (including a farm, restaurant or food processor) or is purchased from an aggregator located outside the United States, Canada, or Mexico.
Emissions Rate
The Proposed 45Z Regulations require taxpayers to use the annual emissions rate table that is in effect on the first day of the taxable year in which the taxpayer produces a section 45Z clean transportation fuel; however, if an updated emissions rate table is published during that taxable year of production, the taxpayer may choose to use the updated table for that year. For non-SAF fuels, taxpayers are directed to use the latest 45ZCF-GREET model; for SAF fuels, taxpayers may use the latest 45ZCF-GREET model or the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) default or actual approach. Taxpayers that produce a fuel with a method or primary feedstock that is not described in the annual emissions table, the taxpayer may make an emissions value request to the DOE. When an emissions rate is first determined, it will relate back to January 1, 2025, meaning that a taxpayer can utilize a later-determined emissions rate for such fuel as of the date of production.
While the Proposed 45Z Regulations go into some detail on the requirements for an emissions value request, the DOE has not yet opened the request portal.
The 45ZCF-GREET model allows taxpayers to use “EACs” (commonly referred to as “renewable energy certificates” or “RECs”) to substantiate their use of zero-emission electricity. This is one of the few levers available to clean fuel producers to reduce the Emissions Rate of their fuel. The Proposed 45Z Regulations adapted the requirements for RECs from the section 45V regulations, however, its interpretation of the incrementality pillar has created some uncertainty for taxpayers. The Proposed 45Z Regulations stipulate that a taxpayer’s facility is considered placed in service solely for purposes of incrementality (i.e., not to be confused with determining when a facility was placed in service for purposes of the PWA requirements) in the first taxable year such facility produces a transportation fuel (i.e., a fuel that has an emissions rate that is less than 50 kg of CO2e). It is unclear how a taxpayer should determine when it produced a “transportation fuel” when the 45ZCF-GREET model was not published until January 2025.
In response to taxpayer frustrations that “Smart Ag” practices could not reduce the Emissions Rates of their fuel for purposes of the 45Z Credit, Treasury noted that the DOE is developing a section 45Z specific feedstock carbon intensity calculator (“45ZCF FD-CIC”) based on the USDA calculator released in January 2025. The 45ZCF FD-CIC is expected to be an input for the 45ZCF-GREET model that will allow taxpayers’ Emissions Values to reflect certain agricultural practices. Surprisingly, Treasury noted that taxpayers should be able to use the 45ZCF FD-CIC for fuel produced and sold in 2025 even though 45ZCF FD-CIC will likely be published in 2026.8
The Proposed 45Z Regulations provide a safe harbor for substantiating the Emissions Rate for a non-SAF transportation fuel that was determined using the 45ZCF–GREET model. A taxpayer relying on this safe harbor would need to obtain a certification in substantially the same form and manner described in proposed § 1.45Z–5 (related to certification for a SAF transportation fuel) with respect to that non-SAF transportation fuel.
Lastly, while the rules regarding Emissions Rates mirror the rules under the Section 45V regulations, the Proposed 45Z Regulations do not allow taxpayers to “lock-in” the applicable 45ZCF-GREET Model, CORSIA approach, or emission value request for the credit period. This likely reflects that while the section 45V credit period is based on the placed-in-service date of the facility, the 45Z Credit is available without regard to the initial placed-in-service date of the facility. Still, taxpayers that are relying on the 45Z Credit to make a financial decision to build or expand a clean fuel production facility face significant uncertainty because changes in the 45ZCF-GREET model can be difficult to predict.
Conclusion
The Proposed 45Z Regulations provide important clarifications and safe harbors for taxpayers seeking to claim the 45Z Credit and will help ensure more efficient utilization and monetization of 45Z Credits consistent with stated Congressional intent, but they also introduce new uncertainties that Treasury should be sure to tackle in final regulations. In order to ensure common sense resolution of these uncertainties, we encourage stakeholders to submit comments, due April 6, 2026, and participate in the public hearing schedule for May 28, 2026. For any questions, please contact any of the authors of this alert.
1Previously, the Treasury and the Service issued a series of IRS notices (see our prior coverage here and here) that included a set of “forthcoming Proposed 45Z Regulations”
2The 45Z Credit is calculated as the product of an applicable amount and the “emissions factor” for a fuel. Assuming PWA requirements are satisfied, the applicable amount is $1.00 and, for sustainable aviation fuels produced after December 31, 2025, $1.75. The emissions factor is equal to (50 kgCO2e/mmBTU – the Emissions Rate)/50 kgCO2e/mmBTU. Following changes made by the One Big Beautiful Bill Act (“OBBBA”), only RNG derived from animal manure can have an Emissions Rate less than 0, so only RNG derived from animal manure can have an emission factor greater than 1 and a 45Z Credit greater than $1.00.
3Taxpayers may rely on the Proposed 45Z Regulations until final regulations are published in the Federal Register, provided that taxpayers follow them in their entirety and in a consistent manner.
4See footnote [1].
5The certificate must be signed under penalty of perjury and be in substantially the form provided in the Proposed 45Z Regulations.
6Importantly, prior to release of these Proposed 45Z Regulations, we were seeing a chilling effect on certain transactions over concerns as to the interpretation of the “qualifying sale” requirement.
7For the vast majority of taxpayers, it will be more valuable to maximize the 45Z Credit. However, because emissions rates have a floor in 2026 and beyond, some taxpayers may not get the full benefit of their carbon sequestration under section 45Z.
8The Proposed 45Z Regulations did not provide relief for the deadline to make a transfer election under section 6418 or direct pay election under 6417 if the release of the 45ZCF FD-CIC is delayed into late-2026.
