Coming Attractions: Section 45Q Carbon Sequestration Guidance, Part II

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The IRS’s much anticipated new guidance (here and here) for Section 45Q carbon sequestration tax credits was rather anticlimactic in that it focused on just two of the many issues for which the IRS had solicited comments in May 2019.  Largely patterned after existing IRS guidance for renewable energy tax credits, the new guidance addressed (1) Section 45Q’s requirement that facility construction commence before January 1, 2024, and (2) tax credit allocation within partnerships.

While the new guidance is certainly useful, it unfortunately did not address some of the larger issues, such as whether the IRS would change its approach to Section 45Q’s “secure geological storage” requirement.  For example, carbon sequestration under a Class VI underground injection control (UIC) permit is currently eligible for Section 45Q tax credits, and 50 years is the default post-injection time horizon for the UIC Class VI program.  However, a minimum 100-year time horizon is now required under the carbon sequestration protocol for California’s low carbon fuel standard program.

Another key outstanding issue concerns recapture of Section 45Q tax credits should some leakage occur over time.  For example, how should leakage be measured and at what point would recapture be triggered?  Answers to these sort of questions are critical for project developers and investors.  The IRS’s press release indicates that guidance on at least some of the other issues, including geologic storage security and recapture, is in the works.

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