IRS issues new Section 45Q CCUS ruling

Eversheds Sutherland (US) LLP

The IRS issued Revenue Ruling 2021-13 on July 1, 2021, which provides additional guidance regarding the section 45Q carbon capture, utilization and storage (CCUS) credit. More specifically, the ruling concludes that:

  • A taxpayer needs to own only one component of carbon capture equipment within a single process train to be the person that is entitled to the tax credit.
  • For section 45Q purposes, the placed in service date of the single process train is the date on which the new components of carbon capture equipment are installed, notwithstanding the inclusion of existing equipment in the single process train.

Relevant facts in the ruling

The facts involve a methanol plant that produces methanol from petroleum coke. The process for producing methanol involves the following steps:

  1. petroleum coke is gasified with very high temperature steam to create a raw syngas comprising carbon monoxide, carbon dioxide, methane, hydrogen and hydrogen sulfide;
  2. particulate matter and some sulfur is removed from the raw syngas;
  3. the raw syngas is purified in an acid gas removal (AGR) unit, such purification includes the removal of CO2; and
  4. the raw syngas, which is comprised of carbon monoxide, hydrogen and methane is converted into methanol in the methanol unit.

The AGR unit was placed in service on January 1, 2017 and, since that time, the CO2 separated by the AGR has been released into the atmosphere and no section 45Q credits have been claimed. 

The taxpayer purchased and installed new components of carbon capture equipment in 2021 necessary to create a single process train capable of capturing, processing, and preparing for transport the CO2. The taxpayer did not acquire any ownership interest in the methanol plant, including the AGR unit.

Summary of applicable rules

Under Treas. Reg. section 1.45Q-2(c), carbon capture equipment generally includes all components of property that are used to capture or process carbon oxide until the carbon oxide is transported for disposal, injection or utilization. Further:

  • Treas. Reg. §1.45Q-2(c)(1) provides that carbon capture equipment is equipment used for the purpose of (i) separating, purifying, drying and/or capturing carbon oxide that would otherwise be related into the atmosphere from an industrial facility; (ii) removing carbon oxide from the atmosphere via direct air capture; or (iii) compressing or otherwise increasing the pressure of carbon oxide.
  • Treas. Reg. §1.45Q-2(c)(2) provides that carbon capture equipment generally includes components of property necessary to compress, treat, process, liquefy, pump or perform some other physical action to capture qualified carbon oxide, which includes, among other items, a system of gathering and distribution lines that collect carbon oxide captured from a qualified facility or multiple qualified facilities that constitute a single project for the purpose of transporting that carbon dioxide to a pipeline used to transport carbon oxide to or from one or more taxpayers and projects.
  • Treas. Reg. §1.45Q-2(c)(3) provides that all components that make up an independently functioning process train capable of capturing, processing, and preparing carbon oxide for transport will be treated as a single unit of carbon capture equipment.

Finally, under section 45Q(f)(3)(A)(ii) and Treas. Reg. §1.45Q-1(h)(1)(ii), the section 45Q credit is available to the person that owns the carbon capture equipment and physically or contractually ensures the capture and disposal, injection, or utilization of such qualified carbon oxide. The final regulations provide that for each single process train of carbon capture equipment, only one taxpayer will be considered the person to whom the credit is attributable.

Conclusions in ruling

In the ruling, the IRS reached the following conclusions:

  1. The AGR unit is carbon capture equipment for purposes of section 45Q because one of its functions is to separate CO2 from a gas stream.
  2. The taxpayer is not required to own every component of carbon capture equipment within a single process train to be the person to whom the section 45Q credit is attributable, but instead must own at least one component of carbon capture equipment in a single process train of carbon capture equipment.
  3. For 45Q purposes, the placed in service date of the single process train is 2021 for the single process train that includes the existing AGR unit and the new components of carbon capture equipment since the single process train was not ready and available for the capture, process and preparation of carbon oxide for transport for disposal, injection, or utilization until 2021.  Accordingly, the 12-year credit period begins in 2021.
  4. For depreciation purposes, the 2017 placed in service date of the existing AGR unit is not impacted by the fact that the placed in service date of the single process train (which includes the AGR unit) is in 2021.

Eversheds Sutherland Observations:  As a preliminary matter, it is encouraging to see the IRS continue to issue guidance on matters requiring clarity to promote the growth of carbon capture, utilization and storage in the US, as Congress intended through the 2018 changes to section 45Q.

This guidance provides substantial flexibility in determining the person to whom the credit is allocated by clarifying that a taxpayer needs to own only one component of carbon capture equipment in a single train of carbon capture equipment to be the person that is entitled to the section 45Q credit. Although this conclusion may have been inferred from the final regulations, the explicit ruling provides very helpful confirmation.  

With regard to the placed in service date ruling, the IRS again took a very practical approach in confirming that the 12-year period for claiming the credit began after the additional carbon capture equipment was installed, since that was the time when the single process train was ready and available for the capture, process and preparation of carbon oxide for transport for disposal, injection, or utilization, without revising the applicable placed in service date rules for depreciation purposes. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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