On February 3, 2026, the Treasury Department and the Internal Revenue Service (IRS) published proposed regulations regarding the clean fuel production credit under section 45Z of the Internal Revenue Code (Proposed Regulations). The Proposed Regulations follow the announcement from January 2025 in Notice 2025-10, which provided a draft of potential regulations regarding the section 45Z credit. The Proposed Regulations follow Notice 2025-10, with some key changes based on comments from taxpayers. The proposal includes regulations pursuant to sections 45Z, 4101, 6417, and 6418.
Background on Section 45Z
Section 45Z was added to the Code by the Inflation Reduction Act in August 2022 and was subsequently amended by the One, Big, Beautiful Bill Act (OBBBA) in July 2025. The section provides an income tax credit for clean transportation fuel produced domestically after December 31, 2024, and sold by December 31, 2029. The section 45Z credit replaced an assortment of prior fuel incentives, including income tax credits, excise tax credits, and excise tax payment provisions for various biofuels and other alternative fuels.
In general, the section 45Z credit is available to producers of transportation fuel. Under section 45Z(d)(5)(A) transportation fuel is defined as a fuel which: (1) is suitable for use as a fuel in a highway vehicle or aircraft, (2) has an emissions rate which is not greater than 50 CO2e per mmBTU, (3) is not derived from coprocessing an applicable material (or materials derived from an applicable material) with a feedstock which is not biomass, and (4) is not produced from a fuel for which a credit under this section is allowable. Additionally, the transportation fuel must be produced by the taxpayer at a qualified facility and sold in a qualified sale. Section 45Z(a)(1)(A). A qualified facility is a facility used for the production of transportation fuels and excludes any facility for which a section 45V credit, section 45Q credit, or the energy credit determined under section 48(a)(15) with respect to certain specified clean hydrogen production facilities. Section 45Z(d)(4). A sale will be considered qualified if the transportation fuel is sold by the taxpayer to an unrelated person for use by such person in the production of a fuel mixture, for use by such person in a trade or business, or who sells such fuel at retail to another person and places such fuel in the fuel tank of such other person. Section 45Z(a)(4).
Clarifications from the Proposed Regulations
Clarification on Production vs. Minimal Processing
Notice 2025-10 provided an initial definition for production as all steps and processes used to make a transportation fuel, which begins with the processing of primary feedstock and ends with a transportation fuel ready for sale. Production involves substantial processing and not instances where a person engages only in minimal processing, such as blending and other activities that do not result in a chemical transformation. With respect to the exclusion of blending, the preamble states that the section 45Z credit is meant to replace fuel credits and payments that specifically incentivize blending. The preamble further states the inclusion of blending as a production activity would be contrary to Congress’s purpose in enacting section 45Z.
Prop. Reg. § 1.45Z-1(b)(27)(i) follows the definition of production from Notice 2025-10 and repeats that production does not include instances in which a person engages in minimal processing, such as creating a fuel mixture or otherwise engaging in activities that do not result in a chemical transformation. However, there is a special rule for low-GHG conventional or alternative natural gas (CANG), for which production includes the act of processing the unrelated sources of alternative natural gas to remove water, carbon dioxide, and other impurities, such that it is interchangeable with fossil natural gas. Moreover, the compression of CANG that is already interchangeable with fossil natural gas to a higher pressure is excluded from the definition of production.
Transportation Fuel
The Proposed Regulations follow the general rule from Notice 2025-10 regarding the determination for whether a fuel is suitable for use in a highway vehicle or aircraft. Under Prop. Reg. § 1.45Z-1(b)(34)(ii)(A), “if the fuel has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft, or may be blended into a fuel mixture that has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft.” It is not required for the fuel’s predominant use to be in a highway vehicle or aircraft. A fuel is suitable for use at the point at which no further processing is necessary before the fuel is ready to be sold in a qualifying sale. Prop. Reg. § 1.45Z-1(b)(34)(ii)(B) includes a special rule for CANG and states that CANG is suitable for use once it is produced so that it is interchangeable with fossil natural gas and would require only minimal processing to meet the specifications of ASTM D8080.
The Notice distinguishes between sustainable aviation fuel (SAF) and non-SAF transportation fuel. In describing non-SAF transportation fuels, the Notice lists several fuels, including CANG that may qualify as a transportation fuel. The Notice provides that the term CANG includes renewable natural gas (RNG) and means a pipeline-quality compressed or liquified gas that meets the specifications of ASTM D8080, except for the compression requirements. Many of the other listed fuels in the Notice also required compliance with different ASTM standards. Commenters expressed concern to the Treasury Department and the IRS about satisfying the ASTM standards, because the ASTM standards are not typically used by the fuel industry. The preamble to the Proposed Regulations recognizes this concern and clarifies that the list of non-SAF fuels in Prop. Reg. § 1.45Z-1(b)(24)(ii) is “non-exhaustive” and “non-exclusive” with respect to determining if a fuel is a transportation fuel.
“Sold for Use in a Trade or Business”
Notice 2025-10 defined “sold for use in a trade or business” as being sold for use as a fuel in at trade or business within the meaning of section 162. Many commenters noted that this definition appeared to exclude a sale to an unrelated intermediary, that would then sell the fuel to another party as part of their trade or business. This arrangement is common in the fuel industry, so commenters noted that this could exclude a large portion of the industry from being eligible for the section 45Z credit.
Prop. Reg. § 1.45Z-1(b)(29)(ii) removes the “use as a fuel” language from the definition and explicitly clarifies that the term “sold for use in a trade or business” includes the sale of fuel to an unrelated person that subsequently resells the fuel in its trade or business. This change responds to stakeholder concerns that the “use as a fuel” language could prevent all sales for resale, such as those to intermediary dealers or wholesalers, from qualifying for the section 45Z credit.
Related-Person Sale Attribution Rules
The draft regulatory text in Notice 2025-10 incorporated the sale attribution rule in section 45Z(f)(3) for fuel sold by another member of the taxpayer's consolidated group. Commenters requested a broader look-through rule, so that sales made to related intermediaries outside of a consolidated group, if such related person ultimately sold the fuel to an unrelated person, would constitute a qualified sale. The OBBBA added rulemaking authority allowing the Treasury Department and IRS to prescribe additional rules related to sales to related persons. Based on this grant of authority, under Prop. Reg. § 1.45Z-1(b)(29)(iv), a taxpayer will be treated as selling fuel to an unrelated person, if the fuel is transferred to a related person and then sold by the related person to an unrelated person.
Additional Clarifications in the Proposed Regulations
- Provisional Emissions Rate Process: Notice 2025-10 outlined a general framework for provisional emissions rates, if an emissions rate has not been established in the applicable emissions rate tables. Stakeholders commented that provisional emissions rates were a key open issue for the section 45Z credit. The Proposed Regulations describe the procedures taxpayers must follow to request a provisional emissions rate determination.
- Recordkeeping: Notice 2025-10 affirms that taxpayers must maintain sufficient records substantiating their section 45Z credit amount. Prop. Reg. § 1.45Z-4(g) provides more descriptions of required records and safe harbors for (1) substantiation of emissions rates for non-SAF transportation fuel determined using the 45ZCF-GREET model by obtaining certification in substantially the same form and manner described for SAF transportation fuel and (2) substantiation of qualified sales by obtaining a certificate from the purchaser under penalty of perjury.
- Anti-Abuse Rule: The Proposed Regulations provide a broad anti-abuse rule that disallows the section 45Z credit if the taxpayer’s primary purpose is to obtain the benefits of the credits in a matter that is “wasteful,” such as discarding, disposing of, or destroying the fuel without putting it to a productive use.
- Applicability Date: The Proposed Regulations would apply to qualified sales occurring in taxable years ending on or after the date the final regulations are published in the Federal Register. Taxpayers are able to rely on the Proposed Regulations until the final regulations are published, provided taxpayers follow them in their entirety and in an consistent manner. Note that Treasury and the IRS are accepting taxpayer comments on the Proposed Regulations until April 6, 2026.
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