November 21, 2023

Section 48 Proposed Regulations Detail Treatment of Qualified Biogas Property

Roger Aksamit, Eli Brander, Nicole Elliott, Mary Kate Nicholson, Joshua Odintz, Kenneth Parsons, Rachel Provencher, Bradley Seltzer, Amish Shah, Daniel Strickland

Holland & Knight LLP

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Highlights

The U.S. Department of the Treasury on Nov. 17, 2023, issued proposed regulations regarding the investment tax credit under Section 48 of the Internal Revenue Code that, following passage of the Inflation Reduction Act of 2022, includes a tax credit for "qualified biogas property."
A qualified biogas property system converts biomass into a gas that consists of not less than 52 percent methane by volume and captures such gas for sale or productive use and not disposal via combustion, among other parameters.
This Holland & Knight alert summarizes the provisions of Section 48 and the proposed regulations specifically relevant to qualified biogas property.

The U.S. Department of the Treasury on Nov. 17, 2023, issued proposed regulations (Proposed Regulations) regarding the investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) that, following passage of the Inflation Reduction Act of 2022, includes a tax credit for "qualified biogas property." This Holland & Knight alert summarizes the provisions of Section 48 and the Proposed Regulations specifically relevant to qualified biogas property. The firm's Energy Tax Team is reviewing the Proposed Regulations and will provide additional analysis. To receive this analysis, please subscribe to our alerts.

Statute

The Inflation Reduction Act of 2022 added "qualified biogas property" to the list of property eligible for a Section 48 ITC. Section 48(c)(7) provides this definition of "qualified biogas property":

(A) In general – The term "qualified biogas property" means property comprising a system which

(i) converts biomass (as defined in section 45K(c)(3), as in effect on the date of enactment of this paragraph) into a gas which (I) consists of not less than 52 percent methane by volume, or (II) is concentrated by such system into a gas which consists of not less than 52 percent methane, and

(ii) captures such gas for sale or productive use, and not for disposal via combustion.

(B) Inclusion of cleaning and conditioning property. The term "qualified biogas property" includes any property which is part of such system which cleans or conditions such gas.

Holland & Knight Insight

Notably, the statute provides that property "which cleans or conditions such gas" – which is gas that "(I) consists of not less than 52 percent methane by volume, or (II) is concentrated by such system into a gas which consists of not less than 52 percent methane" – is ITC-eligible property and does not place any restrictions on the cleaning and conditioning property.

Proposed Regulations

Definition of Qualified Biogas Property

The Proposed Regulations further define "qualified biogas property" – specifically, Prop. Treas. Reg. § 1.48-9(e)(11)(i) states:

"Qualified biogas property is property comprising a system that converts biomass (as defined in section 45K(c)(3) of the Code, as in effect on August 16, 2022) into a gas that consists of not less than 52 percent methane by volume (tested at the point described in paragraph (e)(11)(ii) of this section), or is concentrated by such system into a gas that consists of not less than 52 percent methane (tested at the point described in paragraph (e)(11)(ii) of this section), and captures such gas for sale or productive use and not for disposal via combustion. Qualified biogas property also includes any property that is part of such system that cleans or conditions such gas. For example, qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester. However, gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not included in qualified biogas property." (emphasis added)

Holland & Knight Insight

The Proposed Regulations provide the following key points:

» Landfill gas (LFG) to renewable natural gas (RNG) projects are eligible for the ITC.

» Even though qualified biogas property statutorily "includes any property that is part of such system that cleans or conditions such gas," the proposed regulations take the position that gas upgrading equipment is not included in the definition of qualified biogas property. The preamble to the Proposed Regulations, in response to comments provided to the Treasury Department and IRS, suggests that because the upgrading equipment is not necessary to convert biomass to gas with at least 52 percent methane that it is not cleaning and conditioning equipment integral to the production of the gas:

"Regarding the upgrading equipment that is necessary to condition biogas into the appropriate mixture for injection into the pipeline, this equipment is not functionally interdependent with the qualified biogas property that converts biomass into a gas containing not less than 52 percent methane and captures such gas for sale or productive use as specified in the statute. While this upgrading equipment makes the injection of biogas into a pipeline possible, such upgrading equipment is not necessary to satisfy the statutory requirements that the biogas converted from biomass contain not less than 52 percent methane, and that it be captured for sale or productive use … However, unlike upgrading equipment that is necessary for injection of the biogas into the pipeline, cleaning and conditioning equipment is part of the necessary process to convert biomass into gas that is not less than 52 percent methane and capture gas for sale or productive use. Therefore, proposed §1.48-9(e)(11)(i) would clarify that upgrading equipment is not a functionally interdependent component of qualified biogas property." (emphasis added)

» The Treasury Department's proposed position appears to contradict the statutory provision that specifically includes cleaning and conditioning equipment of gas that is at or above the 52 percent threshold and is inconsistent with its position with regard to similar equipment for other ITC-eligible technologies. The Treasury Department and IRS specifically have requested comments regarding the components that should be included as "cleaning and conditioning property." At this point, it is unclear what equipment the Treasury Department would view as includible cleaning and conditioning property given its position that upgrading equipment is excluded.

"(ii) Methane content requirement. The methane content requirement described in section 48(c)(7)(A)(i) of the Code and paragraph (e)(11)(i) of this section is measured at the point at which gas exits the biogas production system, which may include an anerobic digester, landfill gas collection system, or thermal gasification equipment. This is the point at which a taxpayer generally must determine whether it will convert the biogas to fuel for sale or use it directly to generate heat or to fuel an electricity generation unit."

Holland & Knight Insight

Gas must reach the required 52 percent minimum methane content at the time at which it exits the biogas production system. Read in conjunction with Prop. Treas. Reg. § 1.48-9(e)(11)(i), this point appears to be before the gas enters the upgrading equipment.

Exception to Prevailing Wage and Apprenticeship Requirements

The Proposed Regulations also address the prevailing wage and apprenticeship requirements. Specifically, Prop. Reg. § 1.48-13(e), Nameplate capacity for purposes of the One-Megawatt Exception, states:

"For purposes of paragraph (b)(1) of this section, the determination of whether an energy project has a maximum net output of less than 1 MW of electrical (as measured in alternating current) or thermal energy is determined based on the nameplate capacity. Where applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy project."

"(5) Qualified biogas property. In the case of qualified biogas property, 3.4 mmBtu/hour can be used as equivalent to the One-Megawatt Exception. Taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the EPA GHGRR at table C-1 to subpart C of part 98 (40 CFR part 98). Otherwise, taxpayers may calculate their own equivalent volumetric flow if the heat content of the gas is known."

Holland & Knight Insight

Section 48(a)(9) provides that the prevailing wage and apprenticeship requirements are satisfied for entitlement to the 5X multiplier under Section 48 if the project has "a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy." Under this provision of the Proposed Regulations, smaller RNG projects may be exempt from the prevailing wage and apprenticeship requirements under this one-megawatt exception.

Although the Proposed Regulations provide some clarity for qualified biogas property, they include a very unfavorable outcome for RNG projects as it relates to gas upgrading equipment. Comments on the Proposed Regulations are due 60 days after they are published in the Federal Register, which is expected to be on Nov. 22, 2023.

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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.