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Highlights of the Section 45Q Final Regulations

On January 6, 2021, the IRS issued T.D. 9944 (the “Final Regulations”), which finalizes the proposed regulations under section 45Q (the “Proposed Regulations”) that were issued in REG-112339-19 on May 28, 2020 and discussed in an earlier post. This article summarizes the key ways in which the Final Regulations differ from their predecessor.

Broadly Applicable Concepts

The Final Regulations, as with the Proposed Regulations, contain numerous concepts that are roughly transposed, with some innovations, from the section 45 production tax credit (“PTC”) and the section 48 investment tax credit (“ITC”). The highlights of the Final Regulations, as they relate to these broadly applicable concepts, are listed below.

  • Treating multiple facilities as a single facility. The section 45Q credit is calculated differently, and may be available to different taxpayers, depending on whether the applicable facility was placed in service by the date of the Bipartisan Budget Act of 2018 (the “BBA”), i.e., February 9, 2018. In certain situations, the owner of a post-BBA facility that captures at least 500,000 metric tons of qualified carbon oxide in a taxable year can make an election under section 45Q(f)(6) for the facility to be treated as a pre-BBA facility. For purposes of this election, the Final Regulations state that Section 8.01 of Notice 2020-12[1]—which lists eight non-exclusive factors relevant to determining whether multiple facilities are treated as a single facility for purposes of determining when a facility began construction—can be applied to treat multiple facilities as a single facility for purposes of determining if the 500,000 metric ton threshold is met.[2]

The Final Regulations adopt a similar approach for determining whether a facility has satisfied the annual carbon oxide capture thresholds necessary for a facility to constitute a “qualified facility” under section 45Q(d),[3] observing that such an approach “promotes uniformity of applicable for both the beginning of construction requirement and the minimum capture requirements of section 45Q(d).”[4]

  • Binding written contracts. The section 45Q credit may only be claimed by the person that physically or contractually ensures the disposal, utilization, or use as a tertiary injectant—and, in the case of post-BBA facilities, the capture—of the qualified carbon oxide.[5] The proposed regulations generally imposed a “binding written contract” standard for when a taxpayer is considered to “contractually ensure” the fate of the captured carbon oxide; in addition to being enforceable under state law against both the taxpayer and the party physically performing the disposal, injection or utilization, the contract could not limit damages to a specified amount. In contrast to Notice 2020-12, as well as analogous guidance in the ITC and PTC areas, there was no exception for limitations of damages to 5% or more of the contract price, but liquidated damages provisions were explicitly allowed.[6]

The Final Regulations conform to Notice 2020-12 and analogous ITC/PTC guidance by stating explicitly that a contractual provision that limits damages to an amount equal to at least 5% of the total contract price will not be treated as limiting damages to a specified amount, and by incorporating the principles of Treas. Reg. § 1.168(k)-1(b)(4)(ii)(A)-(D).[7] Existing contracts that do not meet such criteria by the time the Final Regulations are finalized in the Federal Register are given 180 days to conform.[8]

The Final Regulations also clarify that a taxpayer may enter into a binding written contract for a general contractor to physically carry out the capture, disposal, injection or utilization of qualified carbon oxide, so long as the general contractor’s contract with the subcontractor meets the requirements for a “binding written contract” in Treas. Reg. § 1.45Q-1(h)(2)[9]—although such subcontractor may not claim the section 45Q credit pursuant to an election made under section 45Q(f)(3) to pass the credit to a person that disposes of, utilizes, or injects the qualified carbon oxide.[10]

  • Definition of “carbon capture equipment.” The Proposed Regulations stated only that 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, and provided a nonexclusive laundry list of components of carbon capture equipment, such as absorbers, compressors, membranes, “and other carbon oxide related equipment.”[11] Citing the “confusion” caused by the laundry list in the Proposed Regulations and the need for a “functionality-based definition” that would “provide flexibility without limiting the definition of carbon equipment solely to a list of components,[12] the Final Regulations add a more specific statement 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”[13] and explicitly state that carbon capture equipment generally does not include components of property used for transporting qualified carbon oxide for disposal, injection, or utilization[14] (although it may, in certain circumstances, include a system of gathering and distribution lines that collect captured carbon oxide for transport to a pipeline).[15]
  • Additional guidance on the 80/20 Rule. The Proposed Regulations permit a retrofitted qualified facility or carbon capture equipment to qualify as originally placed in service even if it contains some used components of property, provided the fair market value of the used components of property is not more than 20% of the qualified facility or carbon capture equipment’s total value (i.e. the cost of the new components of property plus the value of the used components of property)—the so-called “80/20 Rule” that originally appeared in Rev. Rul. 94-31[16] as wind PTC guidance and has been a major part of the ITC and PTC “repower” guidance since 2016.[17] The Proposed Regulations, as observed at the time, did not specify the unit of property to which the 80/20 Rule applies; the Final Regulations remedy this omission by stating that “[a]ll 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.”[18] This approach applies not only for purposes of the 80/20 Rule, but also for the new clarification that only one taxpayer, i.e., the person who physically or contractually ensures the disposal, injection, or utilization of the carbon oxide, can claim the section 45Q credit for any unit of carbon capture equipment.[19]

In addition to defining the unit of property to which the 80/20 Rule is applied, the Final Regulations add that the general principles of Rev. Rul. 94-31 apply—an enigmatic statement, as it is unclear what meaningful principles Rev. Rul. 94-31 contains other than the 80/20 Rule and the definition of a unit of property, which are already explicitly defined in the Final Regulations on their own terms. Interestingly, the Preamble confirms that the numerator representing “cost of new” in the 80/20 Rule must be attributable to the cost of brand new property that has never been used before and states that this approach is consistent with the existing position for the section 45 PTC, which is “akin to the section 45Q credit.” Finally, the Final Regulations clarify that while the cost of new equipment for a pipeline can be counted in the “cost of new,” the cost of equipment used to repair an existing pipeline cannot.[20]

Carbon Capture-Specific Topics

In addition to their clarification of the broadly applicable concepts discussed above, the Final Regulations also address certain topics that are specific to carbon capture:

  • Facilities producing carbon dioxide from carbon dioxide wells. A qualified facility that is not a direct air capture facility must be an “industrial facility,”[21] and the Proposed Regulations excluded from the definition of “industrial facility” a facility that produces carbon dioxide from carbon dioxide production wells at natural carbon dioxide-bearing formations or a naturally occurring subsurface spring. While the Proposed Regulations generally imposed a facts and circumstances standard on the question of whether a well is producing from a natural carbon dioxide-bearing formation (apart from a safe harbor for deposits of natural gas containing less than 10% carbon dioxide by volume),[22] the Final Regulations provide a bright-line rule that such disqualified wells include only wells that contain 90% or greater carbon dioxide by volume, and even those wells with 90% or greater carbon dioxide by volume may still avoid disqualification if they meet specific criteria, including that the deposit must contain a product other than carbon oxide that is commercially viable to extract and sell.[23]
  • Guidance on analysis of lifecycle greenhouse gas emissions (“LCA”). To qualify for the credit, qualified carbon oxide generally must be “utilized” by the taxpayer through fixation through photosynthesis or chemosynthesis, chemical conversion to a material or chemical compound in which the qualified carbon oxide is securely stored, or for a purpose for which a commercial market exists.[24] The Final Regulations clarify that the LCA must demonstrate that the proposed process results in a net reduction of carbon dioxide equivalents when compared to a comparison system;[25] the LCA report must be performed or verified by an independent third party with an appropriate U.S. or foreign professional license;[26] the LCA report and third-party independent statement must be submitted to the IRS and the Department of Energy[27]and the LCA report will be subject to a technical review by the Department of Energy;[28] and a “commercial market” for purposes of the determining “utilization” means a market in which a product, process or service that utilizes carbon oxide is sold or transacted on commercial terms.[29] In addition, the Preamble clarifies that consistent with the requirement that the LCA must conform to the standards of ISO 14040:2006 and ISO 14044:2006,[30] the LCA generally must take into account greenhouse gas emissions related to the full product lifecycle unless the deletion of lifecycle stages is permitted by such guidance.[31]  
  • Recapture. Pursuant to section 45Q(f)(4) and the Proposed Regulations, the credit generally is recaptured on a project by project basis to the extent that the amount of leaked qualified carbon oxide in a taxable year exceeds the amount of qualified carbon oxide that is disposed of in secure geological storage or used as a tertiary injectant in that same taxable year.[32] The Final Regulations apply a similar approach, but with a three-year recapture window instead of a five-year one.[33] The Final Regulations also clarify that the three-year window can end three years after the last taxable year in which the taxpayer is eligible to claim a credit that it has elected to carry forward (if that is earlier than counting three years from the last taxable year in which the credit is claimed or the date when monitoring under § 1.45Q-3(b)(2) or (2) ends).[34]


In transposing key concepts from the ITC and the PTC, the drafters of the Final Regulations have generally opted for as much consistency as possible. This approach is evident in the Final Regulations’ definition of “binding written contract,” which eliminated some discrepancies between the Proposed Regulations and the analogous guidance in the beginning of construction rules for ITC and PTC projects,[35] as well as in the approach to treating multiple facilities as a single facility for multiple purposes, the revised functionality-based definition of “carbon capture equipment,” and the clarifications to the 80/20 Rule. While most of these issues are explicitly addressed in the ITC and PTC guidance, and thus are not of great practical importance to taxpayers claiming the ITC and the PTC, it should be observed that the Final Regulations and the Preamble thereto contain detailed guidance on certain aspects of the 80/20 Rule that are not explicitly set forth in any ITC or PTC guidance. None of this guidance is obviously inconsistent with the market’s existing interpretation of the 80/20 Rule for purposes of determining whether an ITC or PTC project has been successfully repowered, but the very fact that the IRS has provided a substantial amount of explicit guidance on the subtleties of the 80/20 Rule—which was previously addressed principally by Rev. Rul. 94-31 and a small amount of unpublished guidance—is a positive development.


[1]      2020-11 I.R.B.

[2]      Treas. Reg. § 1.45Q-2(g)(4).

[3]      Treas. Reg. §1.45Q-2(g)(1).

[4]      Preamble at 43.

[5]      I.R.C. § 45Q(f)(3)(A)(i), (ii).

[6]      Prop. Reg. § 1.45Q-1(h)(2)(i), (iii).

[7]      Treas. Reg. § 1.45Q-1(h)(2)(i).

[8]      Treas. Reg. § 1.45Q-1(h)(2)(iv).

[9]      Treas. Reg. § 1.45Q-1(h)(2).

[10]    Treas. Reg. § 1.45Q-1(h)(3).

[11]    Prop. Reg. § 1.45Q-2(c)(2).

[12]    Preamble at 27.

[13]    Treas. Reg. § 1.45Q-2(c)(2).

[14]    Treas. Reg. § 1.45Q-2(c).

[15]    Treas. Reg. § 1.45Q-2(c)(2).

[16]    1994-1 C.B. 16.

[17]    Notice 2016-31, 2016-23 I.R.B. 1025.

[18]    Treas. Reg. § 1.45Q-2(c)(3).

[19]    Treas. Reg. § 1.45Q-1(h)(1).

[20]    Treas. Reg. § 1.45Q-2(g)(5).

[21]    I.R.C. § 45(d)(1).

[22]    Prop. Reg. § 1.45Q-2(d)(1).

[23]    Treas. Reg. § 1.45Q-2(d)(1), (2).

[24]    I.R.C. § 45Q(f)(5).

[25]    Treas. Reg. § 1.45Q-4(c)(2).

[26]    Treas. Reg. § 1.45Q-4(c)(4).

[27]    Treas. Reg. § 1.45Q-4(c)(5).

[28]    Treas. Reg. § 1.45Q-4(c)(6).

[29]    Treas. Reg. § 1.45Q-4(d).

[30]    Treas. Reg. § 1.45Q-4(c)(3).

[31]    Preamble at 72.

[32]    Prop. Reg. § 1.45Q-5(b).

[33]    Treas. Reg. § 1.45Q-5(f).

[34]    Id.

[35]    Notice 2013-29, § 4.03; Notice 2018-59, § 7.03.

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