IRS Issues Additional Guidance on Section 45Q Credit

The 45Q Credit was originally enacted in 2008 as part of the Energy Improvement and Extension Act of 2008, and was substantially revised as part of the Bipartisan Budget Act of 2018 (the “BBA”). The revised 45Q Credit offered enhanced incentives and flexibility for investors and developers, generating significant interest as well as questions regarding the application and calculation of the credit. The IRS has since made substantial efforts to provide clarity to taxpayers, first issuing Notice 2020-12 and Rev. Proc. 2020-12, and then issuing proposed and final regulations.¹ With this latest guidance (Rev. Rul. 2021-13) released on July 1, the IRS adds some additional clarity regarding acid gas removal equipment that comprises a single process, including equipment designed to remove and sequester CO₂.

In Rev. Rul. 2021-13, the taxpayer requested a ruling with respect to the application of section 45Q to equipment used at a methanol plant (“Facility X”). The relevant equipment comprises a single process involving acid gas removal and CO₂ capture and sequestration (the ruling refers to the equipment comprising this single process as the “single process train”). The acid gas removal unit/equipment was placed in service at Facility X on January 1, 2017, and no taxpayer had claimed 45Q Credits with respect to such equipment prior thereto. Apparently, the acid gas removal unit does not qualify for 45Q Credits since it alone does not capture carbon oxide. Thereafter, the taxpayer purchased carbon capture equipment eligible for the 45Q Credit and placed such equipment in service in 2021. The IRS has ruled on the following with respect to the taxpayer’s request:

• For purposes of the 45Q Credit, an acid gas removal unit used to purify raw synthetic gas in a methanol plant is treated as carbon capture equipment (presumably when combined with CO₂ capture equipment) within the meaning of Treas. Reg. Section 1.45Q-2(c).

• A taxpayer is not required to own every component of carbon capture equipment within a single process train at a methanol plant otherwise eligible for the 45Q Credit to claim the 45Q Credit, but a taxpayer must own at least one component of carbon capture equipment in such single process train.

• Section 45Q(a) determines the appropriate amount of credit available based on the date carbon capture equipment is originally placed in service. Solely for purposes of Section 45Q(a), if a single process train of carbon capture equipment which includes an already existing acid gas removal unit is placed in service at a facility, the original placed-in-service date for such single process train, including the existing acid gas removal unit, is the date the single process train is placed in a condition or state of readiness and availability for the capture, processing, and preparation of carbon oxide for transport for disposal, injection, or utilization.

• However, this original placed-in-service date for the single process train determined for purposes of Section 45Q(a) will not affect the placed-in-service date of the acid gas removal unit or new components of carbon capture equipment for depreciation purposes.

While this ruling targets methanol acid gas removal equipment, it is interesting to note the somewhat expansive interpretation the IRS has regarding placed-in-service, ownership, and the scope of equipment that can qualify for the 45Q Credit.

¹ Please see our prior client alerts for detailed discussions regarding Notice 2020-12 and Rev. Proc. 2020-12 and the proposed regulations.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Arthur V. Hazlitt, an O'Melveny partner licensed to practice law in New York, Alexander Roberts, an O'Melveny counsel licensed to practice law in New York, and Dawn Lim, an O'Melveny associate licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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