IRS issues guidance for section 45Q carbon capture and sequestration tax credit

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On July 1, 2021, the Internal Revenue Service issued Revenue Ruling 2021-13 (the “Revenue Ruling”) providing guidance regarding the carbon monoxide sequestration tax credit under Section 45Q. The revenue decision provides guidance on what constitutes carbon capture equipment, who is eligible to claim the credit, and what is the relevant commissioning date for the purposes of the Section 45Q credit.

The revenue decision is based on a factual scenario in which an existing industrial facility (the “Facility”) produces methanol in a multi-stage process. As part of the facility process, an Acid Gas Removal Unit (“AGR”) purifies the raw syngas and releases the separated CO2 into the atmosphere. This AGR unit was put into service in 2017 (for depreciation purposes under Articles 167 and 168) and no taxpayer had requested a credit under Article 45Q with respect to the installation. Then, in 2021, an investor (the “Investor”) purchased and installed new components of carbon capture equipment necessary to create a unique process train capable of capturing, processing and preparing for transport CO2. which was previously released into the atmosphere at ease. The investor has not acquired a stake in the AGR unit or the facility.

What is carbon capture equipment?

Section 45Q does not define the term “carbon capture equipment”. Treasury regulations provide a feature-based approach to defining carbon capture equipment, and do not adopt a primary goal test or allow taxpayers to choose to exclude “dual-use” goods from. the definition of carbon capture equipment. Under Treasury regulations, all components that make up an independently operating process train capable of capturing, processing and preparing carbon monoxide for transport will be treated as a single unit of carbon capture equipment, or a “single process train”. The tax ruling considers the AGR unit described in the tax ruling to be carbon capture equipment for the purposes of Article 45Q because one of its functions is to separate CO2 from a gas stream.

Who is eligible for the section 45Q credit?

In the case of qualified carbon monoxide captured using carbon capture equipment that is initially put into service at a qualified facility on or after February 9, 2018, the section 45Q credit is attributable to the person who owns the carbon capture equipment and is physically or contractually responsible for the capture and disposal, injection or use of such qualified carbon monoxide. Treasury regulations provide that for each process train of carbon capture equipment, the credit will be considered attributable to one person. This person will be the one who physically ensures the capture and disposal, injection or use of such qualified carbon monoxide or contracts with others to capture and remove, inject or use this qualified carbon monoxide. The revenue decision explains that this requirement would be unnecessary if all components of the carbon capture equipment in a single process train were to be owned by the same taxpayer. Accordingly, the tax ruling states that the investor is not required to own every component of the carbon capture equipment in a single process train, but must own at least one component of the carbon capture equipment. in this unique process train to be the person to whom Section 45Q credit is attributable.

What is the relevant in-service date for Section 45Q credit purposes?

The credit period under section 45Q is the 12-year period beginning on the date the carbon capture equipment is initially put into service. The decision explains that for the purposes of section 45Q credit, all components of a single process train should be treated as a single unit of property and the relevant commissioning date is the initial commissioning date. of the single process train. This unit of carbon capture equipment will be considered initially in service for the purposes of section 45Q on the date on which any person first places it in a state or state of readiness and availability for the function. specifically designed capture, treatment and preparation of carbon monoxide. for transport for disposal, injection or use. Based on the facts of the tax ruling, this cannot happen until new components of the carbon capture equipment are added to enable the facility to capture, process and prepare carbon monoxide. for transport for disposal, injection or use, rather than release to the atmosphere. Accordingly, the Revenue Decision maintains, for the purposes of Section 45Q, the original commissioning date of a single process train of carbon capture equipment at the facility that includes the unit. Existing AGR and new components of the carbon capture equipment installed by the investor is in 2021.

For depreciation purposes, the result is different. The single process train as a unit of property and its initial commissioning date for the purposes of section 45Q are not relevant for the purposes of depreciation under sections 167 and 168. For the purposes of amortization, the process train unique to the facility consists of two assets: the existing AGR unit which was commissioned in 2017, and the new components of the carbon capture equipment purchased and installed by Investor in 2021.

To take with

The tax ruling helps clarify several important aspects of the Section 45Q credit: dual-use goods may fall under the definition of carbon capture equipment, multiple owners are allowed for components of a single process train. carbon capture equipment, and the in-service date for the credit of Section 45Q is the date on which a single process train of carbon capture equipment is placed in a state or condition of preparation and availability for capture, processing and preparation of carbon monoxide for transport for disposal, injection or use. The twelve-year period for claiming the Section 45Q credit begins on the date the single-process train is initially placed in service. The revenue decision, however, does not address how ownership of “at least one component” of the carbon capture equipment in this single process train will be measured to determine the credit eligibility of the company. section 45Q. For example, is the sufficiency of the property based on the dollar value of the “component”, so potential investors need to determine when an investment will be considered de minimis? Or is the standard based on the function of the component within the single process train? Owners of different components in a single process train will also need to determine which party will claim the Section 45Q credit and ensure that party is otherwise eligible to do so.


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