The IRS has released updated guidance (Notice 2024-74) for determining eligibility for the new clean fuel production credit under Section 45Z that is scheduled to take effect in 2025.
Section 45Z was created by the Inflation Reduction Act and provides a credit of up to $1 per gallon for transportation fuel and up to $1.75 per gallon of sustainable aviation fuel that meet certain emission standards. The emissions standards are based on the life-cycle analysis of greenhouse gas emissions. For transportation fuel, the new notice updates the calculation model for greenhouse gases, regulated emissions and energy use in technologies to 40BSAF-GREET 2024. A version of the model was first released in prior guidance (Notice 2024-37), but the new GREET model supersedes that guidance.
According to the IRS, there was a calculation issue with the initial 40BSAF-GREET 2024 model, in which calculations of emissions from catalyst inputs for alcohol-to-jet fuel pathways were incorrect.
The Oct. 18 notice also follows on IRS Notice 2024-49, which provided guidance for registration requirements for the 45Z clean fuel production credit. The notice also offered some definitional guidance on the underlying rules but left open many important issues on eligibility. For example, there are open questions around how the GREET model will apply based on different feedstocks, and the IRS has not yet published an annual table that sets forth standard emissions rates as required by the statute.
In general, the sustainable aviation fuel must be certified to have a life-cycle greenhouse gas emissions reduction percentage of at least 50%. The fuel cannot produce more than 50 kg. of carbon dioxide per 1 million British thermal units. The fuel must be produced in the U.S.
Like other energy-related credits created or enhanced by the 2022 Inflation Reduction Act, taxpayers must meet certain wage and apprenticeship requirements in order to qualify for the full credit amount for fuel produced at facilities placed in service after 2024.
Grant Thornton Insight:
Despite expected clarifications on the underlying rules still to come, the registration process has opened. Taxpayers that think they may qualify should immediately register, as any sales occurring before registration is approved will not be eligible for the credit. The Section 45Z credit is structured very differently from the previous versions of the alternative fuel, biodiesel, and ethanol credits available under Sections 40, 40A, 6426, 6427. Certain fuels may no longer qualify for the credit at all, and creditable fuels may qualify at a new point in the production process. Taxpayers that may have previously claimed credits as an end user or blender may not be the producer for purposes of the credit under Section 45Z.
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