More Time to Claim Tax Credits
|The Inflation Reduction Act (IRA) is one of the most ambitious pieces of legislation yet aimed at combating climate change and promoting energy independence. Its proponents claim that it will reduce carbon emissions by 40%, relative to 2005 levels, over the next decade by incentivizing new infrastructure developments such as electrification and expanding renewable energy supply-side resources. Incentives under the IRA include extending and promoting tax credits in the renewable and biofuels sector. Below is a brief rundown of some of the more significant new and existing ways in which you may be able to earn tax credits and other incentives under the IRA.
Direct Support for Alternative Fuel Producers and Blenders
The most apparent incentives for biofuels within the IRA are the legislation’s direct support for alternative fuel producers and blenders. For instance, the IRA extends the preexisting alternative fuel tax credit, alternative fuel mixture tax credit, biodiesel and renewable diesel tax credit, and biodiesel mixture tax credit until December 31, 2024. These credits were otherwise scheduled to expire at the end of 2022. The extension means that alternative fuel producers and users can continue to claim credits of 50 cents per gallon sold for the alternative fuel and alternative fuel mixture credits. They can also claim $1.00 per gallon of biodiesel used for the biodiesel and renewable diesel and biodiesel mixture tax credits.
Qualifying alternative fuels include liquefied petroleum gas, compressed natural gas and compressed or liquefied fuels made from biomass. “Biodiesel” under the biodiesel and renewable diesel and biodiesel mixture tax credits includes diesel derived from vegetable and seed oils as well as animal fats. Potential claimants should note that the alternative fuel and alternative fuel mixture tax credits can be claimed as an excise tax credit or received as an outlay, while the biodiesel and renewable diesel and biodiesel mixture tax credits can both be claimed as an immediate excise tax credit against the blender’s motor and aviation fuels excise taxes. Any credits in excess of excise tax liability may be refunded.
Extension of Existing Second Generation Biofuel Producer Tax Credit
The IRA also extends the second generation biofuel producer tax credit until 2025, which was set to expire in 2022. This credit provides a $1.01 per gallon income tax credit for second generation biofuel producers. “Second generation biofuel” refers to liquid fuel made from certain feedstock, such as lignocellulose or hemicellulose, that meets the registration and emission requirements of the Clean Air Act. The air emissions restrictions may make this credit more difficult to obtain than other incentives, but that added qualification presents the opportunity to enhance the relatively limited commercial value of secondary agricultural products like grass stalks and associated biomass.
New Sustainable Aviation Fuel Credit
Beyond supporting ethanol and biodiesel for motor vehicles, the IRA incentivizes the production of alternative fuels for airlines by establishing the sustainable aviation fuel credit. This credit attaches to both the sale and use of qualifying aviation fuel and entitles claimants to a $1.25 per gallon credit. Claimants may also increase the credit amount up to $1.75 per gallon by using sustainable aviation fuel that reduces greenhouse gas emissions beyond the requisite 50% reduction compared to traditional aviation fuel. To qualify, alternative aviation fuels will need to meet certain engineering specifications and be created from biomass like fats, oils and greases.
Because the sustainable aviation fuel market is still emerging, this tax credit may be available to expand commercial opportunities for agricultural producers as well entities involved in the creation and shipping of biofuels. The sustainable aviation fuel credit will be available through the 2024 calendar year.
New Qualified Advanced Energy Project Tax Credit
The IRA authorizes an additional $10 billion to fund the qualified advanced energy project credit. In contrast to the aforementioned credits which attach directly to the sale or use of biofuels, the qualified advanced energy project credit incentives the reestablishment of energy infrastructure production facilities, which may involve ethanol and other biofuels. The total credit amount is 30% of the qualified investment into a qualifying advanced energy project such as capital improvements that enable a fuel manufacturing facility to reduce greenhouse gas emissions by at least 20%.
Note, however, that receiving the full tax credit is contingent on meeting the IRA’s prevailing wage and apprenticeship requirements. The credit is also not allowed under this section for investments when any of several other renewable facility credits are available, including the carbon sequestration tax credit discussed below.
New Clean Fuel Production Tax Credit
Another new tax credit created under the IRA is the clean fuel production tax credit for the sale and production of qualifying fuels from 2025 through 2027. Qualifying fuels, such as biofuels, are subject to specified emissions rates and must also be produced in qualifying facilities. For example, qualifying transportation fuels must have an emissions rate no greater than 50 kilograms of CO2-equivalent per one million British thermal units, and claimants must meet prevailing wage and registered apprenticeship requirements to receive the maximum credit amount. Biofuel manufacturers that adopt new technologies to improve their emissions efficiencies will be best positioned to capitalize on this credit.
Total potential tax credits amount to $1.00 per gallon of transportation fuel, or $1.75 per gallon of sustainable aviation fuel, multiplied by an emissions factor. The emissions factor depends on the clean fuel’s emissions performance relative to 50 kilograms of CO2-equivalent per one million British thermal units. Of cautionary note though, the clean fuel production tax credit is unavailable for fuel produced at facilities that may be subject to other tax credits such as the tax credit for carbon sequestration discussed below.
Continued Carbon Sequestration Tax Credit
Although not directly benefiting biofuel producers, another tax incentive which supports the biofuel industry altogether is the IRA’s extension of tax credits for carbon sequestration activities. The energy and land requirements to produce biofuel can undercut the fuel alternative’s environmental potential because more carbon may be released into the atmosphere over a fuel’s lifecycle than compared to carbon emissions while burning. Carbon sequestration presents a potential solution to this lifecycle problem by enabling ethanol producers to effectively remove a substantial portion of their carbon emissions from lifecycle emission calculations. If successful, carbon sequestration can lower a biofuel’s carbon intensity score and, in turn, make it more attractive in a low-carbon fuel standard market like California or Oregon.
The IRA supports carbon sequestration efforts by extending the existing tax credit until December 31, 2032, and lowering annual emission requirements. Claimants previously seeking a tax credit under Section 45Q were required to capture 100,000 metric tons (mt) of carbon oxide annually. Now, per the IRA’s revisions, carbon capture facility owners may claim credits up to $180 per mt if they capture at least 12,500 mt/year and the facilities started construction prior to January 1, 2033. However, the total credit amount will depend on the type of carbon capture process, and potential claimants need to consider that the carbon capture tax credit is now subject to the IRA’s prevailing wage and apprenticeship programs. Failing to meet these requirements reduces potential credits by 80% in accordance with the IRA.
The IRA supports two general carbon capture processes: source capture, which involves carbon capture equipment installed directly on an emissions source, such as a fuel refinery or a power plant; and direct air capture (DAC), which involves equipment that removes carbon oxides from the atmosphere. For source capture, assuming the IRA prevailing wage and apprenticeship requirements are satisfied, an entity can obtain a tax credit up to $85 per mt for sequestered carbon ($60 per mt for reused carbon) as long as the facility captures 12,500 mt annually (18,750 mt for power plants). For DAC, again assuming the IRA prevailing wage and apprenticeship requirements are satisfied, an entity can obtain a tax credit up to $180 per mt for sequestered carbon ($130 per mt for reused carbon), with DAC facilities required to only capture 1,000 mt annually to qualify for the credit.
Other Investment Opportunities May Be Available
This article highlights the IRA’s provisions most likely to support biofuel facilities. However, application of these IRA provisions is complex and should not be considered in a vacuum. These tax incentives may be impacted by other federal infrastructure programs. Consult with counsel to address these programs in light of your specific circumstances.
If you have questions about this alert, or would like assistance addressing how to take advantage of the IRA’s incentives, please reach out to Stinson’s Infrastructure Task Force, or the Stinson LLP contact with whom you regularly work.