[Federal Register Volume 86, Number 10 (Friday, January 15, 2021)]
[Rules and Regulations]
[Pages 4728-4773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-00302]



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Vol. 86

Friday,

No. 10

January 15, 2021

Part IX





Department of The Treasury





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Internal Revenue Service





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26 CFR Part 1





Credit for Carbon Oxide Sequestration; Final Rule

  Federal Register / Vol. 86 , No. 10 / Friday, January 15, 2021 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD9944]
RIN 1545-BP42


Credit for Carbon Oxide Sequestration

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide guidance 
regarding the credit for carbon oxide sequestration under section 45Q 
of the Internal Revenue Code (Code). These final regulations affect 
persons who physically or contractually ensure the capture and disposal 
of qualified carbon oxide, use of qualified carbon oxide as a tertiary 
injectant in a qualified enhanced oil or natural gas recovery project, 
or utilization of qualified carbon oxide in a manner that qualifies for 
the credit.

DATES: 
    Effective date: These regulations are effective on January 13, 
2021.
    Applicability dates: For dates of applicability, see Sec. Sec.  
1.45Q-1(i), 1.45Q-2(j), 1.45Q-3(f), 1.45Q-4(e), and 1.45Q-5(j).

FOR FURTHER INFORMATION CONTACT: Maggie Stehn of the Office of 
Associate Chief Counsel (Passthroughs & Special Industries) at (202) 
317-6853 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 45Q of the Code.
    Section 45Q was enacted on October 3, 2008, by section 115 of 
Division B of the Energy Improvement and Extension Act of 2008, Public 
Law 110-343, 122 Stat. 3765, 3829, to provide a credit for the 
sequestration of carbon oxide. On February 17, 2009, section 45Q was 
amended by section 1131 of Division B of the American Recovery and 
Reinvestment Tax Act of 2009, Public Law 111-5, 123 Stat. 115, 325. 
Section 45Q was further amended on December 19, 2014, by section 
209(j)(1) of Division A of the Tax Increase Prevention Act of 2014, 
Public Law 113-295, 128 Stat. 4010, 4030, and again on February 9, 
2018, by section 41119 of Division D of the Bipartisan Budget Act of 
2018 (BBA), Public Law 115-123, 132 Stat. 64, 162, to encourage the 
construction and use of carbon capture and sequestration projects. On 
December 27, 2020, section 45Q was amended by section 121 of the 
Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as 
Division EE of the Consolidated Appropriations Act, 2021, Public Law 
116-260, 134 Stat. 1182, 3051, to extend the beginning of construction 
deadline for qualified facilities and carbon capture equipment by two 
years.
    On March 9, 2020, the Department of the Treasury (Treasury 
Department) and the IRS published Revenue Procedure 2020-12, 2020-11 
I.R.B. 511, and Notice 2020-12, 2020-11 I.R.B. 495. Revenue Procedure 
2020-12 provides a safe harbor under which the IRS will treat 
partnerships as properly allocating the section 45Q credit in 
accordance with section 704(b). Notice 2020-12 provides guidance on the 
determination of when construction has begun on a qualified facility or 
on carbon capture equipment that may be eligible for the section 45Q 
credit.
    On June 2, 2020, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG -112339-19) in the Federal Register 
(85 FR 34050) containing proposed regulations under section 45Q 
(proposed regulations). The Treasury Department and the IRS received 
written and electronic comments responding to the proposed regulations. 
A public hearing on the proposed regulations was held on August 26, 
2020. Copies of written comments and the list of speakers at the public 
hearing are available at https://www.regulations.gov or upon request.
    After full consideration of the comments received on the proposed 
regulations and the testimony presented at the public hearing, this 
Treasury decision adopts the proposed regulations with clarifying 
changes and additional modifications in response to comments and 
testimony as described in the Summary of Comments and Explanation of 
Revisions section.

Summary of Comments and Explanation of Revisions

I. Overview

    The final regulations retain the basic approach and structure of 
the proposed regulations, with certain revisions. This Summary of 
Comments and Explanation of Revisions section discusses the revisions 
as well as comments received.

II. General Credit Provisions

A. Credit Amount in General

    Section 45Q(a)(1) allows a credit of $20 per metric ton of 
qualified carbon oxide (i) captured by the taxpayer using carbon 
capture equipment which is originally placed in service at a qualified 
facility before the date of the enactment of the BBA (February 9, 
2018); (ii) disposed of by the taxpayer in secure geological storage; 
and (iii) neither used by the taxpayer as a tertiary injectant in a 
qualified enhanced oil or natural gas recovery project nor utilized in 
a manner described in section 45Q(f)(5).
    Section 45Q(a)(2) allows a credit of $10 per metric ton of 
qualified carbon oxide (i) captured by the taxpayer using carbon 
capture equipment which is originally placed in service at a qualified 
facility before February 9, 2018; and (ii) either (A) used by the 
taxpayer as a tertiary injectant in a qualified enhanced oil or natural 
gas recovery project and disposed of by the taxpayer in secure 
geological storage; or (B) utilized by the taxpayer in a manner 
described in section 45Q(f)(5).
    Section 45Q(a)(3) allows a credit of the applicable dollar amount 
(as determined under section 45Q(b)(1)) per metric ton of qualified 
carbon oxide (i) captured by the taxpayer using carbon capture 
equipment which is originally placed in service at a qualified facility 
on or after February 9, 2018, during the 12-year period beginning on 
the date the equipment was originally placed in service; (ii) disposed 
of by the taxpayer in secure geological storage; and (iii) neither used 
by the taxpayer as a tertiary injectant in a qualified enhanced oil or 
natural gas recovery project nor utilized in a manner described in 
section 45Q(f)(5) (referred to as ``disposal'' or ``disposed of,'' 
respectively, throughout the final regulations).
    Section 45Q(a)(4) allows a credit of the applicable dollar amount 
(as determined under section 45Q(b)(1)) per metric ton of qualified 
carbon oxide (i) captured by the taxpayer using carbon capture 
equipment which is originally placed in service at a qualified facility 
on or after February 9, 2018, during the 12-year period beginning on 
the date the equipment was originally placed in service; and (ii) 
either (A) used by the taxpayer as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project and disposed of by the 
taxpayer in secure geological storage (referred to as ``injection'' or 
``injected,'' respectively, throughout the final regulations), or (B) 
utilized by the taxpayer in a manner described in section 45Q(f)(5) 
(referred to as ``utilization'' or ``utilized,'' respectively, 
throughout the final regulations). Section 45Q(b)(1)(A)(i)(I) and 
(ii)(I) provides that the applicable dollar amount for activities under 
section 45Q(a)(3) for any taxable year beginning in a calendar year (1) 
after 2016 and

[[Page 4729]]

before 2027, is an amount equal to the dollar amount established by 
linear interpolation between $22.66 and $50 for each calendar year 
during such period, and (2) after 2026 is an amount equal to the 
product of $50 and the inflation adjustment factor for such calendar 
year determined under section 43(b)(3)(B) for such calendar year, 
determined by substituting ``2025'' for ``1990.''
    Section 45Q(b)(1)(A)(i)(II) and (ii)(II) provides that the 
applicable dollar amount for activities under section 45Q(d)(4) for any 
taxable year beginning in a calendar year (1) after 2016 and before 
2027, is an amount equal to the dollar amount established by linear 
interpolation between $12.83 and $35 for each calendar year during such 
period, and (2) after 2026, is an amount equal to the product of $35 
and the inflation adjustment factor for such calendar year determined 
under section 43(b)(3)(B) for such calendar year, determined by 
substituting ``2025'' for ``1990.'' Section 45Q(b)(1)(B) provides that 
the applicable dollar amount determined under section 45Q(b)(1)(A) is 
rounded to the nearest cent.
    Section 45Q(b)(2) provides a method to compute the amount of 
qualified carbon oxide captured at a qualified facility that was placed 
in service before February 9, 2018, and for which additional carbon 
capture equipment is placed in service on or after February 9, 2018. 
For purposes of section 45Q(a)(1)(A) and (2)(A), the amount of 
qualified carbon oxide that is captured by the taxpayer is equal to the 
lesser of (i) the total amount of qualified carbon oxide captured at 
such facility for the taxable year, or (ii) the total amount of the 
carbon dioxide capture capacity of the carbon capture equipment in 
service at such facility on February 8, 2018 (the day before the date 
of enactment of the BBA). For purposes of section 45Q(a)(3)(A) and 
(4)(A), the amount of qualified carbon oxide captured by the taxpayer 
is an amount (not less than zero) equal to the excess of (i) the total 
amount of qualified carbon oxide captured at such facility for the 
taxable year, over (ii) the total amount of the carbon dioxide capture 
capacity of the carbon capture equipment in service at such facility on 
February 8, 2018. These final regulations explain the difference 
between a physical modification or equipment addition that results in 
an increase in the carbon dioxide capture capacity of existing carbon 
capture equipment, which will be treated as newly placed in service, 
and a mere increase in the amount of carbon dioxide captured by 
existing carbon capture equipment, which will not be treated as newly 
placed in service.
    Pursuant to section 45Q(b)(3), a taxpayer may elect to have the 
dollar amounts applicable under section 45Q(a)(1) or (2) apply in lieu 
of the dollar amounts applicable under section 45Q(a)(3) or (4) for 
each metric ton of qualified carbon oxide which is captured by the 
taxpayer using carbon capture equipment which is originally placed in 
service at a qualified facility on or after February 9, 2018. These 
final regulations provide that the election will apply to all metric 
tons of qualified carbon oxide captured by the taxpayer at the 
qualified facility for the full 12-year credit period.
    Section 45Q(f)(6)(A) provides that for any taxable year in which an 
applicable facility captures not less than 500,000 metric tons of 
qualified carbon oxide, the person described in section 
45Q(f)(3)(A)(ii) may elect to have such applicable facility, and any 
carbon capture equipment placed in service at such applicable facility, 
deemed as having been placed in service on February 9, 2018. The term 
``applicable facility'' means a qualified facility (i) which was placed 
in service before February 9, 2018, and (ii) for which no taxpayer 
claimed a section 45Q credit for any taxable year ending before 
February 9, 2018.
    Section 45Q(f)(7) provides that in the case of any taxable year 
beginning in a calendar year after 2009, there is substituted for each 
dollar amount contained in section 45Q(a)(1) and (2) an amount equal to 
the product of (i) such dollar amount, multiplied by (ii) the inflation 
adjustment factor for such calendar year determined under section 
43(b)(3)(B) for such calendar year, determined by substituting ``2008'' 
for ``1990.''
    Section 45Q(g) provides that in the case of any carbon capture 
equipment placed in service before February 9, 2018, the section 45Q 
credit applies with respect to qualified carbon oxide captured using 
such equipment before the end of the calendar year in which the 
Secretary of the Treasury or his delegate (Secretary), in consultation 
with the Administrator of the Environmental Protection Agency (EPA), 
certifies that a total of 75,000,000 metric tons of qualified carbon 
oxide have been taken into account in accordance with former section 
45Q(a) (as in effect before February 9, 2018) and sections 45Q(a)(1) 
and (2).
    The proposed regulations restated the statutory credit amounts. 
Commenters did not request changes to the proposed regulations 
regarding the statutory amounts. Therefore, these final regulations 
adopt the amounts in the proposed regulations.
    Regarding the 75,000,000 metric ton cap on the amount of qualified 
carbon oxide that may be taken into account under sections 45Q(a)(1) 
and (a)(2), commenters inquired as to whether the cap should be 
adjusted to account for claimed section 45Q credits that are 
subsequently disallowed. Section 45Q credits that are subsequently 
disallowed are added back to the pool of available metric tons, and are 
reflected in the yearly notices in which the IRS publishes the carbon 
oxide sequestration credit inflation adjustment factor and the amount 
of qualified carbon oxide that has been taken into account by taxpayers 
during the year. The most recent notice is Notice 2020-40, 2020-25 
I.R.B. 952. Once the 75,000,000 metric ton cap has been reached, the 
IRS will publish a notice certifying that the cap has been reached.
    A commenter suggested that the final regulations clarify who can 
make the election under section 45Q(f)(6) to treat applicable 
facilities as placed in service on the date of enactment of the BBA, by 
revising Sec.  1.45Q-2(g)(4) of the proposed regulations to state the 
definition of the attributable taxpayer, rather than cross referencing 
to section 45Q(f)(3)(A)(ii) and Sec.  1.45Q-1(h)(1). Because the 
commenter's suggested clarification improves the readability of the 
regulations, Sec.  1.45Q-2(g)(4) has been revised to specifically refer 
to the person that owns the carbon capture equipment and physically or 
contractually ensures the capture and disposal, injection or 
utilization of such qualified carbon oxide as the person who can make 
the election under section 45Q(f)(6).
    A commenter recommended that the final regulations clarify what 
constitutes a single applicable facility for purposes of making an 
election under section 45Q(f)(6). The commenter referred to section 
8.01(1) of Notice 2020-12, which sets out factors indicating that 
multiple qualified facilities or units of carbon capture equipment are 
operated as part of a single project for purposes of determining 
whether construction of a qualified facility or carbon capture 
equipment has begun for purposes of the section 45Q credit. The 
commenter noted that these rules do not apply to the section 45Q(f)(6) 
election, and suggested that they provide a very useful methodology for 
determining whether carbon capture operations should be aggregated for 
purposes of section 45Q(f)(6). The final regulations allow taxpayers to 
apply the rules of section 8.01 of Notice 2020-12 to treat multiple 
facilities as a single facility for

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purposes of whether a facility satisfies the requisite annual carbon 
oxide capture thresholds described in section 45Q(d)(2), and, 
therefore, is a qualified facility. Because a section 45Q(f)(6) 
election apples to a qualified facility that must meet a similar carbon 
oxide capture threshold, the final regulations adopt this comment.

B. Contractually Ensuring Capture and Disposal, Injection, or 
Utilization of Qualified Carbon Oxide

    Section 45Q(f)(3)(A)(i) provides that in the case of qualified 
carbon oxide captured using carbon capture equipment which is 
originally placed in service at a qualified facility before February 9, 
2018, the section 45Q credit is attributable to the person that 
captures and physically or contractually ensures the disposal through 
secure geological storage, use for tertiary injection and disposal 
through secure geological storage, or utilization in a manner 
consistent with section 45Q(f)(5).
    Section 45Q(f)(3)(A)(ii) provides that in the case of qualified 
carbon oxide captured using carbon capture equipment which is 
originally placed in service at a qualified facility on or after 
February 9, 2018, the section 45Q credit is attributable to the person 
that owns the carbon capture equipment and physically or contractually 
ensures the capture and disposal, injection, or utilization of such 
qualified carbon oxide.
    The proposed regulations provided a framework for the types of 
contracts, terms, and reporting requirements that will demonstrate the 
contractual assurance of the capture and disposal, injection, or 
utilization of qualified carbon oxide. The proposed regulations also 
provided that a taxpayer may enter into multiple contracts with 
multiple parties for the disposal, injection, or utilization of 
qualified carbon oxide. For example, a taxpayer that captures qualified 
carbon oxide may contract with one party to dispose of a portion of its 
captured qualified carbon oxide in a deep saline formation, with 
another party to use another portion of its captured qualified carbon 
oxide as a tertiary injectant in multiple enhanced oil recovery (EOR) 
sites, and with several parties to utilize the remaining portion of its 
captured qualified carbon oxide. The existence of each contract and the 
parties involved must be reported to the IRS on an annual basis on Form 
8933, ``Carbon Oxide Sequestration Credit.'' For purposes of this 
Summary of Comments and Explanation of Revisions section, a reference 
to Form 8933 includes any successor form(s), pursuant to instructions 
to any of the foregoing (see Sec.  601.602 of this chapter), or other 
guidance.
    The proposed regulations provided that for contracts for the 
disposal of qualified carbon oxide or use of qualified carbon oxide as 
a tertiary injectant in enhanced oil or natural gas recovery, the 
following information must be included: Identifying information (name 
of operator, field, unit and reservoir), the location (county and 
state) and the identification number assigned to the facility by the 
EPA's electronic Greenhouse Gas Reporting Tool (e-GGRT ID number).
    The final regulations provide more details regarding the 
requirements of both parties to a contract for the disposal of 
qualified carbon oxide or use of qualified carbon oxide as a tertiary 
injectant in enhanced oil or natural gas recovery. Specifically, the 
failure of the taxpayer claiming the credit to satisfy this reporting 
requirement in a taxable year will result in the inability of that 
taxpayer to claim the credit with respect to any qualified carbon oxide 
that is disposed of, injected, or utilized in that taxable year 
pursuant to that particular contract.
1. Binding Written Contract
    The proposed regulations required taxpayers to contractually ensure 
the disposal, injection, or utilization of qualified carbon oxide in a 
binding written contract that includes commercially reasonable terms 
that provide for enforcement. The proposed regulations provided that 
taxpayers may include information regarding the amount of qualified 
carbon oxide the parties agree to dispose of, inject, or utilize in 
their contracts. Contracts may also include other specific provisions 
relating to enforcement, such as long-term liability provisions, 
indemnity provisions, or penalties for breach of contract or liquidated 
damages. While the proposed regulations required that the contract 
include a mechanism for enforcement, no specific enforcement-related 
provision or other particular kind of enforcement provision was 
mandated.
    Under the proposed regulations, a taxpayer did not elect to allow 
all or a portion of the section 45Q credit to any of the contracting 
parties merely by contracting with that party to ensure the disposal, 
injection, or utilization of qualified carbon oxide. Any election to 
allow all or a portion of the credit to another taxpayer was required 
to be made separately in the manner provided in the proposed 
regulations. See Election to Allow the Credit to Another Taxpayer in 
section II.C. of this Summary of Comments and Explanation of Revisions.
    In response to the proposed regulations, commenters requested that 
the Treasury Department and the IRS clarify which contract provisions 
are necessary to contractually ensure the capture and disposal, 
injection, or utilization of qualified carbon oxide. Several commenters 
requested broad guidance on commercially reasonable terms rather than 
specifying exact language. One commenter requested guidance regarding 
the assurance of capture, remedies, guarantees, and the prevention of 
leakage.
    Further, commenters recommended that the final regulations 
harmonize the permission for liquidated damages in Sec.  1.45Q-
1(h)(2)(iii)(B) of the proposed regulations and the exclusion of 
contracts that limit damages to a specified amount in Sec.  1.45Q-
1(h)(2)(i) of the proposed regulations. To further the goal of 
harmonizing the conflicting provisions, commenters recommended that the 
words ``and does not limit damages to a specified amount'' in Sec.  
1.45Q-1(h)(2)(i) of the proposed regulations be excluded from the final 
regulations, or the final regulations should include language from 
section 8.02 of Notice 2020-12 that provides that a contractual 
provision that limits damages to an amount equal to at least five 
percent of the total contract price will not be treated as limiting 
damages to a specified amount.
    The final regulations harmonize the conflicting provisions 
regarding liquidated damages by replacing the definition of binding 
written contract in Sec.  1.45Q-1(h)(2)(i) of the proposed regulations 
with the definition of binding written contract in section 8.02(1) of 
Notice 2020-12 and Sec.  1.168(k)-1(b)(4)(ii)(A)-(D).
2. Multiple Binding Written Contracts Permitted
    A commenter noted that while Sec.  1.45Q-1(h)(2)(ii) of the 
proposed regulations permitted a taxpayer to enter into multiple 
binding written contracts with multiple parties for disposal, 
injection, or utilization of the qualified carbon oxide, the proposed 
regulations failed to address the possibility that a sequestration 
party may enter into a binding written contract with more than one 
party that owns carbon capture equipment or captures or ensures the 
capture of qualified carbon oxide. The commenter suggested adding the 
following clarifying language to Sec.  1.45Q-1(h)(2)(ii): ``A party 
that physically carries out the disposal, injection, or utilization of 
qualified

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carbon oxide may enter into multiple binding written contracts with 
multiple parties that own carbon capture equipment to capture or 
contractually ensure the capture of qualified carbon oxide.'' The final 
regulations adopt the commenter's clarification.
3. Contract Provisions
    A commenter suggested that Sec.  1.45Q-1(h)(2) of the proposed 
regulations be revised to clarify that the owner of carbon capture 
equipment is not required to physically carry out the capture of 
qualified carbon oxide to claim the section 45Q credit as long as the 
owner contractually ensures that the party that physically carries out 
the capture satisfies the requirements of the regulations. The 
commenter's suggestion is consistent with section 45Q(f)(3)(ii), which 
applies to qualified carbon oxide captured using carbon capture 
equipment which is originally placed in service at a qualified facility 
on or after February 9, 2018. Section 45Q(f)(3)(ii) requires the person 
that owns the carbon capture equipment to physically or contractually 
ensure the capture of the qualified carbon oxide. However, the 
commenter's suggestion is inconsistent with section 45Q(f)(3)(i), which 
applies to qualified carbon oxide captured using carbon capture 
equipment that is originally placed in service at a qualified facility 
before February 9, 2018. Section 45Q(f)(3)(i) requires the person that 
owns the carbon capture equipment to capture the qualified carbon 
oxide. Unlike section 45Q(f)(3)(ii), section 45Q(f)(3)(i) does not 
include ``or contractually ensures the capture.'' Therefore, the final 
regulations adopt the commenter's suggestion for qualified carbon oxide 
captured using carbon capture equipment which is originally placed in 
service at a qualified facility on or after February 9, 2018, but not 
for qualified carbon oxide captured using carbon capture equipment 
which is originally placed in service at a qualified facility before 
February 9, 2018.
    Commenters sought clarification that taxpayers may employ a chain 
of contracts or contractual assurances with subcontractors to ensure 
disposal, injection, or utilization. Many commenters requested revising 
Sec.  1.45Q-1(h)(2) of the proposed regulations and the examples 
thereunder to provide that direct privity of contract is not required 
between the taxpayer to which the credit is attributable (the carbon 
capture equipment owner) and the party that performs the disposal, 
injection, or utilization of qualified carbon oxide, as long as there 
is a chain of contractual privity ultimately connecting those parties 
and satisfying the requirements of the regulation. Similarly, several 
commenters requested clarification that a taxpayer can satisfy the 
``contractual assurance'' requirement through a single offtake contract 
with a counterparty who contractually assures the disposal, injection, 
or utilization of qualified carbon oxide through one or more levels of 
subcontractors.
    The final regulations provide that a taxpayer may enter into a 
binding written contract with a general contractor that hires 
subcontractors to physically carry out the capture, disposal, 
injection, or utilization of the qualified carbon oxide, but the 
contract must bind the subcontractors to the requirements of Sec.  
1.45Q-1(h)(2). The final regulations also permit multiple binding 
written contracts. Further, as long as all the requirements of Sec.  
1.45Q-1(h)(2) are met, parties to these contracts may be related.
    One commenter requested that the final regulations include a rule 
that parties to a contract that contractually assures the disposal, 
injection, or utilization of qualified carbon oxide for the taxpayer 
may be commonly owned or controlled or otherwise have some overlapping 
ownership relationship. Neither the statute, the proposed regulations, 
nor these final regulations prevent such relationships. The contracts 
simply must conform to all of the requirements of these final 
regulations.
4. Pre-Existing Contracts
    A commenter requested that the final regulations provide that an 
amendment of a contract is unnecessary to meet the requirements of the 
regulation as long as there is a unilateral undertaking, such as side 
letter or certification, that meets the terms required by proposed 
regulations. The determination of whether an amendment of a contract is 
binding depends on whether the amendment is enforceable under State law 
against both the taxpayer and the party that physically carries out the 
disposal, injection, or utilization of qualified carbon oxide. 
Therefore, the final regulations do not adopt this commenter's request.
    Commenters requested that existing contracts should be 
grandfathered from the requirements of Sec.  1.45Q-1(h)(2) of the 
proposed regulations and treated as providing contractual assurance 
until new contracts that include conforming provisions are executed. 
Commenters presented alternative definitions of ``existing contracts,'' 
such as ``pre-BBA contracts and contracts signed before the date the 
final regulations are promulgated.''
    In response to these commenters, the final regulations provide 
taxpayers who have existing contracts that were signed before the date 
these final regulations are published in the Federal Register 
additional time to conform their contracts to the requirements of Sec.  
1.45Q-1(h)(2). To be eligible for the section 45Q credit, taxpayers 
must execute new contracts or amend existing contracts so as to conform 
to all of the requirements of these final regulations by July 12, 2021.

C. Election To Allow the Credit to Another Taxpayer

    Section 45Q(f)(3)(B) provides that a person that is entitled to 
claim the credit under section 45Q(f)(3)(A)(i) or section 
45Q(f)(3)(A)(ii) may elect to allow the person that disposes of the 
qualified carbon oxide, utilizes the qualified carbon oxide, or uses 
the qualified carbon oxide as a tertiary injectant to claim the section 
45Q credit (section 45Q(f)(3)(B) election).
    The proposed regulations provided guidance regarding who may make a 
section 45Q(f)(3)(B) election and the time and manner for making a 
section 45Q(f)(3)(B) election. The proposed regulations also provided 
that section 45Q(f)(3)(B) elections must be made on an annual basis no 
later than the time prescribed by law (including extensions) for filing 
the Federal income tax return or Form 1065, U.S. Return of Partnership 
Income, and may not be made on an amended Federal income tax return. 
However, the proposed regulations provided that a section 45Q(f)(3)(B) 
election may be made on an amended Federal income tax return, an 
amended Form 1065 or an administrative adjustment request under section 
6227 of the Code (AAR), for any taxable year ending after February 9, 
2018, but not for taxable years beginning after June 2, 2020. In 
addition, as provided in Revenue Procedure 2020-23, 2020-18 I.R.B. 749, 
the exception applies regarding the time to file an amended return by a 
partnership subject to the centralized partnership audit regime enacted 
as part of the BBA (BBA partnership) for the 2018 and 2019 taxable 
years. The amended Federal income tax return or the amended Form 1065 
must be filed, in any event, not later than the applicable period of 
limitations on assessment for the taxable year for which the amended 
Federal income tax return or Form 1065 is being filed. A BBA 
partnership may make a late election by filing an AAR on or before 
October 15, 2021, but in any event, not later than the period of 
limitations on filing an AAR under section 6227(c).

[[Page 4732]]

    The proposed regulations also set forth information to be provided 
as part of a section 45Q(f)(3)(B) election, requiring both an electing 
taxpayer and a credit claimant to include a Form 8933 with its timely 
filed Federal income tax return or Form 1065 (including extensions) as 
applicable. The proposed regulations required an electing taxpayer to 
provide each credit claimant with a copy of the electing taxpayer's 
Form 8933, and each credit claimant must attach that copy of the 
electing taxpayer's Form 8933 to its own Form 8933.
    Further, the proposed regulations provided that section 
45Q(f)(3)(B) elections may be made for all or a portion of the 
available section 45Q credit and may be made for one or more credit 
claimants. If an electing taxpayer elects to allow multiple credit 
claimants to claim section 45Q credits, the proposed regulations 
provided that the maximum amount of section 45Q credits allowable to 
each credit claimant is proportional to the amount of qualified carbon 
oxide disposed of, utilized, or used as a tertiary injectant by the 
credit claimant.
1. Parties Eligible To Qualify as Credit Claimants
    Commenters sought clarification concerning whether elections could 
be made for several parties along a contractual chain, or whether only 
the end disposer, injector, or utilizer would qualify as credit 
claimants. The commenters supported permitting the electing taxpayers 
to retain a portion of the credit and allow portions of the credit to 
various intermediaries, as well as the end disposer, injector, or 
utilizer.
    The final regulations provide that the disposer, injector, or 
utilizer that enters into the contract with the electing taxpayer for 
the disposal, injection, or utilization of the electing taxpayer's 
qualified carbon oxide is the party that may qualify as a credit 
claimant pursuant to a section 45Q(f)(3)(B) election. If such disposer, 
injector, or utilizer enters into a subcontract with a third-party to 
carry out the disposal, injection, or utilization, then the 
subcontractor may not be a credit claimant. This is consistent with the 
provisions in these final regulations relating to contractual assurance 
under section 45Q(f)(3)(ii) that allow a third party who hired 
subcontractors to contract directly with the carbon capture equipment 
owner and also be allowed to subcontract the physical disposal, 
injection, or utilization of qualified carbon oxide through one or more 
levels of subcontractors, and is premised on the fact that the third 
party who hired subcontractors is the party that has contractual 
privity with the attributable taxpayer for the disposal, injection, or 
utilization of the qualified carbon.
2. Failure To Satisfy Reporting Requirements
    A commenter recommended that the credit allowable under section 45Q 
should not be jeopardized by a counterparty (the person physically 
disposing, injecting or utilizing) failing to meet the reporting 
requirements under Sec.  1.45Q-1(h)(2)(iv) of the proposed regulations, 
noting that the proposed regulations do not provide what happens if a 
counterparty fails to report the required information. The commenter 
suggested that the failure of a counterparty to meet the reporting 
requirements under Sec.  1.45Q-1(h)(2)(iv) of the proposed regulations 
should not affect whether a compliant taxpayer is entitled to section 
45Q credits.
    The final regulations require both parties to a contract to report 
their contract information to the IRS on a Form 8933, and also require 
the party that contracts with the taxpayer claiming the section 45Q 
credit (counterparty) to provide that taxpayer with a copy of its Form 
8933. The taxpayer claiming the section 45Q credit must attach and file 
the Form 8933 received from the counterparty to its own signed Form 
8933. If the taxpayer claiming the section 45Q credit fails to satisfy 
this reporting requirement, then that taxpayer may not claim the 
section 45Q credit. Permitting a section 45Q credit to a taxpayer that 
fails to meet its applicable reporting requirements would undermine tax 
administration. However, the failure of the counterparty to file its 
Form 8933 with the IRS will not impact the ability of the taxpayer to 
claim the section 45Q credit.
    Commenters sought to clarify whether a minimum amount of tonnage or 
credit would be required to make a section 45Q(f)(3)(B) election, and 
whether the election would be limited to either whole tons, whole 
dollars, or the minimum capture requirements based on the type of 
qualified facility.
    The final regulations do not limit the election to whole metric 
tons or whole dollars. Because the value of the pre-BBA credit is based 
on an annual inflation adjustment, and the post-BBA credit is based on 
linear interpolation until arriving at the $35 and $50 values, limiting 
an election to whole metric tons or whole dollars would improperly 
distort the value of the credit in certain instances. The final 
regulations place minimum capture requirements on the owner of the 
carbon capture equipment to be considered a qualified facility, but do 
not impose such requirements on the credit claimant, which is the party 
that disposes, uses, or utilizes the qualified carbon oxide.

D. Timing of Credit--Placed in Service Date

    A commenter suggested that the twelve-year credit period should not 
begin until the disposal, injection, or utilization operations are 
active and a sequestration plan is in place. Therefore, the commenter 
suggested that the twelve-year period should begin on the later of 
February 9, 2018, and the date the MRV plan is approved or the ISO plan 
is certified. Section 45Q(a)(3) and (4) clearly provides that the 12-
year credit period begins on the date the carbon capture equipment was 
originally placed in service. Therefore, the final regulations do not 
adopt the commenter's suggestion.
    A commenter proposed that taxpayers be allowed to treat the placed 
in service date as (1) the date the facility (or specific unit of 
carbon capture equipment) is capable of being placed in service, even 
if the facility or the carbon capture equipment is not fully operable 
on that date; or (2) the earlier of the conclusion of a 180-day ramp-up 
period or the date upon which the facility or carbon capture equipment 
at the facility is fully operable.
    The final regulations do not alter the placed in service standard 
provided in other guidance, but instead apply the placed in service 
standard consistent with existing guidance. The current standard is 
clear, and applying the same standard should provide clarity to 
taxpayers and avoid the confusion of having multiple standards.

III. Definitions

A. Qualified Carbon Oxide

    Section 45Q(c) provides that ``qualified carbon oxide'' means (A) 
any carbon dioxide which (i) is captured from an industrial source by 
carbon capture equipment which is originally placed in service before 
February 9, 2018; (ii) would otherwise be released into the atmosphere 
as industrial emission of greenhouse gas or lead to such release; and 
(iii) is measured at the source of capture and verified at the point of 
disposal, injection, or utilization; (B) any carbon dioxide or other 
carbon oxide which (i) is captured from an industrial source by carbon 
capture equipment which is originally placed in service on or after 
February 9, 2018; (ii) would otherwise be released into the atmosphere 
as industrial emission of greenhouse gas or lead to

[[Page 4733]]

such release; and (iii) is measured at the source of capture and 
verified at the point of disposal, injection, or utilization; or (C) in 
the case of a direct air capture facility, any carbon dioxide which (i) 
is captured directly from ambient air; and (ii) is measured at the 
source of capture and verified at the point of disposal, injection, or 
utilization.
    While ``qualified carbon oxide'' includes the initial deposit of 
captured carbon oxide used as a tertiary injectant, section 45Q(c)(2) 
provides that the term does not include carbon oxide that is 
recaptured, recycled, and re-injected as part of the qualified enhanced 
oil or natural gas recovery process. Additionally, section 45Q(f)(1) 
provides that the section 45Q credit applies only with respect to 
qualified carbon oxide the capture and disposal, injection, or 
utilization of which is within the United States (within the meaning of 
section 638(1)), or a possession of the United States (within the 
meaning of section 638(2)).
    The proposed regulations generally conformed to the statutory 
definition of qualified carbon oxide, including the provision that only 
qualified carbon oxide captured and disposed of, injected, or utilized 
within the United States or a possession of the United States is taken 
into account.
    One commenter requested that the final regulations explicitly state 
that because carbon dioxide is fungible, carbon dioxide transported or 
stored in shared pipelines or facilities meets the definition of 
qualified carbon oxide in Sec.  1.45Q-2(a) of the proposed regulations, 
so long as the amount of carbon dioxide (as opposed to the particular 
molecules) is measured at the source of capture and verified at the 
point of disposal, injection, or utilization.
    The International Organization for Standardization (ISO) standard 
for carbon dioxide capture, transportation, and geological storage has 
been endorsed by the American National Standards Institute (ANSI) and 
the CSA Group (CSA). CSA/ANSI ISO 27916:2019, ``Carbon Dioxide Capture, 
Transportation and Geological Storage--Carbon Dioxide Storage Using 
Enhanced Oil Recovery (CO2-EOR) (hereafter referred to as 
CSA/ANSI ISO 27916:2019) was developed for the purpose of quantifying 
and documenting the total carbon dioxide that is stored in association 
with EOR. In general, reporting under CSA/ANSI ISO 27916:2019 uses mass 
balance accounting, has established reporting and documentation 
requirements, and includes requirements for documenting a monitoring 
program and a containment assurance plan.
    Subpart RR and CSA/ANSI ISO 27916:2019 both provide for methods of 
accounting for qualified carbon oxide, expressly providing for mass 
balance accounting, which recognizes the fungibility of carbon dioxide. 
Because this guidance addresses the fungibility issue, the recommended 
change is unnecessary, and the final regulations do not adopt this 
comment.
    A commenter suggested that based on the plain language of the 
statute, only carbon dioxide and carbon monoxide may satisfy the 
definition of qualified carbon oxide for purposes of qualifying for the 
credit, and that other greenhouse gases that may be included as part of 
a lifecycle analysis should not be eligible for the credit. However, 
another commenter stated that because of the methodology for preparing 
a lifecycle analysis for utilization provided in section 
45Q(f)(5)(B)(i) and (ii), all greenhouse gases should be eligible for 
section 45Q credits as carbon dioxide equivalents.
    Section 45Q(c) clearly provides that only carbon dioxide or other 
carbon oxide may be qualified carbon oxide. The section 45Q credit may 
be calculated only on the amount of qualified carbon oxide that is 
captured and utilized. Section 45Q makes this clear in a number of 
instances. The final regulations provide that the amount of the section 
45Q credit is not computed on all greenhouse gases, but is based only 
on qualified carbon oxide measured at the source of capture and 
utilized. See section IV.A. of this Summary of Comments and Explanation 
of Revisions for a detailed explanation regarding lifecycle analysis 
and the amount utilized.
    A commenter requested that the final regulations recognize that 
both subpart RR and the ISO standard do not apply to any carbon oxide 
other than carbon dioxide (e.g., carbon monoxide). Because the section 
45Q credit is computed on the total volume of qualified carbon dioxide 
and any other carbon oxide captured and disposed of, injected, or 
utilized in the tax year, and the ISO standard and subpart RR are made 
applicable to section 45Q pursuant to these final regulations for 
purposes of establishing secure storage and monitoring standards, 
rather than defining carbon oxide, the final regulations do not adopt 
the commenter's request.
    A commenter suggested that Sec.  1.45Q-2(h)(5) of the proposed 
regulations, which provides that carbon oxide that is injected into an 
oil reservoir that is not a qualified enhanced oil recovery project 
under section 43(c)(2) cannot be treated as qualified carbon oxide 
unless the reservoir permanently ceased oil production, the operator 
has obtained an Underground Injection Control Class VI permit, and the 
operator complies with 40 CFR part 98 subpart RR, conflicts with 
section 45Q(c), which defines qualified carbon oxide. The commenter 
proposed that the provision be revised as follows:

    Carbon oxide that is injected into an oil reservoir that is not 
a qualified enhanced oil recovery project under section 43(c)(2) 
cannot be treated as qualified carbon oxide, disposed of, injected, 
or utilized. This rule will not apply to an oil reservoir if (i) The 
reservoir permanently ceased oil production; (ii) The operator has 
obtained an EPA Underground Injection Control class VI permit; and 
(iii) The operator complies with 40 CFR part 98 subpart RR.

    This suggested revision removes the requirement to timely file a 
petroleum engineer's inspection, which the final regulations retain on 
the grounds of uniformity and transparency. In addition, the revision 
removes the provision for the first injection occurring before 1991, 
which the final regulations retain to comport with section 43. Further, 
section 45Q(c)(1)(A)(iii), (B)(iii), and (C)(iii) takes into account 
the end use of qualified carbon oxide when determining which volumes 
constitute qualified carbon oxide. Accordingly, the final regulations 
do not adopt the commenter's suggestion.

B. Carbon Capture Equipment

    Section 45Q does not define carbon capture equipment. The proposed 
regulations provided that in general, carbon capture equipment 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. Further, the proposed regulations listed specific uses for 
the equipment, as well as items that are included in, or excluded from, 
the definition of carbon capture equipment. Components of property 
related to the function of capturing carbon oxides, such as components 
of property necessary to compress, treat, process, liquefy, or pump 
carbon oxides, are included within the definition of carbon capture 
equipment. Components of property related to transporting carbon oxides 
for disposal, injection, or utilization are not included in the general 
definition.
1. General Comments
    Several commenters asserted that the definition of carbon capture 
equipment in the proposed regulations at Sec.  1.45Q-

[[Page 4734]]

2(c) is overbroad. Commenters generally requested alternative 
definitions or tests to determine whether equipment is considered 
carbon capture equipment for section 45Q purposes.
    One commenter suggested deleting the list of carbon capture 
equipment components in proposed regulation Sec.  1.45Q-2(c)(2) as it 
results in more confusion in practice. Similarly, another commenter 
suggested deleting the proposed regulation Sec.  1.45Q-2(c)(3) list of 
``excluded components'' as it causes confusion.
    A commenter suggested that the following components should be 
included in the list of carbon capture equipment: Pressure and 
temperature swing adsorption units, absorbers and regenerators, 
columns, storage tanks, and vaporizers, biogas compression equipment, 
equipment used for the primary purpose of removing compounds other than 
carbon oxide from biogas or biomethane, and biomethane compression 
equipment.
    A commenter recommended defining carbon capture equipment as 
equipment that is placed in service at a qualified facility and that 
performs the function of, or is used for the purpose of, capturing 
qualified carbon oxide from an industrial source, or in the case of a 
direct air capture facility, directly from the ambient air.
    Another commenter recommended revising the list of excluded 
components to exclude land and marine transport vessels used for 
transporting captured qualified carbon oxide for disposal, injection, 
or utilization. The commenter also recommended excluding pipelines and 
branch lines, except where they are part of a gathering and 
distribution system that collects carbon oxide captured from a 
qualified facility or multiple facilities that constitute a single 
project and are used to transport that carbon oxide away from the 
qualified facility or single project to a pipeline that transports 
carbon oxide from multiple taxpayers or projects.
    In response to these comments, the final regulations provide 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. The final 
regulations also remove the list of qualifying carbon capture 
components and the excluded components. Further, the final regulations 
provide that carbon capture equipment generally does not include 
components of property used for transporting qualified carbon oxide for 
disposal, injection, or utilization. However, the final regulations 
provide that carbon capture equipment includes a system of gathering 
and distribution lines that collect carbon oxide captured from a 
qualified facility or multiple qualified facilities that constitute a 
single project (as described in section 8.01 of Notice 2020-12). These 
revisions provide a functionality-based definition of carbon capture 
equipment, and provide flexibility without limiting the definition of 
carbon equipment solely to a list of components, which caused confusion 
in the proposed regulations.
2. Primary Purpose Test
    Commenters requested that the final regulations provide a primary 
purpose test to distinguish between equipment for which the primary 
function is the separation of qualified carbon oxide and equipment that 
incidentally separates qualified carbon oxide but for which the primary 
function is the manufacture of other products. One commenter elaborated 
that only equipment whose primary purpose is to capture, process, 
separate, purify, dry or compress qualified carbon oxide should be 
treated as carbon capture equipment. Another commenter requested that 
the final regulations clarify that only additional equipment, installed 
with the primary purpose to separate and capture qualified carbon oxide 
in a manner such that carbon oxide is of suitable quality for 
transport, disposal, and utilization, be treated as carbon capture 
equipment.
    Commenters suggested that the definition of carbon capture 
equipment consider whether the equipment is integral to the industrial 
facility. The commenters suggested that any equipment that is integral 
to the industrial facility would be part of the industrial facility and 
equipment that is not necessary for the functioning of the industrial 
facility that captures, processes, separates, purifies, dries or 
compresses qualified carbon oxide should be considered carbon capture 
equipment.
    A commenter requested that Sec.  1.45Q-2(c) of the proposed 
regulations be revised to clarify that in the context of a biogas 
processing facility, carbon capture equipment is limited to the 
equipment used for the primary purpose of separating and capturing or 
processing qualified carbon oxide until the qualified carbon oxide is 
transported for disposal, injection or utilization.
3. Dual Use Property
    Commenters requested clarification of the definition of carbon 
capture equipment in the case of a dual purpose facility that produces 
gases suitable for process usage and qualified carbon oxide as a by-
product. The commenters noted that the definition of carbon capture 
equipment under the proposed regulations did not differentiate between 
dual purpose equipment that is tied to both an industrial process not 
related to carbon capture and to carbon capture as defined by the 
proposed regulations. Consequently, the commenters recommended that the 
final regulations allow a taxpayer to treat the two types of systems 
differently when the taxpayer owns both the dual purpose industrial 
process units and the downstream components that only serve a carbon 
capture function, and that taxpayers should be permitted to elect to 
exclude such dual purpose equipment from the definition of carbon 
capture equipment.
    The commenters stated that a bright-line distinction between the 
two types of equipment is supported by the definition of carbon capture 
equipment in the proposed regulations and the underlying intent of 
section 45Q, and that a component of industrial equipment that is 
essential to the production of chemicals normally is not considered to 
be carbon capture equipment. Further, the commenters noted difficulties 
for tax equity partnerships if they are required to own manufacturing 
equipment in addition to carbon capture equipment. Therefore, these 
commenters recommended applying a primary purpose test to define carbon 
capture equipment, which differentiates between equipment that 
primarily functions to separate qualified carbon oxide and equipment 
that incidentally separates qualified carbon oxide, but primarily 
functions to manufacture other products.
    The final regulations do not adopt a primary purpose test, and do 
not allow taxpayers to elect to exclude ``dual purpose'' property from 
the definition of carbon capture equipment. Instead, the final 
regulations provide a functionality-based definition of carbon capture 
equipment and remove the lists of specific items of included components 
and excluded components. Specifically, and as discussed in section 
III.B.1. of this Summary of Comments and Explanation of Revisions, the 
final regulations provide 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. Further, the final regulations provide that 
carbon capture equipment generally does not include components of 
property used for transporting qualified carbon oxide for disposal, 
injection, or utilization.

[[Page 4735]]

4. Unit of Property: Independently Functioning Process Train
    Commenters requested that the definition of carbon capture 
equipment be revised to clarify that all components that make up an 
independently functioning process train capable of capturing, 
processing, and preparing carbon oxide for transport should be treated 
as one unit of carbon capture equipment, consistent with the single 
project rule in Revenue Ruling 94-31, 1994-1 C.B. 16, 1994-21 I.R.B. 4. 
A commenter requested that the regulations clarify that at a single 
industrial facility there can be two or more pieces of carbon capture 
equipment and that the owner of a component of carbon capture equipment 
is separately eligible to claim credits.
    The final regulations clarify that all components that make up an 
independently functioning process train capable of capturing, 
processing, and preparing carbon oxide for transport should be treated 
as one unit of carbon capture equipment. This clarification is 
consistent with the single project rule provided in Revenue Ruling 94-
31.
5. Safe Harbor
    One commenter requested a safe harbor to determine whether a 
component is considered carbon capture equipment based on the level of 
qualified carbon oxide in the gas stream entering the piece of 
equipment. The commenter suggested that carbon capture equipment could 
include all equipment from the point where the gas stream is 90 percent 
carbon oxide to the point where the carbon oxide is transported for end 
use. The commenter recommended that the final regulations clarify the 
interaction of Sec. Sec.  1.45Q-2(c) and 1.45Q-2(c)(1) of the proposed 
regulations consistent with a primary purpose test and the proposed 
safe harbor.
    The final regulations do not adopt this recommendation. 
Establishing which components within a carbon capture, utilization, or 
storage process consistently contain a gas stream of 90 percent 
qualified carbon oxide (by volume) would require a significant 
expenditure for monitoring and compliance that would put small 
businesses at a disadvantage.
6. Ownership Issues
    Many commenters requested that the final regulations clarify that 
carbon capture equipment may be owned by a taxpayer other than the 
taxpayer that owns the qualified facility at which the carbon capture 
equipment is placed in service. In response, the final regulations 
clarify that carbon capture equipment that is originally placed in 
service at a qualified facility on or after February 9, 2018, may be 
owned by a taxpayer other than the taxpayer that owns the industrial 
facility at which the carbon capture equipment is placed in service. 
However, this clarification does not extend to credits granted under 
section 45Q(a)(1) and (2), which require carbon capture equipment that 
is originally placed in service at a qualified facility before February 
9, 2018.
    Commenters recommended that the final regulations provide rules 
regarding ownership of carbon capture equipment by multiple taxpayers, 
which respect an allocation agreed to by the parties and, in the 
absence of such agreement, which provide for a pro rata allocation 
based on the equipment's contribution to increased carbon oxide 
capture, for taxpayers to be on firm footing when negotiating the scope 
and terms of any election under section 45Q(f)(3)(B).
    A commenter recommended that the final regulations clarify that at 
a single industrial facility, two or more taxpayers can own an 
undivided interest in the same carbon capture equipment. In such 
circumstance, each owner should be eligible to claim section 45Q 
credits in an amount equal to the arm's-length negotiated qualified 
carbon oxide allocated to the owner. One commenter requested that the 
final regulations clarify that where multiple taxpayers own different 
components within the same industrial facility, the taxpayer owning the 
majority by value should claim the credit.
    The final regulations do not provide specific rules regarding how 
to allocate any section 45Q credits generated by carbon capture 
equipment that captures qualified carbon oxide among multiple taxpayers 
that own different components within a carbon capture system or an 
undivided interest in the same carbon capture equipment. Allowing the 
credit to be shared in this manner will generate significant 
administrative burden for the IRS. Accordingly, for each single process 
train of carbon capture equipment, only one taxpayer will be permitted 
to claim the section 45Q credit, and it will be the taxpayer who either 
physically ensures the capture and disposal, injection, or utilization 
of qualified carbon oxide or contracts with others who capture and 
dispose of, inject, or utilize qualified carbon oxide. However, 
multiple owners of carbon capture equipment may form a partnership to 
allocate section 45Q credits among themselves pursuant to Revenue 
Procedure 2020-12.
7. Characterization of Specific Components as Carbon Capture Equipment
    A commenter requested confirmation, through an example or a safe 
harbor, that the person that owns both an absorber unit and 
regeneration unit (or their functional equivalents) is treated as the 
sole ``person that owns the carbon capture equipment'' for section 
45Q(f)(3)(A)(ii). A commenter requested clarification that for a 
project in which the carbon capture equipment owner also owns the 
pipeline for transporting the qualified carbon oxide that the pipeline 
should be included in the definition of carbon capture equipment 
because it is an essential aspect of the carbon capture process.
    The final regulations remove the list of included and excluded 
carbon capture equipment components, which caused confusion among 
commenters. In addition, the final regulations do not include language 
discussing whether the owner of specific components of carbon capture 
equipment is treated as the sole owner. Regarding pipelines, the final 
regulations provide that carbon capture equipment generally does not 
include components of property used for transporting qualified carbon 
oxide for disposal, injection, or utilization.

C. Qualified Facility

    Section 45Q(d) provides that ``qualified facility'' means any 
industrial facility or direct air capture facility, the construction of 
which begins before January 1, 2026, and (i) the construction of carbon 
capture equipment begins before such date; or (ii) the original 
planning and design for such facility includes installation of carbon 
capture equipment. In addition, a qualified facility must capture: (i) 
In the case of a facility which emits not more than 500,000 metric tons 
of qualified carbon oxide into the atmosphere during the taxable year, 
not less than 25,000 metric tons of qualified carbon oxide during the 
taxable year which is utilized in a manner described in section 
45Q(f)(5) (Section 45Q(d)(2)(A) Facility); (ii) in the case of an 
electricity generating facility which is not a Section 45Q(d)(2)(A) 
Facility (Section 45Q(d)(2)(B) Facility), not less than 500,000 metric 
tons of qualified carbon oxide during the taxable year; or (iii) in the 
case of a direct air capture facility or any facility which is not a 
Section 45Q(d)(2)(A) Facility or a Section 45Q(d)(2)(B) Facility, not 
less than 100,000 metric tons of qualified carbon oxide during the 
taxable year.

[[Page 4736]]

1. Original Planning and Design
    A commenter requested that the final regulations provide a bright-
line definition of ``original planning and design'' for purposes of 
section 45Q(d)(1). For example, the commenter suggested that at least 
one version of the engineering plans or designs for the facility 
(either issued for construction drawings or earlier version) should 
identify both the point where the carbon oxide would be captured, such 
as a tie-in point, and the physical location for the carbon capture 
equipment to be installed either in conjunction with the initial 
construction of the facility or at some later date. Because there is 
more than one possible interpretation of the term ``original planning 
and design,'' and a definition was not proposed in the proposed 
regulations, defining the term exceeds the scope of these final 
regulations, and these final regulations do not define the term.
2. 80/20 Rule
    The proposed regulations included an ``80/20 Rule,'' which allowed 
a qualified facility or carbon capture equipment to qualify as 
originally placed in service even though it contains some used 
components of property, if the fair market value of the used components 
of property is not more than 20 percent of the total value of the 
qualified facility or carbon capture equipment. For purposes of the 80/
20 Rule, the cost of a new qualified facility or carbon capture 
equipment includes all properly capitalized costs of the new qualified 
facility or carbon capture equipment. Solely for purposes of the 80/20 
Rule, properly capitalized costs of a new qualified facility or carbon 
capture equipment may, at the option of the taxpayer, include the cost 
of new equipment for a pipeline owned and used exclusively by that 
taxpayer to transport carbon oxides captured from that taxpayer's 
qualified facility that would otherwise be emitted into the atmosphere.
A. Timing of Determination
    Several commenters suggested that the fair market value of the used 
equipment should be the replacement cost of the equipment less physical 
depreciation, and the appropriate valuation date should be the 
construction start date. These commenters further recommended that the 
final regulations provide that costs attributable to any disposal well 
used exclusively by the taxpayer as necessary for achieving the same 
underlying policy goals be included in the denominator for purposes of 
the 80/20 Rule.
    The 80/20 Rule has been used in both the section 48 investment tax 
credit and section 45 production tax credit contexts since the 1990s. 
Importantly, until the mid-2000s, energy property otherwise eligible 
for the section 48 credit and qualified facilities otherwise eligible 
for the section 45 credit were not eligible until they were placed in 
service. Over time, Congress has amended the section 45 and 48 credits 
to use a beginning of construction standard for credit eligibility 
while retaining some placed in service dates. However, the 80/20 Rule 
has survived and continues to be computed on the date that a facility 
is placed in service for the section 45 and 48 credits. The section 45Q 
credit is similar to the section 45 production tax credit. Allowing 
taxpayers to compute the 80/20 Rule on the beginning of construction 
date instead of the placed in service date, thereby reducing risk of 
loss during the years that construction may require, would unfairly 
favor one group of similarly situated taxpayers over another. 
Accordingly, the final regulations do not adopt this recommendation.
B. Methodology
    A commenter recommended that the final regulations clarify that in 
determining the value of old or existing equipment compared to new 
equipment, the general principles of Revenue Ruling 94-31 should apply. 
Revenue Ruling 94-31 provides that a facility would qualify as 
originally placed in service even though it contains some used 
property, provided the fair market value of the used property is not 
more than 20 percent of the facility's total value (the cost of the new 
property plus the value of the used property). The final regulations 
clarify that in determining the value of old or existing equipment as 
compared to new equipment, the general principles of Revenue Ruling 94-
31 will apply.
C. Alternative Basis for Calculation
    As previously mentioned, several commenters requested that the fair 
market value of used property for purposes of the 80/20 Rule be 
ascertained by determining the replacement cost of new property minus 
physical depreciation. One commenter requested that for purposes of the 
80/20 Rule, the regulations refer to the used equipment's capitalized 
costs (either depreciated or undepreciated) rather than its fair market 
value, or cap its fair market value (so determined for the used 
equipment at the aggregate capitalized costs for the used equipment). 
Another commenter requested an alternative approach for facilities that 
cannot meet the 80/20 Rule, allowing facilities to allocate qualified 
carbon oxide according to the ratio of old/new equipment that 
constitutes the capture equipment process.
    The final regulations do not incorporate these suggestions because 
they are inconsistent with the conventional understanding and use of 
the 80/20 Rule. Further, the regulations do not address the appropriate 
valuation method.
D. Previously Owned Equipment
    A commenter suggested that carbon capture equipment that was used 
at a different industrial facility and is moved to the qualified 
facility should be treated as new property for purposes of the 80/20 
Rule. One commenter sought clarification that if a taxpayer purchases 
used equipment from the marketplace, which the taxpayer itself had not 
previously placed in service, the equipment will qualify as new 
equipment (with a valued based on cost) for purposes of the 80/20 Rule. 
Another commenter requested that ``New Components of Property'' for 
purposes of the 80/20 Rule can include two categories of property: (1) 
Brand new property that has never been used before, and (2) Property 
that is used, so long as it was never used in connection with a 
qualified facility or carbon capture equipment for which a section 45Q 
credit was claimed (used-but-new property).
    The final regulations do not adopt these suggestions. The position 
of the Treasury Department and the IRS has always been that the 
numerator of the 80/20 Rule is for new equipment, which does not 
include previously used equipment that is purchased by a taxpayer for 
use in a project. This has also been the Treasury Department's and the 
IRS's position for purposes of applying the 80/20 Rule for the section 
45 credit, which is a production tax credit akin to the section 45Q 
credit.
E. Assets Included as Carbon Capture Equipment for Purposes of 80/20 
Rule
    Noting the concepts in the examples set forth in Sec.  1.45Q-
1(g)(4) of the proposed regulations, a commenter asked whether treating 
all components that make up an independently functioning process train 
could be considered for purposes of the 80/20 Rule, compared to 
applying the 80/20 Rule to the entire qualified facility. Another 
commenter asserted that the relevant unit of carbon capture

[[Page 4737]]

equipment is an independently functioning process train for purposes of 
the 80/20 Rule and the retrofitted carbon capture equipment rules, and 
requested that the final regulations reflect this assertion.
    A commenter recommended that the final regulations clarify whether 
certain relevant items of equipment, including pressure and temperature 
adsorption units, adsorbers, and regenerators, columns, storage tanks, 
and vaporizers, are carbon capture equipment to inform whether and how 
the 80/20 Rule applies. A commenter suggested that the final 
regulations clarify that pipeline construction costs may be included 
for purposes of the 80/20 Rule.
    A commenter requested modifications to the 80/20 Rule, suggesting 
that: (1) The exclusivity requirement be eliminated; (2) the qualified 
carbon oxides to be transported in the pipeline should be captured ``by 
the taxpayer's carbon capture equipment'' and not ``from the taxpayer's 
qualified facility;'' and (3) eliminating the limitation that the 
pipeline must only transport carbon oxide that ``would otherwise be 
emitted into the atmosphere'' because the limitation unfairly 
prejudices direct air capture facilities without justification or cost/
benefit analysis. The commenter asserted that direct air capture 
facilities should be able to enjoy the benefits of this provision in 
the same way as industrial facilities.
    The final regulations clarify that an independently functioning 
process train is the appropriate unit of carbon capture equipment for 
purposes of the 80/20 Rule, and clarify the meaning of ``the cost of 
new equipment for a pipeline owned and used exclusively by that 
taxpayer.'' However, the final regulations do not eliminate the 
exclusivity requirement for pipelines because the purpose of the 80/20 
Rule is to calculate the fair market value ratio of new to used 
property within a project. If the taxpayer and the IRS are unable to 
determine how much of a pipeline the taxpayer actually owns or is part 
of the project, because it is a common carrier pipeline, the 80/20 Rule 
cannot be used to determine whether the project has met the test.
3. Electricity Generating Facility
    A commenter requested that the final regulations clarify whether 
carbon capture equipment at a facility that is a combined heat and 
power system property (CHP) would be categorized as an electricity 
generating facility, particularly if the facility's primary purpose is 
to provide steam and electric power to the industrial facilities where 
they are located, but sometimes sells electricity to the grid. The 
commenter sought explicit guidance concerning whether a CHP facility 
emitting carbon oxides that primarily serve the steam and industrial 
load of the host industrial plant may be treated as an industrial 
facility that is subject to the ``not less than 100,000 metric tons'' 
requirement of section 45Q(d)(2)(C).
    A commenter noted that it is unclear whether carbon capture 
equipment installed at a CHP is an electricity generating facility or 
an industrial facility. The commenter suggested that routine but de 
minimis sales of electricity to the grid could cause a CHP to be 
subject to depreciation under one of the MACRS classes listed in Sec.  
1.45Q-2(e) of the proposed regulations, thus triggering the 500,000 
metric ton threshold applicable to carbon capture equipment installed 
at electric generating facilities in Sec.  1.45Q-2(g)(1)(ii) of the 
proposed regulations. The commenter stated that many CHP facilities are 
small and do not produce 500,000 metric tons of carbon oxide annually, 
so this categorization could disqualify many otherwise attractive 
industrial CHP carbon capture projects from meeting the threshold for 
qualified facilities under Sec.  1.45Q-2(g)(1)(ii) of the proposed 
regulations. Accordingly, the commenter requested guidance as to 
whether a CHP facility where the majority of carbon oxides emitted are 
attributable to serving the steam and industrial load of the host 
industrial plant may be treated as an industrial facility to which the 
``not less than 100,000 metric tons'' threshold under section 
45Q(d)(2)(C) applies.
    A commenter sought clarification that the MACRS Asset Classes 
listed in the proposed regulations are the only categories in which a 
facility may be treated as an ``electricity generating facility'' and 
other more diverse or less clear facilities would not be at risk of 
being classified as such.
    Based on the definition of electricity generating facility under 
Sec.  1.45Q-2(e) of the proposed regulations, unless a facility is 
subject to depreciation under one of the listed MACRS asset classes, 
the facility does not qualify as an electricity generating facility. If 
the principal function of a power generation component of an industrial 
facility or direct air capture facility is to provide power for that 
facility, the definition provided in Sec.  1.45Q-2(e) of the proposed 
regulations prevents the characterization of such an industrial 
facility or direct air capture facility as an electricity generating 
facility. The final regulations do not revise the MACRS asset 
categories listed in the proposed regulations. The categories listed in 
the proposed regulations were generally supported by commenters, and 
the proposed regulations clearly indicated that only facilities subject 
to the listed MACRS asset classes are treated as electricity generating 
facilities for purposes of section 45Q.
4. Minimum Threshold Requirements--Direct Air Capture Facilities
    A commenter supported the annualization of the first-year capture 
amounts described in Sec.  1.45Q-2(g)(3) of the proposed regulations, 
but noted that this provision could be interpreted to be limited to 
only facilities that have ``emissions'' and possibly be inapplicable to 
direct air capture facilities. The commenter suggested that the 
language of the proposed regulations attempts to try to take into 
account not only the minimum capture amounts in Sec.  1.45Q-2(g)(1)(ii) 
and (iii) of the proposed regulations, but also the maximum emission 
amounts in Sec.  1.45Q-2(g)(1)(i) of the proposed regulations. 
Therefore, the commenter suggested that the provision should be 
clarified to apply to all facilities, including direct air capture 
facilities. The final regulations adopt this commenter's suggestion.
    A commenter recommended that the final regulations confirm that for 
purposes of meeting the section 45Q(d)(2) threshold levels for a 
qualified facility, all carbon oxide captured at an industrial facility 
or direct capture facility will be considered together, even if the 
carbon oxide will be subject to different levels of credits. The 
commenter explained that if some of the captured carbon oxide will be 
used for EOR and the remaining captured carbon oxide will immediately 
be disposed of in secure geological storage, then the total amount of 
captured carbon oxide should be aggregated for purposes of determining 
whether the facility meets the definition of a qualified facility.
    The statute makes clear that the section 45Q(d)(2) threshold levels 
for a qualified facility look only to the amount of qualified carbon 
oxide captured. Taxpayers are permitted to consider all carbon oxide 
captured at an industrial facility or direct air capture facility 
together, even if the carbon oxide will be subject to different levels 
of credits. For example, if a taxpayer captures 100,000 metric tons of 
qualified carbon oxide and sends 50,000 metric tons to secure 
geological storage and 50,000 metric tons to enhanced oil recovery, the 
total 100,000 metric tons will qualify for the section 45Q credit at 
their respective credit values.

[[Page 4738]]

5. Aggregation
    Many commenters requested that the final regulations allow 
taxpayers to aggregate carbon capture amounts from various facilities 
to meet the minimum capture requirements of section 45Q(d). The 
commenters generally recommended applying a test similar to the 
``single project'' determination applicable for purposes of the 
beginning of construction requirements in Notice 2020-12. Section 8.01 
of Notice 2020-12 allows for multiple facilities or units of carbon 
capture equipment that are operated as a single project to be treated 
as a single qualified facility or unit of carbon capture equipment for 
purposes of determining when construction began. Factors indicating 
that multiple qualified facilities or units of carbon capture equipment 
are operated as part of a single project include, but are not limited 
to: (1) The units of carbon capture equipment are owned by the same 
legal entity; (2) the units of carbon capture equipment are commonly 
managed or operated; (3) the units of carbon capture equipment are 
operated under similar operations and maintenance protocols established 
by the owner of the equipment, considering differences attributable in 
resource utilization and expected use of captured carbon oxides; (4) 
the units of carbon capture equipment are constructed pursuant to a 
single plan for Front-End Engineering and Design (FEED) or other 
approaches for front-end planning (e.g., the Front-End Loading (FEL) 
approach); (5) the carbon oxide captured with the carbon capture 
equipment is transported, disposed of, utilized, or used as a tertiary 
injectant pursuant to a shared contract; (6) the units of carbon 
capture equipment were constructed pursuant to a single construction 
management contract; and (7) if construction of any unit of carbon 
capture equipment was debt financed, construction of all units of 
carbon capture equipment is financed pursuant to a single loan 
agreement.
    Some commenters agreed that factors indicating that sites are 
operated as a single project listed in Notice 2020-12 provide a helpful 
start for determining whether multiple landfills are operated under a 
single program. However, these commenters stated that not all of the 
beginning of construction factors are readily applied to multiple 
municipal solid waste landfill sites and should be modified for this 
purpose.
    Commenters suggested an alternative aggregation standard, which 
authorizes aggregation of all facilities that include carbon capture 
equipment owned by the same taxpayer treating members of an affiliated 
group, within the meaning of section 1504, as a single taxpayer for 
this purpose.
    The final regulations allow taxpayers to apply the single project 
rule in section 8.01 of Notice 2020-12 for purposes of meeting the 
minimum capture requirements of section 45Q(d). Applying the single 
project rule in Notice 2020-12 promotes uniformity of application for 
both the beginning of construction requirement and the minimum capture 
requirements of section 45Q(d). Also, section 8.01 of Notice 2020-12 
states that whether multiple qualified facilities or units of carbon 
capture equipment are operated as part of a single project will depend 
on the relevant facts and circumstances. Each of the 8 factors listed 
in section 8.01 may or may not be relevant in a particular case and, 
therefore, do not need to be excluded in the final regulations.
D. Industrial Facility
    Section 45Q does not define the term ``industrial facility.'' The 
proposed regulations adopted the definition of industrial facility in 
section 3.03 of Notice 2020-12, which provides that an ``industrial 
facility'' is a facility that produces a carbon oxide stream from a 
fuel combustion source, a manufacturing process, or a fugitive carbon 
oxide-emission source that, absent capture and disposal, injection, or 
utilization, would otherwise be released into the atmosphere. Under the 
proposed regulations, an industrial facility did not include a facility 
that produces carbon dioxide from carbon dioxide production wells at 
natural carbon dioxide-bearing formations or a naturally occurring 
subsurface spring. The proposed regulations provided that a deposit of 
natural gas that contains less than 10 percent carbon dioxide by volume 
is not a natural carbon dioxide-bearing formation (10 percent safe 
harbor). For other deposits, whether a well is producing from a natural 
carbon dioxide-bearing formation is based on all the facts and 
circumstances.
1. Exclusion
    Commenters sought clarification and revisions to the 10 percent 
safe harbor for naturally occurring carbon oxides, seeking a higher 
threshold or a bright-line rule. For example, commenters sought a rule 
providing that when a facility captures a carbon dioxide stream from a 
manufacturing process where carbon dioxide is not the exclusive 
commercial product, it is per se an industrial facility, without regard 
to whether the carbon dioxide was produced from a deposit of natural 
gas that contained greater than 10 percent carbon dioxide by volume. A 
commenter suggested revising the examples in Sec.  1.45Q-2(d)(4) of the 
proposed regulations to incorporate definitions and applications of 
industrial facility, natural carbon oxide-bearing formations, and the 
10 percent safe harbor. Commenters recommended that producing carbon 
dioxide from a carbon dioxide-bearing formation should be considered a 
manufacturing process so long as the facility also manufactures 
products other than carbon dioxide that are intended to be sold at a 
profit or for commercial use.
    The Treasury Department and the IRS agree with the majority of 
commenters who noted that a bright line rule that excludes carbon 
dioxide production wells at natural carbon dioxide-bearing formations, 
or at naturally occurring subsurface springs, with greater than 90 
percent carbon dioxide by volume would conform with the recognized and 
administrable definition of natural carbon dioxide-bearing formations 
or a naturally occurring subsurface spring. Thus, the final regulations 
replace the facts and circumstances standard and the 10 percent safe 
harbor in the proposed regulations and adopt a greater than 90 percent 
test.
    The final regulations also provide an exception for wells at 
natural carbon dioxide-bearing formations or naturally occurring 
subsurface springs that contain a product other than carbon dioxide. 
This exception provides that a well meeting the 90 percent test will 
not be treated as a carbon dioxide production well at a natural carbon 
dioxide-bearing formation or a naturally occurring subsurface spring 
if: (a) The gas stream contains a product, other than carbon oxide, 
that is commercially viable to extract and sell, without taking into 
account the availability of a commercial market for the carbon oxide 
that is extracted or any section 45Q tax credit that might be 
available; (b) the taxpayer provides an attestation from an independent 
registered engineer with experience in feasibility studies for natural 
gas extraction that the gas stream contains a product, other than 
carbon oxide, that is commercially viable to extract and sell, without 
taking into account the availability of a commercial market for the 
carbon oxide that is extracted; (c) a direct air capture facility 
(defined in section 45Q(e)(1)(A)) is not used to capture carbon oxide 
from the gas stream; and (d) any carbon oxide extracted from the 
deposit is used as tertiary injectant in an enhanced oil or natural gas 
recovery project or as feedstock of a utilization project (i.e., the 
cycling of the gas from the deposit

[[Page 4739]]

to a processing facility and then back to the deposit will not be 
considered the capture and storage of carbon oxide for purposes of the 
section 45Q credit).
2. Electricity Generating Facility
    Commenters recommended adding more details to the definition of 
industrial facility. For example, the commenters suggested expressly 
including ``electricity generating facility'' in the definition. Under 
section 45Q(d), an electricity generating facility is treated as an 
industrial facility. As a result, the final regulations adopt this 
commenter's recommendation and revise the definition of industrial 
facility at Sec.  1.45Q-2(d) to include electricity generating 
facilities. However, to be a qualified facility, an electricity 
generating facility must capture at least 500,000 metric tons of 
qualified carbon oxide during the taxable year.
3. Manufacturing Process
    A commenter noted that the definition of ``manufacturing process'' 
in Sec.  1.45Q-2(d)(3) of the proposed regulations is not appropriately 
applied in the example at Sec.  1.45Q-2(d)(4) of the proposed 
regulations. The commenter requested that the example be modified to 
recognize that, to the extent carbon oxide was captured from a process 
that manufactured methane that fueled and powered processing equipment, 
the carbon oxide should be considered qualified carbon oxide because 
the manufactured methane was used for a commercial purpose.
    The final regulations clarify the example but do not adopt the 
commenter's request to treat the carbon oxide as qualified carbon 
oxide. In the example, because carbon oxide is the only product 
manufactured that is intended to be sold at a profit or used for a 
commercial purpose, the process described in the example is not a 
manufacturing process, and the carbon dioxide captured by the process 
is not qualified carbon oxide.
4. General Comments
    A commenter recommended revising the definition of an ``industrial 
facility'' under Sec.  1.45Q-2(d) of the proposed regulations as 
follows: ``An industrial facility is a facility that produces a carbon 
oxide stream from a fuel combustion source (whether or not the 
combustion generates mechanical or electrical power) or fuel cell, a 
manufacturing process, or a fugitive carbon oxide emission source that, 
absent capture and disposal, would otherwise be released into the 
atmosphere as industrial emission of greenhouse gas or lead to such 
release.'' One commenter recommended clarifying what is meant by ``a 
fugitive carbon oxide emission source'' by applying the definition from 
the EPA's Clean Air Act regulations, 40 CFR 57.103(m), which defines 
fugitive emissions as ``any air pollutants emitted to the atmosphere 
other than from a stack.''
    The final regulations do not amend the definition of ``fugitive 
carbon oxide emission source.'' The definition is accurate in the 
proposed regulations. However, pursuant to several requests for 
examples to illustrate the application of the rule for manufacturing 
processes, the final regulations clarify the example at Sec.  1.45Q-
2(d)(4), and add an additional example to illustrate the concept of 
what qualifies as a manufacturing process.
5. Industry-Specific Comments
    Commenters recommended that the final regulations modify the 
definition of industrial facility to include facilities that produce a 
carbon dioxide stream from a biogas flare, biogas-to-electricity 
facility, flare stack gas, LFG-to-electricity, and biogas processing 
facility. One commenter requested clarification regarding whether a 
flare facility will satisfy the definition of an industrial facility as 
a ``facility that produces a carbon oxide stream from a fuel combustion 
source.''
    Another commenter requested clarification regarding whether a 
facility that combusts biogas to generate electricity (LFGTE Facility) 
would satisfy the definition of an industrial facility as ``a facility 
that produces a carbon oxide stream from a fuel combustion source.''
    A commenter requested clarification on whether a LFG processing 
facility would satisfy the definition of an industrial facility as ``a 
facility that produces a carbon oxide stream from . . . a manufacturing 
process'' to the extent that they manufacture a biomethane product that 
is sold on the market or is used for fueling collection vehicles that 
otherwise would run on conventional natural gas.
    One commenter sought confirmation that a biogas flare facility 
meets the definition of an industrial facility as ``a facility that 
produces a carbon oxide stream from a fuel combustion source'' despite 
not resulting in generation of electricity or mechanical work. 
Alternatively, the commenter requested clarification that an LFTGE 
Facility meets the definition of an industrial facility because it 
produces a carbon dioxide stream from a fuel combustion source. The 
commenter further requested clarification that a biogas facility meets 
the definition of an industrial facility because it produces a carbon 
dioxide stream from a manufacturing process. The commenter also 
requested that the final regulations provide an additional example that 
demonstrates how biogas facilities meet the definition of an industrial 
facility.
    One commenter requested that the regulations be revised to state 
that a flare at a facility that utilizes methane from municipal solid 
waste (MSW) as a fuel to combust regulated non-methane organic 
compounds (NMOCs contained in biogas qualifies as an industrial 
facility as ``a producer of a carbon oxide stream from a fuel 
combustion source.'' The commenter suggested that Sec.  1.45Q-2(d) of 
the proposed regulations be revised to clarify that a facility 
producing a carbon oxide stream from a fuel combustion source does not 
need to generate electrical or mechanic power for productive use to 
qualify as an industrial facility.
    The determination of whether any particular facility qualifies as 
an industrial facility will depend on the facts and circumstances. A 
rule that explicitly characterizes certain facilities as industrial 
facilities would risk being imprecise or giving rise to the perception 
that those facilities not listed will not qualify, making a facts and 
circumstances approach preferable. Thus, the final regulations do not 
adopt these comments.
E. Direct Air Capture Facility
    Section 45Q(e)(1) provides that the term ``direct air capture 
facility'' means any facility which uses carbon capture equipment to 
capture carbon dioxide directly from the ambient air, except the term 
does not include any facility which captures carbon dioxide that is 
deliberately released from naturally occurring subsurface springs or 
using natural photosynthesis.
    The proposed regulations reiterated the statutory provision. In 
response to the proposed regulations, one commenter requested 
clarification of the definition of direct air capture facilities, which 
inherently may capture nominal amounts of carbon dioxide using natural 
photosynthesis. The commenter discussed that carbon dioxide present in 
the air not only consists of carbon dioxide vented from industrial 
sources but also contains small amounts of carbon dioxide that was 
produced by plant life through natural photosynthesis. The commenter 
suggested that if the definition of direct air capture facility were 
strictly interpreted to not allow for capture of even nominal amounts 
of carbon

[[Page 4740]]

dioxide produced through natural photosynthesis, then no direct air 
capture facility could qualify for the definition.
    The final regulations do not adopt this comment. Section 
45Q(c)(1)(C) provides that direct air capture facilities capture carbon 
dioxide from directly from ambient air. By its nature, ambient air 
includes carbon dioxide and other qualified carbon oxides from all 
sources, whether from naturally-occurring subsurface springs, animal 
respiration, or the very trace amounts produced as part of natural 
photosynthesis when a plant utilizes carbon dioxide to produce oxygen. 
Therefore, the plain meaning of the term ambient air encompasses these 
concepts.
F. Secure Geological Storage
    Section 45Q(f)(2) provides that the Secretary, in consultation with 
the Administrator of the EPA, the Secretary of Energy, and the 
Secretary of the Interior, must establish regulations for determining 
adequate security measures for the geological storage of qualified 
carbon oxide under section 45Q(a) such that the qualified carbon oxide 
does not escape into the atmosphere. Such term includes, but is not 
limited to, storage at deep saline formations, oil and gas reservoirs, 
and unminable coal seams under such conditions as the Secretary may 
determine under such regulations.
    Injection of carbon oxide into any underground reservoir, onshore 
or offshore under submerged lands within the territorial jurisdiction 
of States, requires the operator to comply with Underground Injection 
Control (UIC) program regulations under the Safe Drinking Water Act and 
to obtain the appropriate UIC well permits. Under 40 CFR 146.5 
(Classification of injection wells), Class II may be an appropriate UIC 
well permit for wells that inject fluids (including carbon dioxide) 
brought to the surface in connection with conventional oil or natural 
gas production and may be commingled with waste waters from gas plants 
that are an integral part of production operations, unless those fluids 
are classified as a hazardous waste at the time of injection, and for 
wells which inject fluids (including carbon oxides) for enhanced 
recovery of oil or natural gas. Class VI is an appropriate UIC well 
permit for wells that are not experimental in nature that are used for 
geologic sequestration of carbon dioxide beneath the lowermost 
formation containing an underground source of drinking water; or, for 
wells used for geologic sequestration of carbon dioxide that have been 
granted a waiver of the injection depth requirements pursuant to 
requirements at 40 CFR 146.95; or for wells used for geologic 
sequestration of carbon dioxide that have received an expansion to the 
areal extent of an existing Class II enhanced oil recovery or enhanced 
gas recovery aquifer exemption pursuant to Sec. Sec.  146.4 and 
144.7(d) of 40 CFR.
    Operators that inject carbon dioxide underground are also subject 
to the EPA's Greenhouse Gas Reporting Program (GHGRP) requirements set 
forth at 40 CFR part 98. Under 40 CFR part 98 subpart RR (Geologic 
Sequestration of Carbon Dioxide source category, referred to as subpart 
RR), certain facilities, including UIC Class VI wells, are required to 
report basic information on carbon dioxide received for injection, 
develop and implement an EPA-approved site-specific Monitoring, 
Reporting, and Verification Plan (MRV Plan), and report the amount of 
carbon dioxide geologically sequestered using a mass balance approach 
and annual monitoring activities. Under 40 CFR part 98 subpart UU 
(Injection of Carbon Dioxide source category, referred to as subpart 
UU), all other facilities that inject carbon dioxide underground such 
as for EOR or any other purpose, are required to report basic 
information on carbon dioxide received for injection. Facilities that 
conduct EOR are not required by 40 CFR part 98 to report under subpart 
RR unless (1) the owner or operator chooses to opt into subpart RR or, 
(2) the facility holds a UIC Class VI permit for the well used for EOR. 
Annual reports that are submitted under 40 CFR part 98 to the EPA's 
GHGRP undergo verification by the EPA, and non-confidential data from 
these reports are published on the EPA's website.
    The proposed regulations allowed CSA/ANSI ISO 27916:2019 as an 
alternative to subpart RR for UIC Class II wells using qualified carbon 
oxide for EOR, but did not allow standards set by states as an 
alternative to subpart RR. In addition, the proposed regulations did 
not provide for an alternative to subpart RR reporting for UIC Class VI 
wells because all UIC Class VI wells are already subject to subpart RR 
reporting requirements. A taxpayer that reported volumes of carbon 
oxide to the EPA pursuant to subpart RR may self-certify the volume of 
carbon oxide claimed for purposes of section 45Q. Alternatively, if a 
taxpayer determined volumes pursuant to CSA/ANSI ISO 27916:2019, the 
taxpayer may prepare documentation as outlined in CSA/ANSI ISO 
27916:2019 internally, but such documentation must be provided to a 
qualified independent engineer or geologist, who then must certify that 
the documentation provided, including the mass balance calculations as 
well as information regarding monitoring and containment assurance, is 
accurate and complete.
1. General Comment
    One commenter noted that the proposed regulations use different 
terms to describe the location where secure geological sequestration 
occurs, and suggested using a single term ``secure geological storage 
site'' throughout the final regulations. The final regulations adopt 
this comment and incorporate the suggestion throughout.
2. Requirements for Qualified Independent Engineers or Geologists
    In response to the proposed regulations, commenters discussed the 
``qualified independent engineer or geologist'' requirement applicable 
to the ISO standard for UIC Class II wells using qualified carbon oxide 
for EOR. Commenters recommended including a company's professional 
engineer in good standing to be qualified to make the required 
certification, despite being employed by the taxpayer.
    Commenters suggested that the qualified independent engineer or 
geologist should be able to be either an individual or a team. 
Commenters recommended that the leader of the team be a licensed 
petroleum engineer or professional geologist, and that the individual 
or team be employed independently of the taxpayer. A commenter 
recommended that the party or teams performing the certification be 
accredited by a third-party accreditation body to reduce the potential 
impacts of employment by the taxpayer and still maintain independence.
    Commenters requested that the final regulations adopt the 
established and internationally recognized American National Standards 
Institute (ANSI) National Accreditation Board ANAB accreditation 
program for third-party validation and verification bodies found at 
https://anab.ansi.org/greenhouse-gas-validation-verification/. The 
Commenters requested that this process be used as the accreditation 
process for certifying qualified, independent individuals or bodies to 
review all of the relevant documentation for verifying long-term 
storage of qualified carbon oxide injected into EOR projects under CSA/
ANSI ISO 27916:2019.
    Some commenters suggested options for a competent accreditation 
body for implementation of CSA/ANSI ISO 27916:2019 such as the American 
National Standards Institute (ANSI), which currently acts as the 
accreditation body for Greenhouse Gas Program reporting verifications, 
or other

[[Page 4741]]

international professional organizations such as the Society of 
Petroleum Engineers.
    The final regulations do not adopt these recommendations. While the 
suggested accreditation bodies may be able to certify third-party 
reporting under similar standards, at this time no accreditation body 
exists that expressly certifies third-party reporting under CSA/ANSI 
ISO 27916:2019. Instead, the final regulations clarify that the 
qualified independent engineer or geologist certifying a project must 
be duly registered or certified in any State.
    A commenter noted the difference in language between Sec.  1.45Q-3 
of the proposed regulations, regarding ``qualified independent engineer 
or geologist'' for secure geological storage, and Sec.  1.45Q-4 of the 
proposed regulations, regarding ``independent third-party'' for 
utilization, asking whether the geologist would need to be a third 
party as well or provide affidavits regarding the independence of the 
geologist or team.
    In response to this comment, the final regulations provide that the 
certification required must be accompanied by an affidavit from the 
qualified independent engineer or geologist stating under penalties of 
perjury that the qualified independent engineer or geologist is 
independent from the taxpayer, electing taxpayer, and/or credit 
claimants as applicable.
    A commenter recommended that for taxpayers using the ISO standard, 
the final regulations should require annual certification of volumes by 
a party accredited by a nationally or internationally recognized CSA/
ANSI ISO 27916:2019 accreditation body.
    In contrast to the recommendation that a company may use its own 
professional engineer in good standing to make the required 
certification, another commenter recommended clarifying ``independent'' 
to mean a person who is not an employee of the taxpayer.
    Commenters suggested that the standard of independence for a 
qualified engineer or geologist should be the same standard of 
independence for the ``independent third-party'' described in Sec.  
1.45Q-4(c)(2) of the proposed regulations. Section 1.45Q-4(c)(2) of the 
proposed regulations provided that the measurement and written LCA 
report must be performed by or verified by an independent third-party. 
The report must contain documentation consistent with the International 
Organization for Standardization (ISO) 14044:2006, ``Environmental 
management--Life cycle assessment--Requirements and Guidelines,'' as 
well as a statement documenting the qualifications of the third-party, 
including proof of appropriate U.S. or foreign professional license, 
and an affidavit from the third-party stating that it is independent 
from the taxpayer. Therefore, the commenters recommended that the 
certification requirements under Sec.  1.45Q-3(d) of the proposed 
regulations should be amended to include an affidavit from the 
qualified engineer or geologist stating that he or she is independent 
from the taxpayer, the electing taxpayer, and the credit claimant.
    Commenters recommended that the qualified independent engineer or 
geologist make his or her certification under penalties of perjury. The 
commenters noted that this standard of certification is required for 
petroleum engineers who certify enhanced oil recovery projects under 
section 43. Another commenter recommended that the final regulations 
take into account the EOR-related provisions under Sec.  1.43-3 and 
limit Sec.  1.45Q-2(h)(4) of the proposed regulations to only natural 
gas projects, and expressly state that certifications for enhanced oil 
projects under section 43 must be made annually even if no section 43 
credit is being claimed.
    Commenters requested that the final regulations define ``qualified 
engineer/qualified geologist'' as a person, or team led by such a 
person, with relevant expertise in areas such as enhanced oil or 
natural gas recovery projects, secure geologic storage of carbon 
dioxide, and the requirements of CSA/ANSI 27916:2019, and who is 
licensed as a Professional Engineer or Professional Geologist.
    The final regulations take the commenters' recommendations into 
account by refining the definition of qualified independent engineer or 
geologist. The revised definition incorporates the same standard of 
independence used for an ``independent third party'' that was described 
in Sec.  1.45Q-4(c)(2) of the proposed regulations. Further, the final 
regulations apply the rules imposed on engineers who provide 
certifications for the section 43 enhanced oil recovery credit 
regarding qualifications to the ``qualified independent engineer or 
geologist'' who provides a certification for the ISO standard.
3. ISO Standard
    A commenter noted that the proposed regulations only applied the 
ISO standard to EOR projects and did not apply the ISO standard to 
enhanced natural gas recovery projects. The commenter proposed that the 
final regulations require UIC Class II permit holders to receive an 
approved MRV plan under subpart RR for enhanced natural gas recovery 
projects. The commenter requested that the final regulations maintain 
EPA's GHGRP subpart RR requirements as minimum reporting requirements 
to demonstrate ``secure storage'' under section 45Q, arguing that 
allowing claimants to use CSA/ANSI ISO 27916:2019, instead of subpart 
RR, lowers the bar for demonstrating secure geological storage, weakens 
the existing transparency of the program, and removes EPA from its role 
in approving MRV plans. The commenter requested that the regulation be 
revised to require a taxpayer to receive an approved MRV plan before 
any section 45Q credit can be claimed. The principles of CSA/ANSI ISO 
27916:2019 apply to both EOR projects and enhanced natural gas recovery 
projects. Accordingly, the final regulations do not adopt this comment.
    Another commenter requested that the final regulations prohibit 
section 45Q credit claims until a new class of UIC well and/or other 
regulations are developed, specifically for CO2-EOR. The 
commenter stated that existing regulations for CO2-EOR are 
not designed to ensure secure geological storage of qualified carbon 
oxides, and allowing a tax credit for this activity is inappropriate.
    A commenter suggested that for taxpayers awaiting approval of an 
MRV plan, during the interim period beginning when carbon capture 
operations commence and ending when an MRV plan is finalized, the final 
regulations should allow taxpayers to claim section 45Q tax credits. 
However, another commenter disagreed with the suggestion for interim 
allowance of the credit, suggesting that only taxpayers with approved 
MRV plans should be allowed to claim the credit. The final regulations 
do not adopt an interim allowance of the credit. Allowing taxpayers 
that use subpart RR to claim the section 45Q credit before they receive 
an EPA-approved MRV plan would conflict with the long-standing position 
of the Treasury Department and the IRS that this condition must be met 
for purposes of determining adequate security measures for the 
geological storage of qualified carbon oxide such that the qualified 
carbon oxide does not escape into the atmosphere.
    A commenter disapproved of the allowance of the ISO standard, 
preferring subpart RR and MRV plans to be the sole standard for 
disposal and injection of qualified carbon oxide. The Treasury 
Department and the IRS, in consultation with the EPA, DOE, and the 
Department of Interior, agree that

[[Page 4742]]

the ISO standard is an alternative standard for a qualified enhanced 
oil or natural gas recovery project. Both subpart RR and CSA/ANSI ISO 
27916:2019 require an assessment and monitoring of potential leakage 
pathways, quantification of inputs, losses and storage through a mass 
balance approach, and documentation of steps and approaches. Therefore, 
the final regulations retain the ability for taxpayers to use the CSA/
ANSI ISO 27916:2019 standard to establish that qualified carbon oxides 
are being securely stored.
    Another commenter requested that the final regulations provide 
additional detail regarding what documentation is required to establish 
the volumes of qualified carbon oxide that were captured and disposed 
of, injected, or utilized, and what taxpayer(s) would need to file such 
documentation.
a. Certifications
    A commenter recommended that the final regulations require annual 
qualified, independent, third-party verification of conformance with 
the ISO standard for taxpayers electing to use it to bolster reporting 
standards. Another commenter requested that in addition to the 
currently proposed mass balance calculations and information regarding 
monitoring and containment assurance (as required by the ISO standard) 
to be reported on an annual basis, Sec.  1.45Q-3(d) of the proposed 
regulations should be revised to explicitly require three key types of 
documentation that cover the lifecycle of a qualified carbon oxide EOR 
project. The three types of documentation include: (1) Initial 
documentation (as required by CSA/ANSI ISO 27916:2019 Sec.  4.3) 
required prior to period of quantification; (2) Periodic documentation 
(as required by CSA/ANSI ISO 27916:2019 Sec.  4.4) required at least 
annually throughout the lifespan of the project; and (3) Termination 
documentation (as required by CSA/ANSI ISO 27916:2019 Sec.  10.4).
    Several commenters requested that Sec.  1.45Q-3(d) be revised to 
allow that a certification by a qualified independent engineer or 
geologist would be a one-time event based upon the project's physical 
or contractual manner of use of qualified carbon oxide as a tertiary 
injectant in a EOR or natural gas recovery project.
    One commenter noted that annual confirmation by a credit claimant 
on Form 8933 that the project is being executed pursuant to the 
certified CSA/ANSI ISO 27916:2019 standard (subject to IRS audit, 
recapture and potential penalty) should be sufficient for subsequent 
years.
    The final regulations do not adopt these comments. Taxpayers must 
provide all documentation required by CSA/ANSI ISO 27916:2019 to the 
verifying party, and the documentation recommended by the commenters is 
already required by that standard. Adding a separate documentation 
requirement for taxpayers to provide all documentation required by CSA/
ANSI ISO 27916:2019 to the verifying party and to submit that 
documentation to the IRS would be redundant and an unwarranted burden 
on taxpayers.
b. Transparency
    A commenter supported the concept that the initial ISO plan and 
annual reports be made available to the public, similar to MRV Plans 
and associated subpart RR annual reports.
    Several commenters requested that the EPA promulgate a new subpart 
to the GHGRP regulations to establish procedures for documenting and 
reporting the amount of carbon oxide securely stored using the ISO 
standard for EOR projects. Proponents of these rules request that the 
final regulations include an interim approach to provide public access 
to the relevant information needed to maintain public confidence in the 
integrity of the section 45Q tax credit.
    The Treasury Department and the IRS do not have the authority to 
disclose taxpayer information or to require taxpayers to self-disclose 
taxpayer information as a condition of using the ISO standard provided 
in the final regulations. Therefore, the final regulations do not adopt 
the recommendations of the commenters requesting such disclosure. 
However, the inflation adjustment factor notices published by the IRS 
annually will continue to provide the total metric tons of credits that 
have been taken into account claimed, without publishing taxpayer 
information.
G. Tertiary Injectant
    Section 45Q(e)(3) defines tertiary injectant as follows: ``The term 
`tertiary injectant' has the same meaning as when used within section 
193(b)(1).'' Section 1.45Q-2(h)(6) of the proposed regulations defines 
tertiary injectant as follows:

For purposes of section 45Q, a tertiary injectant is qualified 
carbon oxide that is injected into and stored in a qualified 
enhanced oil or natural gas recovery project and contributes to the 
extraction of crude oil or natural gas. The term tertiary injectant 
has the same meaning as used within section 193(b)(1) of the Code. A 
commenter requested the definition of tertiary injectant in Sec.  
1.45Q-2(h)(6) of the

proposed regulations be revised because section 193(b)(1) does not 
define ``tertiary injectant,'' and Sec.  1.193-1(b)(2), merely 
references other applicable energy regulations and tax regulations. The 
commenter suggested that the final regulations define ``tertiary 
injectant'' as any injectant that is used as part of a qualified 
enhanced oil or natural gas recovery project, and does not include a 
hydrocarbon injectant defined in section 193(b)(2) that is recoverable. 
Section 45Q(e)(3) provides that the term tertiary injectant has the 
same meaning as when used within section 193(b)(1). Therefore, the 
final regulations do not adopt the commenter's suggested revision.

IV. Utilization of Qualified Carbon Oxide

    Section 45Q(f)(5)(A) provides that ``utilization of qualified 
carbon oxide'' means (i) the fixation of such qualified carbon oxide 
through photosynthesis or chemosynthesis, such as through the growing 
of algae or bacteria; (ii) the chemical conversion of such qualified 
carbon oxide to a material or chemical compound in which such qualified 
carbon oxide is securely stored; or (iii) the use of such qualified 
carbon oxide for any other purpose for which a commercial market exists 
(with the exception of use as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project), as determined by the 
Secretary.
    Section 45Q(f)(5)(B) provides a methodology to determine the amount 
of qualified carbon oxide utilized by the taxpayer. Such amount is 
equal to the metric tons of qualified carbon oxide which the taxpayer 
demonstrates, based upon an analysis of lifecycle greenhouse gas 
emissions and subject to such requirements as the Secretary, in 
consultation with the Secretary of Energy and the Administrator of the 
EPA, determines appropriate, were (i) captured and permanently isolated 
from the atmosphere, or (ii) displaced from being emitted into the 
atmosphere, through use of a process described in section 45Q(f)(5)(A). 
The term ``lifecycle greenhouse gas emissions'' has the same meaning 
given such term under subparagraph (H) of section 211(o)(1) of the 
Clean Air Act (42 U.S.C. 7545(o)(1)(H)), as in effect on February 9, 
2018, except that ``product'' is substituted for ``fuel'' each place it 
appears in such subparagraph.
    The proposed regulations conformed the definition of utilization to 
the statutory definition. The proposed regulations also provided that 
an

[[Page 4743]]

analysis of lifecycle greenhouse gas emissions (LCA) must be in writing 
and either performed or verified by a professionally-licensed 
independent third party. In particular, the proposed regulations 
required the LCA report to contain documentation consistent with the 
International Organization for Standardization (ISO) 14044:2006, 
``Environmental management--Life cycle assessment--Requirements and 
Guidelines,'' as well as a statement documenting the qualifications of 
the independent third party. The proposed regulations required a 
taxpayer to submit an LCA report to the IRS and the DOE, with the LCA 
report subject to a technical review by the DOE. Further, the proposed 
regulations provided that the IRS, in consultation with the DOE and the 
EPA, would determine whether to approve the LCA report.

A. Lifecycle Analysis--Amount Utilized

    In response to the proposed regulations, commenters requested that 
the final regulations provide more detail regarding the use of LCAs and 
specifically address whether greenhouse gases other than qualified 
carbon oxides qualify for the section 45Q credit.
    Some commenters requested clarification that the section 45Q credit 
is not available for a reduction of carbon dioxide equivalents but only 
for qualified carbon oxides. The commenters based this recommendation 
on the statutory language in section 45Q(a) and (f)(5) limiting the 
section 45Q credit to qualified carbon oxide. Some commenters further 
suggested that an LCA merely should be used to determine whether a 
product or process generally is eligible for section 45Q credits, while 
the amount of section 45Q credits generated by a given product or 
process should be correlated only to the volume of carbon oxides 
directly utilized from a qualified facility or displaced from being 
emitted to the atmosphere.
    Other commenters suggested that the plain language of section 
45Q(f)(5)(B) requires the section 45Q credit calculation to be based on 
all greenhouse gases reflected in the LCA because the measurement of 
qualified carbon oxides for purposes of utilization is based on carbon 
dioxide equivalents (CO2-e), not carbon oxides. 
CO2-e is a unit of measurement, providing a common scale for 
measuring the climate effects of different greenhouse gases. It 
includes carbon oxides, as well as methane, and other greenhouse gases. 
Some of these commenters stated that section 45Q(f)(5)(B)(ii) directs 
the IRS to look to the Clean Air Act for the definition of lifecycle 
greenhouse gas emissions, which requires an analysis of all greenhouse 
gases. According to these commenters, because an LCA performed in 
accordance with section 45Q(f)(5) must include the aggregate quantity 
of greenhouse gas emissions captured and permanently isolated from the 
atmosphere, or displaced from being emitted into the atmosphere, such 
greenhouse gases are treated as carbon oxides for purposes of measuring 
the amount of qualified carbon oxide upon which the section 45Q credit 
is calculated.
    One commenter inquired whether the numerical values resulting from 
direct measurement (via metered flows of qualified carbon oxide at the 
point of capture and subsequent use) are properly viewed as a 
``ceiling'' on allowed section 45Q benefits, subject to netting as a 
result of the lifecycle impacts on qualified carbon oxide emissions as 
documented in the LCA report.
    Another commenter proposed that the section 45Q credit be based on 
the lesser of directly utilized emissions and the amount of carbon 
oxide determined to be displaced by an LCA. According to the commenter, 
this approach would set a cap on the number of credits that can be 
claimed by a product or process, equal to the volume of utilized carbon 
oxides that originated from mechanical carbon capture equipment at a 
qualified facility, and it is consistent with the section 45Q 
accounting method for the secure geologic storage of carbon dioxide.
    A commenter recommended that the final regulations include examples 
of how an ``all-greenhouse-gas LCA'' works in connection with the 
``only carbon oxides'' tax credit.
    Although all greenhouse gas emissions are taken into account by an 
LCA, the section 45Q credit may only be calculated on the qualified 
carbon oxides that are captured and utilized. Section 45Q makes this 
clear in a number of instances. First, the general rule in section 
45Q(a) provides a credit for metric tons of ``qualified carbon oxide'' 
captured and used by the taxpayer as a tertiary injectant in a 
qualified enhanced oil or natural gas recovery project and disposed of 
by the taxpayer in secure geological storage, or utilized, not for 
other greenhouse gases. Second, the statutory definition of ``qualified 
carbon oxide'' in section 45Q(c) limits the applicability of section 
45Q to ``any carbon dioxide or other carbon oxide.'' The definition 
does not include other greenhouse gases. Third, under section 
45Q(f)(1), section 45Q applies to qualified carbon oxide captured and 
utilized within the United States, not to other greenhouse gases. 
Fourth, the title of section 45Q, ``Credit For Carbon Oxide 
Sequestration,'' does not suggest that section 45Q credits may be 
claimed for greenhouse gases other than carbon oxide. Fifth, if a 
greenhouse gas other than carbon oxide (such as methane) were to 
qualify for the section 45Q credit as a CO2-e, the 
utilization of that other greenhouse gas would qualify for multiple 
times the credit as carbon oxide based on its CO2-
equivalence. This is an unreasonable result under the statute. Sixth, 
greenhouse gases other than carbon oxides do not contribute to the 
amount of qualified carbon oxide required to meet the emission and 
capture thresholds for a qualified facility under section 45Q(d)(2). 
Finally, under section 45Q(f)(5)(B), the amount of qualified carbon 
oxide utilized is equal to the metric tons of qualified carbon oxide 
which the taxpayer demonstrates, based upon an LCA, were captured and 
permanently isolated from the atmosphere, or displaced from being 
emitted into the atmosphere through use of a process described in 
section 45Q(f)(5)(A). Therefore, the calculation of the section 45Q 
credit must be based on qualified carbon oxide, not other greenhouse 
gases.
    The final regulations provide that the amount of the section 45Q 
credit is not computed on all greenhouse gases, but is based only on 
qualified carbon oxide captured and utilized. For purposes of 
determining the amount of qualified carbon oxide utilized by the 
taxpayer under section 45Q(a)(2)(B)(ii) or (a)(4)(B)(ii), such amount 
shall be equal to the metric tons of qualified carbon oxide which the 
taxpayer demonstrates, based upon an LCA, were captured and permanently 
isolated from the atmosphere, or displaced from being emitted into the 
atmosphere through a use of a process described in section 
45Q(f)(5)(A).
    Section 45Q(f)(5)(B) provides that an LCA must be used for purposes 
of determining the amount of qualified carbon oxide utilized by the 
taxpayer. However, an LCA does not yield a result in metric tons of 
qualified carbon oxide that is utilized. An LCA provides the result in 
CO2-e. The final regulations reconcile this by requiring the 
use of an LCA to measure CO2-e, but limiting the section 45Q 
credit to the amount of qualified carbon oxide measured at the source 
of capture. This allows taxpayers to continue to use the current 
industry-standard LCA process, ensuring an overall decrease in 
greenhouse gases, while also preventing taxpayers from claiming the 
section 45Q credit for a reduction in greenhouse gases other than 
carbon oxides (measured in CO2-e)

[[Page 4744]]

that exceeds the amount of carbon oxides that are captured.
    The final regulations do not provide examples, but the Treasury 
Department and the IRS will consider issuing future guidance regarding 
common fact patterns.
    A commenter requested that LCAs recognize biogenic carbon dioxide 
in any greenhouse gas as a neutral factor without any global warming 
potential. This issue exceeds the scope of these final regulations. 
Therefore, the final regulations do not adopt this comment.
    A commenter requested that the final regulations add the phrase 
``through use of a process described in paragraph (a) of this section'' 
to Sec.  1.45Q-4(b)(1) of the proposed regulations, as the phrase 
modifies ``captured and permanently isolated from the atmosphere,'' and 
``displaced from being emitted into the atmosphere.'' This is 
consistent with the statute. Therefore, the final regulations adopt the 
commenter's suggestion.

B. Lifecycle Analysis--Standards of Adequate Lifecycle Analysis

    The proposed regulations did not provide standards of lifecycle 
analysis, and the Treasury Department and the IRS requested comments on 
this issue. Commenters supported adopting the ISO standards, in 
particular ISO 14044:2006 for preparing an LCA for purposes of section 
45Q. One commenter stated that a detailed discussion of the process of 
determining the appropriate baseline and boundaries is set forth in the 
ISO LCA Standard. Commenters asserted that it would be very difficult 
to develop a one-size-fits-all solution to the selection of boundaries 
and baselines for all products, as these determinations depend on the 
particular product involved. One commenter posited that attempting to 
do so in the final regulations likely would undermine the ISO standard.
    One commenter supported the use of the ISO 14044:2006 standard, but 
requested that the final regulations clarify that the results of the 
LCA for section 45Q purposes are unique compared to how the ISO 
standard might be used in other contexts.
    Another commenter requested that the regulations clarify whether 
LCA reports are to be prepared in full conformity with the standards of 
ISO 14044:2006, or just consistent with the standard. The commenter 
supported full conformity with the standard as this should readily 
enable LCA review and comparison across LCAs.
    The ISO standards provide consistency, especially in the LCA 
context. ISO 14040:2006, ``Environmental management--Life cycle 
assessment--Principles and framework,'' establishes the framework for 
LCAs, by describing the LCA and its phases in general terms, and ISO 
14044:2006, ``Environmental management--Life cycle assessment--
Requirements and guidelines,'' details the requirements for conducting 
an LCA.
    It would be very difficult to develop a one-size-fits-all solution 
to the selection of boundaries and baselines for all products. Thus, 
the final regulations retain the requirement that the LCA must conform 
with ISO 14044:2006 and add a reference to ISO 14040:2006, 
``Environmental management--Life cycle assessment--Principles and 
framework,'' as that standard discusses the overall framework for LCAs. 
The final regulations also clarify that LCAs must be prepared and 
documented in conformance with the ISO standards. The Treasury 
Department and the IRS note that the DOE's current CO2 
utilization guidelines are consistent with the ISO standards. Such 
guidance can be found on DOE's website under the National Energy 
Technology Laboratory's CO2 Utilization Guidance Toolkit at 
https://www.netl.doe.gov/LCA/CO2U.
    One commenter also recommended that the final regulations 
incorporate the use of ISO 14067:2018, ``Greenhouse gases--Carbon 
footprint of products--Requirements and guidelines for 
quantification,'' which addresses the proper boundaries for an LCA. The 
commenter further recommended that the IRS acknowledge that an LCA 
performed consistently with ISO 14044 and ISO 14067 satisfies the 
statutory requirement to assess greenhouse gas emissions from the full 
product lifecycle.
    Another commenter recommended applying regulations implemented by 
the GHGRP (40 CFR part 98), because 40 CFR part 98 provides 
comprehensive and detailed rules and equations for measuring greenhouse 
gas emissions in the United States.
    ISO 14067:2018 and the GHGRP do not provide overall guidance on 
LCAs. The reporting of greenhouse gases serves a different purpose than 
the LCA for purposes of section 45Q. Therefore, the final regulations 
do not cite to these standards.

C. Lifecycle Analysis--Boundaries

    The Treasury Department and the IRS requested comments regarding 
how to achieve consistency in boundaries for similarly-situated 
taxpayers. One commenter requested that the IRS clarify the boundaries 
of the LCA and how other greenhouse gases should be taken into account 
in the lifecycle analysis of the utilization process. The commenter 
recommended that, with respect to non-carbon oxide greenhouse gases, 
the final regulations set the boundaries for the LCA at the beginning 
of the utilization process, and after the capture of the qualified 
carbon oxide. The commenter recommended that if the utilization of the 
qualified carbon oxide results in emissions of other greenhouse gases, 
then the emissions should be taken into account in the LCA as 
CO2-e, but the capture of greenhouse gases other than carbon 
oxides should not be taken into account in the LCA.
    Another commenter supported the rule in the proposed regulations 
that calculates lifecycle emissions based on the aggregate quantity of 
greenhouse gas emissions related to the full product lifecycle relative 
to a baseline for certain products and processes. According to the 
commenter, a holistic perspective is needed to account for key factors 
such as product longevity and durability relative to the status quo.
    Another commenter recommended that the final regulations rely on 
the ISO standards to determine the full product lifecycle, specifically 
ISO Standards 14044 and 14067. According to the commenter, any 
requirements in addition to the ISO standards would create an undefined 
and potentially overbroad LCA requirement that Congress likely did not 
intend.
    A commenter recommended that the final regulations set the LCA end 
boundary at the facility gate for all products other than fuels, 
because the carbon intensity for such products outside the boundary 
gates (in the product-use or product-disposal phase) will not vary 
between the process that uses captured carbon oxide and the process 
that sources its carbon oxide elsewhere. Commenters suggested that 
because respective use and end-of-life phases of the technologies being 
compared are the same, they could be excluded from the LCA. These 
commenters noted significant challenges associated with obtaining the 
information about the products' use and disposal and when the products 
may be sold to third parties for use and disposal.
    During their lifecycle, products undergo different stages from 
feedstock extraction to production phases, and use phase, until the 
end-of-life (disposal, recycle). System boundaries set the limits of 
the product system and must be selected in line with the overall goal 
of the assessment. The final regulations define lifecycle greenhouse 
gas

[[Page 4745]]

emissions consistently with section 45Q(f)(5)(B)(ii). The definition 
uses the cradle-to-grave boundary, which considers the entire product 
life cycle, including all the phases from raw material extraction until 
end-of-life.
    ISO 14040:2006 and ISO 14044:2006 identify the rules regarding the 
system boundary. Although the cradle-to-grave boundary is used for 
LCAs, ISO 14044:2006 permits the deletion of lifecycle stages under 
certain circumstances, when the deletion will not significantly change 
the overall conclusions of the study.
    Because the final regulations require LCAs to be performed in 
conformity with ISO 14040:2006 and 14044:2006, the final regulations 
provide that generally an LCA must take into account emissions from 
cradle to grave, unless the deletion of lifecycle stages is permitted 
by ISO 14040:2006 and ISO 14044:2006. Any decisions to omit lifecycle 
stages must be clearly stated in the LCA report, and the reasons and 
implications for the omission must be explained in the LCA report.

D. Lifecycle Analysis--Comparison Systems

    The Treasury Department and the IRS requested comments regarding 
how to achieve consistency in baselines for similarly-situated 
taxpayers. One commenter requested guidance regarding the baselines to 
be used for the LCA, and requested that the regulations clarify that it 
is not necessary for the LCA to identify as a baseline a process that 
was previously used by the taxpayer or the taxpayer's industry in which 
qualified carbon oxide was not used. According to the commenter, if the 
LCA were required to be prepared using a baseline that illustrates the 
difference from a changed process, then taxpayers that are engaged in a 
qualifying activity but cannot demonstrate that they previously made 
the product using non-qualified carbon oxide will not be able to 
provide an LCA that shows the greenhouse gas emission reductions from 
the process they are using. The commenter suggested that the LCA should 
compare the capture and utilization process to a baseline in which the 
taxpayer sourced carbon oxide from a fossil carbon source.
    The final regulations provide that an LCA must demonstrate that the 
proposed process results in a net reduction of CO2-e when 
compared to a comparison system. The LCA must be prepared in conformity 
with ISO 14040:2006 and ISO 14044:2006. In addition, Taxpayers must use 
the NETL's CO2 Utilization Guidance Toolkit, including the 
guidance and data available on DOE's website at https://www.netl.doe.gov/LCA/CO2U. Further, for purposes of the section 45Q 
credit, taxpayers must continue to use the NETL's CO2 
Utilization Guidance Toolkit, including the guidance and data available 
on DOE's website at https://www.netl.doe.gov/LCA/CO2U, until such time 
as additional guidance is developed by the DOE or another federal 
agency.

E. Lifecycle Analysis--Verification

    The proposed regulations stated that the taxpayer measures the 
amount of carbon oxide captured and utilized through a combination of 
direct measurement and LCA. Commenters requested clarification of the 
reference to ``a combination of direct measurement and LCA.'' One 
commenter stated that the language in the proposed regulations implies 
that direct measurement and LCA are mutually exclusive, which is 
inconsistent with ISO 14044. The commenter requested clarification 
regarding whether measurement of the amount of carbon oxide captured 
and utilized should be through direct measurement, use of a mass 
balance model, or a combination. In addition, the commenter requested 
clarification regarding whether an LCA based on calculated and 
estimated data would receive the same level of scrutiny. The commenter 
viewed measured data as the highest standard, providing both 
transparency and an incentive for incremental improvements that 
displace additional carbon oxides, for purposes of life cycle analysis.
    Another commenter requested clarification that the third party 
preparing or verifying the LCA does not need to take direct 
measurements on site. The direct measurement of captured and utilized 
qualified carbon oxide typically will be provided by metering devices 
installed at the point of capture and/or use.
    A commenter requested that the final regulations be modified to 
focus on verification at the point of utilization, not measurement of 
carbon oxide at the source of capture.
    To increase clarity, the final regulations change the subheading of 
Sec.  1.45Q-4(c)(2) of the proposed regulations to focus on verifying 
the amount of qualified carbon oxide utilized through the LCA. Under 
the final regulations, the LCA measures CO2-e and verifies 
that qualified carbon oxide is utilized by demonstrating that the 
proposed process results in a net reduction of CO2-e when 
compared to a comparison system. Thus, if an LCA indicates that the 
proposed process reduces CO2-e emissions by the amount of 
qualified carbon oxide captured or more, then the LCA has verified that 
the full greenhouse gas benefit is achieved. The amount of qualified 
carbon oxide is the lesser of the amount of CO2-e emission 
reduction verified by the LCA, or the amount of qualified carbon oxide 
measured at the source of capture. If the LCA indicates that the 
CO2-e emission reduction is less than the amount of 
qualified carbon oxide captured, then only a portion of the greenhouse 
gas reduction benefit has been achieved, and the amount of qualified 
carbon oxide is the amount of CO2-e emission reduction that 
is verified by the LCA.
    In addition, the final regulations clarify that the LCA may consist 
of direct and indirect data in conformity with ISO 14040:2006 and 
14044:2006. The results of the LCA must be documented in a written LCA 
report. Regardless of the type of data used, each LCA will be subject 
to a technical review by the DOE.
    Under the final regulations, measurement of qualified carbon oxide 
at the point of capture is required. The qualified carbon oxide 
eligible for the section 45Q credit cannot exceed the amount of 
qualified carbon oxide that is captured.

F. Lifecycle Analysis--Independent Third-Party Review

    Section 1.45Q-4(c)(2) of the proposed regulations required a 
written LCA report to be performed by or verified by an independent 
third party. In addition, the proposed regulations required the LCA 
report to include a statement documenting the qualifications of the 
third party, including proof of appropriate U.S. or foreign 
professional license, and an affidavit from the third party stating 
that it is independent from the taxpayer.
    Commenters stated that the independent third-party verification 
requirement seemed reasonable. One commenter suggested substituting a 
``critical review'' of LCAs, as provided by the ISO standards, for the 
otherwise ``undefined `verification' currently invoked'' by the 
proposed regulations' requirement that a written LCA report must be 
performed by or verified by an independent third party.
    One commenter encouraged permitting voluntary third-party 
verification of an LCA to avoid regulatory burdens, and suggested that 
the final regulations provide a safe-harbor for taxpayers who have 
their LCAs approved by an accredited third-party verification entity.
    The final regulations require the LCA and the LCA report to be 
performed by

[[Page 4746]]

or verified by an independent third party. This requirement is intended 
to increase consistency in the LCAs and to streamline the DOE's 
technical review of LCAs. The final regulations do not provide a safe-
harbor from review of the LCA.
    The final regulations also require an LCA report to provide a 
statement documenting the qualifications of the third party, including 
proof of appropriate U.S. or foreign professional license, an affidavit 
from the third party stating that it is independent from the taxpayer 
(if a section 45Q(f)(3)(B) election has been made, the affidavit must 
state that the third party is independent from both the electing 
taxpayer and the credit claimant), and the statement must be made under 
penalties of perjury. The final regulations do not use the term 
``critical review,'' as a ``critical review'' under ISO does not 
necessarily require an independent third party.
    One commenter noted that the proposed regulations did not describe 
what constitutes an ``appropriate professional license'' regarding the 
qualifications of a third party and requested that the final 
regulations provide additional guidance. The commenter also recommended 
coordinating the reference to an ``independent third-party'' with Sec.  
1.45Q-5(c) of the proposed regulations.
    Another commenter stated that the verification of the independent 
third party should be consistent with the certification of the 
independent engineer or geologist who certifies documentation prepared 
as outlined in the CSA/ANSI ISO 27916:2019 standard. At a minimum, the 
commenter stated the independent third party should provide the 
verification under penalties of perjury. The final regulations adopt 
this commenter's recommendation by providing that the independent 
third-party statement must be made under penalties of perjury.
    One commenter suggested that the IRS take advantage of existing 
accreditation programs, such as that used by California or the 
voluntary program established under the Clean Air Act renewable fuels 
program.
    The final regulations simply require the independent third party to 
provide proof of an appropriate U.S. or foreign professional license. 
This requirement provides flexibility to the taxpayer and recognizes 
that there are no nationally-recognized accreditation programs for this 
field.
    Another commenter requested clarification regarding how often the 
third-party preparation or verification of the measurement and LCA must 
occur. The commenter suggested that the LCA should not need to be 
repeated unless the production process is changed in a manner that 
results in a significant increase in the total greenhouse gas emissions 
during production of the product. The IRS will publish separate 
procedural guidance that provides how often the third-party preparation 
or verification must occur.

G. LCA Report Submission and Review

    The proposed regulations provided that a taxpayer must submit an 
LCA report to the IRS and the DOE, and that the LCA report would be 
subject to a technical review by the DOE. The proposed regulations 
further provided that the IRS, in consultation with the DOE and the 
EPA, would determine whether to approve the LCA report.
    Commenters requested that the LCA review process be described in 
more detail. Commenters also suggested that the final regulations 
provide a defined review period for reviewing an LCA. One commenter 
recommended a 60-day review period for the IRS, DOE, and EPA to review 
a taxpayer's LCA.
    Commenters suggested that the requirement to submit an LCA for 
review by the IRS, DOE, and EPA prior to a taxpayer claiming section 
45Q credits is overly burdensome, contrary to statutory intent, and 
likely to result in significant approval delays, dampening commercial 
interest in utilization projects.
    Commenters stated that the IRS should not condition a taxpayer 
claiming the section 45Q credit on pre-approval of the LCA. One 
commenter proposed that taxpayers be given the option of seeking 
advance approval of their LCAs prior to claiming section 45Q credits, 
or be allowed to claim section 45Q credits while accepting the risk 
that the credits may be deemed invalid depending on the outcome of the 
technical review process. Another commenter requested audit protection 
if pre-approval of LCAs is required.
    Another commenter requested a formal interim process, in lieu of 
requiring pre-approval of LCAs, allowing taxpayers to work with the 
IRS, the DOE, and the EPA on specific utilization project details and 
credit claims. The goal of this process would be to provide insight 
into potential viability of taxpayer's utilization projects.
    The final regulations provide that the taxpayer must submit the LCA 
report and third-party statement to the IRS and the DOE pursuant to the 
instructions to Form 8933 or other guidance issued by the IRS. The 
taxpayer must also submit the model if an independent third-party 
review is not conducted. The final regulations also provide that each 
LCA report will be subject to a technical review by the DOE. After the 
completion of the technical review, the IRS will determine whether to 
approve the LCA and will send a notification to the taxpayer. The 
taxpayer must receive approval of its LCA prior to claiming the prior 
to claiming the section 45Q credits for such taxable year on any 
Federal income tax return. Pre-approval of the LCA is necessary to 
ensure taxpayers' compliance with the statute. In addition to receiving 
approval of its LCA, the final regulations require the taxpayer to 
satisfy all other requirements of section 45Q and sections 1.45Q-1, 
1.45Q-2, and 1.45Q-4 in order to be eligible to claim section 45Q 
credits.
    One commenter requested that pre-approval of an LCA should not be 
required prior to submission prior to filing a claim for a section 45Q 
credit on an amended return. According to the commenter, if it were, 
the taxpayer's claim may be limited by the statute of limitations 
before such approval is received. The final regulations provide that 
pre-approval of an LCA is required in all circumstances. Priority in 
the LCA review process will be given to prior tax years to address this 
concern.
    Taxpayers may rely on these regulations to submit an LCA. However, 
the IRS will issue separate procedural guidance that provides 
additional details regarding the LCA submission and review process, 
including the length of time necessary for an LCA review. In response 
to comments, the IRS has streamlined the LCA review and approval 
process in these final regulations. The final regulations provide that 
the DOE will conduct a technical review of each LCA, and the IRS will 
determine whether to approve the LCA and will send notification to the 
taxpayer. The Treasury Department and the IRS will consult with the DOE 
and the EPA on general fact patterns and any future guidance.
    One commenter suggested that the final regulations allow taxpayers 
to claim the section 45Q credit while an LCA is under review and 
provide a safe harbor to avoid a section 6662 penalty. The final 
regulations do not provide relief from any applicable penalties.
    Another commenter requested a safe harbor permitting taxpayers to 
rely on an LCA that has been accepted or created by the EPA. The final 
regulations do not provide a safe harbor for an LCA that has been 
accepted or created by the EPA. An LCA accepted or created by the EPA 
may have been accepted or performed for different

[[Page 4747]]

purposes, separate and distinct from section 45Q. An LCA must be 
reviewed independently for compliance with section 45Q and these final 
regulations.
    Commenters requested that taxpayers should be required to make 
their LCA report, application, and IRS approval public. One commenter 
requested that the applicant should be required to make public a 
written LCA report that was approved by the IRS. According to the 
commenter, this transparency would increase integrity and credibility 
in the section 45Q credit program. The final regulations do not require 
taxpayers or the third-party verifier to make an LCA report public, as 
the LCA report may contain confidential business information. As the 
DOE and the IRS review LCAs, the Treasury Department and the IRS will 
consider issuing future guidance regarding common fact patterns.

H. Displacement of Qualified Carbon Oxide

    Under section 45Q(f)(5)(B), for purposes of determining the amount 
of qualified carbon oxide utilized by the taxpayer, such amount shall 
be equal to the metric tons of qualified carbon oxide which the 
taxpayer demonstrates, based upon an analysis of lifecycle greenhouse 
gas emissions, were (I) captured and permanently isolated from the 
atmosphere through use of a process described in section 45Q(f)(5)(A), 
or (II) displaced from being emitted into the atmosphere through use of 
a process described in section 45Q(f)(5)(A).
    One commenter recommended eliminating the distinction between 
displacement and isolation, or explaining its meaning and significance. 
Another commenter stated that displacement is a term of art used in 
environmental guidance, referring to indirect reductions in greenhouse 
gases that result from comparing a process for utilizing qualified 
carbon oxide against baseline emissions of the processes in the same 
commercial market. This commenter stated that a rule considering 
qualified carbon oxide as the lesser of the amount measured at capture 
or the amount verified ignores the amount of qualified carbon oxide 
displaced from being emitted into the atmosphere. An LCA, however, 
takes into account the amount of qualified carbon oxide displaced in 
addition to the qualified carbon oxide captured and permanently 
isolated from the atmosphere.
    One commenter described displacement as other non-captured carbon 
dioxide that was displaced by utilization of the captured carbon 
dioxide.
    Another commenter asserted that the section 45Q credit should be 
available to taxpayers that capture carbon dioxide from an industrial 
process and recycle the carbon dioxide by selling it to commercial end 
users such as dry ice manufacturers or other commercial market uses 
that displace non-captured carbon dioxide.
    One commenter also proposed that the best measurement of qualified 
carbon oxide being displaced would be to measure the difference between 
a base case without utilization and the section 45Q case that includes 
carbon oxide utilization.
    The final regulations provide that a taxpayer must demonstrate, 
based on an LCA, that a utilization process leads to a reduction in 
carbon dioxide equivalents. As section 45Q(f)(5)(B) provides, this 
reduction may be achieved by capturing and permanently isolating 
qualified carbon oxide from the atmosphere through use of a process 
described in section 45Q(f)(5)(A), or by displacing the qualified 
carbon oxide from being emitted into the atmosphere through use of a 
process described in section 45Q(f)(5)(A). Displacement is a process 
which assumes that an existing product in the market will be 
substituted with the product from the carbon oxide utilization process. 
The products must be comparable. NETL's most recent guidance, ``Carbon 
Dioxide Utilization Life Cycle Analysis Guidance for the U.S. DOE 
Office of Fossil Energy,'' can be found at http://www.netl.doe.gov/projects/files/NETLCO2ULCAGuidanceDocument_092019.pdf. The guidance 
defines displacement as, ``[a] co-product management method in which 
the system boundary is first expanded to include each co-product. The 
LCA model results are generated for all systems, the multi-functional 
unit is then reduced to one-product functional unit, by removing one 
unwanted product and related impacts at a time until only the desired 
product is left.''

I. Commercial Market

    Section 45Q(f)(5)(A)(iii) provides that ``utilization of qualified 
carbon oxide'' means the use of such qualified carbon oxide for any 
other purpose for which a commercial market exists (with the exception 
of use as a tertiary injectant in a qualified enhanced oil or natural 
gas recovery project), as determined by the Secretary. The proposed 
regulations did not define ``any purpose for which a commercial market 
exists,'' and the Treasury Department and the IRS requested comments on 
this issue. Many commenters sought clarification regarding the meaning 
of use for ``any other purpose for which a commercial market exists.''
    Several commenters also requested expansive rules regarding 
commercial markets. For example, some commenters suggested that the IRS 
should publish a list of qualifying commercial markets, or a list of 
markets that do not qualify as commercial markets. However, one 
commenter recommended that the final regulations should not provide an 
exhaustive list of eligible markets.
    Another commenter recommended that the Treasury Department and the 
IRS acknowledge the existence of specific commercial markets for 
captured carbon oxide, or describe the manner in which the Treasury 
Department and the IRS expect to make the determination of the 
existence of commercial markets, perhaps by defining the meaning of the 
term ``commercial market'' in the final regulations.
    Some commenters suggested that the final regulations provide a 
broad, plain-language definition of this term. For example, commenters 
suggested that a use resulting in a good or service that is available 
for purchase by the public or nongovernmental entities should be deemed 
to constitute use for a purpose for which a commercial market exists. 
Some commenters recommended that the IRS look to the DOE's 
constellation of carbon dioxide uses and recognize each of these as a 
valid commercial market.
    One commenter suggested that the commercial market provision only 
applies to a product, not a service. This commenter requested that the 
final regulations state that a product must be the end result of any 
approved utilization process that uses the qualified carbon oxide.
    Another commenter stated that the final regulations should avoid 
suggesting that qualified carbon oxide must be physically or chemically 
incorporated into the final product or can only be used in production 
of a good, as opposed to a service.
    A commenter suggested that utilization of qualified carbon oxide 
for any other purpose for which a commercial market exists occurs when 
the captured gases are used in a practical and effective way to produce 
a product.
    Another commenter suggested that commercial markets should qualify 
categorically and not be subject to examination.
    A commenter noted that secure storage is not a required element of 
commercial market use. Therefore, in the commenter's view, the sales 
covered

[[Page 4748]]

by section 45Q(f)(5)(A)(iii) must be: (i) Sales of captured carbon 
oxide, as such, or (ii) sales of a substance into which carbon oxide 
has been converted but is not securely stored.
    One commenter recommended that the final regulations specifically 
recognize the many existing and potential uses for carbon dioxide in 
commercial markets, such as for building products, food production and 
refrigeration.
    A commenter requested that the final regulations identify fuels, 
chemicals, and building materials as the primary categories of 
commercial markets for carbon oxide utilization. The commenter 
suggested that another category should be added for newly developed 
utilization technologies. Section 45Q allows the carbon capturer to 
elect to allow the section 45Q credit to the utilizer, which provides 
an opportunity for fledgling technologies to use the 45Q credit to 
support innovation in the field of carbon oxide utilization. The 
commenter noted that these technologies often have insufficient or 
incomplete data to perform an LCA, and the resulting data may be 
subject to high uncertainty. This category would allow for developing 
utilization techniques to benefit from the 45Q credit and allow for the 
government to track the carbon mitigating benefits of these new 
technologies. The commenter also suggested that a specific category for 
these new technologies could require regular updates to an LCA as 
relevant data becomes available. Further, the commenter stated that the 
economic viability of the business case must be considered, and 
suggested that supplemental information, such as a techno-economic 
assessment of the market viability, be provided for newly developed 
utilization technologies.
    One commenter requested a definition sufficiently broad to 
encompass not only utilization processes resulting in consumer goods or 
products but also industrial-grade feedstocks, commodities, materials, 
and chemicals that may be used as an input for any purpose. Another 
commenter stated that the food and beverage industry is a significant 
commercial market for carbon dioxide utilization.
    One commenter recommended that the final regulations require 
taxpayers to provide certain information to enable the IRS to determine 
whether a commercial market exists. The commenter suggested that a 
viable approach simply would be to allow a taxpayer to provide this 
information in a statement attached to its Form 8933. In addition, the 
commenter requested that the final regulations explicitly provide that 
a commercial market includes a market for fuel. The commenter also 
stated that the IRS should provide more details about the process for 
determining whether a commercial market exists.
    A commenter noted that the Secretary's discretion under section 
45Q(f)(5)(A)(iii) is limited to determining whether a commercial market 
exists, and the Secretary does not have discretion to impose 
requirements as to the nature of the use of the carbon oxide by the 
market.
    The final regulations define the term commercial market broadly as 
a market in which a product, process, or service that utilizes carbon 
oxide is sold or transacted on commercial terms. Section 
45Q(f)(5)(A)(iii) suggests that the definition of a commercial market 
should not be limited to particular products or markets by using the 
phrase ``for any other purpose for which a commercial market exists.'' 
Thus, the final regulations do not restrict the definition by limiting 
it to certain products or markets. Further, with the emergence of new 
technologies, markets are likely to develop and change rapidly. 
Consequently, the final regulations do not list particular products or 
markets that qualify or do not qualify as a commercial market.
    In addition, carbon dioxide is commonly used for services, and 
section 45Q does not restrict the definition of commercial market to 
products. Therefore, the final regulations do not adopt the 
recommendation of commenters who suggested excluding services from the 
definition of commercial market.
    Under section 45Q(f)(5)(A)(iii), the Secretary must determine 
whether a commercial market exists. In order to make this 
determination, the final regulations require a taxpayer to submit a 
statement attached to its Form 8933 substantiating that a commercial 
market exists for its particular product, process, or service. The 
instructions to the form or other guidance will provide more details 
regarding the information to be provided. This information should be 
retained by the taxpayer and may be reviewed during an examination.

J. Recapture and Utilization

    Commenters requested that the regulations clarify whether the 
recapture provisions apply to utilization if a product that utilized 
qualified carbon dioxide releases the qualified carbon dioxide into the 
atmosphere when it is used, recycled, or disposed of.
    One commenter recommended that the final regulations clarify that 
permanent sequestration is not a prerequisite for carbon oxide utilized 
according to section 45Q(f)(5)(A) and that eventual emission into the 
atmosphere does not, in itself, subject the taxpayer to recapture 
provisions so long as the LCA accounts for a full project lifecycle 
analysis.
    Under section 45Q(f)(4), recapture applies to any qualified carbon 
oxide which ceases to be captured, disposed of, or used as a tertiary 
injectant in a manner consistent with the requirements of this section, 
not to qualified carbon oxide that is utilized according to section 
45Q(f)(5)(A). Further, recapture does not apply to utilization of 
qualified carbon oxide because an LCA accounts for all emissions of 
greenhouse gases throughout the life cycle of the utilized product. 
Therefore, the final regulations provide that a recapture event occurs 
when qualified carbon oxide for which a section 45Q credit has been 
previously claimed ceases to be disposed of in secure geological 
storage or used as a tertiary injectant during the recapture period. 
The final regulations do not provide for recapture when qualified 
carbon oxide is utilized.

K. Industries and Processes

    One commenter requested that the final regulations specifically 
provide that qualified carbon dioxide captured by ethanol plants and 
utilized in the food and beverage industry is considered utilization of 
qualified carbon oxide under section 45Q(f)(5)(A).
    A commenter requested that the final regulations define what types 
of utilization qualify as ``fixation of qualified carbon oxide through 
photosynthesis or chemosynthesis, such as through the growing of algae 
or bacteria'' as described in section 45Q(f)(5)(A). Another commenter 
requested that the final regulations find photosynthesis to be both a 
qualified carbon dioxide capture process and a qualified utilization 
process. Further, the commenter urged the IRS to recognize carbon oxide 
that is verifiably retained in solid form (organic or mineral) in the 
top 48 inches of the soil layer as ``disposed of.'' The commenter 
asserted that regenerative agriculture processes should qualify for the 
section 45Q credit, as these processes are at a minimum carbon neutral. 
The commenter also recommended expanding section 45Q to include 
sustainable technologies such as microbial conversion technologies that 
use photosynthesis for the capture of carbon dioxide in soil.
    A commenter sought guidance regarding the fermentation of sugar

[[Page 4749]]

waste products (desugarized molasses) in coal seams as an artificially-
induced chemical synthesis process that produces substantial amounts of 
methane (CH4) and carbon dioxide. The commenter asserted that the 
generation of carbon dioxide through the sugaring process and its 
subsequent sequestration or disposal in coal seams should qualify for 
the section 45Q credit.
    A commenter suggested that the final regulations should clarify 
that the conversion of captured carbon dioxide to carbon monoxide is 
considered utilization of qualified carbon oxide under section 
45Q(f)(5). The commenter explained that conversion of carbon dioxide to 
carbon monoxide should be considered the conversion of qualified carbon 
oxide to a chemical compound, in which the qualified carbon oxide 
(carbon dioxide) is securely stored and utilized. The commenter further 
requested that the IRS should consider utilization of carbon oxide, 
such as carbon monoxide, as a durable good or chemical feedstock in the 
production of durable goods as utilized and verified qualified carbon 
oxide.
    The determination of whether particular technologies, processes, or 
industries qualify for the section 45Q credit exceeds the scope of 
these final regulations. However, the Treasury Department and the IRS 
will continue to consider these comments for purposes of potential 
future guidance regarding section 45Q.

V. Credit Recapture

    The recapture rules in the proposed regulations applied on a 
project-by-project basis. Section 45Q(f)(4) directs the Secretary to 
provide regulations for recapturing the benefit of any section 45Q 
credit allowable with respect to any qualified carbon oxide which 
ceases to be captured, disposed of, or used as a tertiary injectant in 
a manner consistent with the requirements of section 45Q.
    The proposed regulations provided that the period during which a 
recapture event may occur (recapture period) begins on the date of the 
first injection of qualified carbon oxide for disposal in secure 
geological storage or use as a tertiary injectant and ends the earlier 
of five years after the last taxable year in which the taxpayer claimed 
a section 45Q credit or the date monitoring ends under subpart RR 
requirements or the CSA/ANSI ISO 27916:2019 standard.
    The proposed regulations provided that any recapture amount will be 
accounted for in the taxable year that it is identified and reported. 
If, during the recapture period, a taxpayer, operator, or regulatory 
agency determines that qualified carbon oxide has leaked to the 
atmosphere, the taxpayer will have a recapture amount if the leaked 
amount of qualified carbon oxide exceeds the amount of qualified carbon 
dioxide disposed of in secure geological storage, including used as a 
tertiary injectant, in that taxable year. That excess amount of leaked 
qualified carbon oxide will be recaptured at a credit rate calculated 
on a LIFO basis (that is, the excess leaked qualified carbon oxide will 
be deemed attributable first to the first preceding year, then to 
second preceding year, and then up to the fifth preceding year) to 
simplify the calculation of the recapture amount.
    The taxpayer must add the amount of the recaptured section 45Q tax 
credit to the amount of tax due in the taxable year in which the 
recapture event occurs. Consistent with this five-year lookback period, 
the proposed regulations provided that the post-credit-claiming period 
ends the earlier of (i) five years after the last taxable year in which 
the taxpayer claimed a section 45Q credit or (ii) the date monitoring 
ends under the requirements of the subpart RR standard or the CSA/ANSI 
ISO 27916:2019 standard.
    The proposed regulations also provided that in the event of a 
recapture event for a secure geological storage location in which the 
stored qualified carbon oxide had been captured from more than one unit 
of carbon capture equipment that was not under common ownership, the 
recapture amount must be allocated among the taxpayers that own the 
multiple units of carbon capture equipment pro rata on the basis of the 
amount of qualified carbon oxide captured from each of the multiple 
units of carbon capture equipment.
    Similarly, the proposed regulations provided that in the case of a 
recapture event where the leaked amount of qualified carbon oxide is 
deemed attributable to qualified carbon oxide for which multiple 
taxpayers claimed section 45Q credit amounts, the recapture amount is 
allocated on a pro rata basis among the taxpayers that claimed the 
section 45Q credits.
    The proposed regulations provided a limited exception to recapture 
in the event of a leakage of qualified carbon oxide resulting from 
actions not related to the selection, operation, or maintenance of the 
storage facility, such as volcanic activity or a terrorist attack. 
Further, the proposed regulations provided that if qualified carbon 
oxide is deliberately removed from a secure storage site, a recapture 
event occurs in the year in which the qualified carbon oxide is removed 
from its original storage. Finally, section 5 of the Summary of 
Comments and Explanation of Revisions to the proposed regulations noted 
that a taxpayer may obtain third-party recapture insurance to protect 
against recapture.
    In the proposed regulations, the Treasury Department and the IRS 
requested comments on how to apply the recapture provisions to section 
45Q credits that are carried forward to future taxable years due to 
insufficient income tax liability in the current taxable year.

A. Recapture Period

    Several commenters approved of a five-year recapture period, noting 
that the Investment Tax Credit also provided for a five-year lookback 
period. However, many commenters suggested that a five-year recapture 
period is too long, and advocated limiting the recapture period to 
three years or to the most recent taxable year.
    Several commenters were supportive of a three-year recapture period 
to be consistent with the statute of limitations for the IRS to 
initiate an audit of a tax year, thereby making the provision similarly 
situated with respect to other tax credits containing recapture 
provisions. One commenter noted that providing a three-year recapture 
period would improve tax and financial statement certainty for 
taxpayers claiming the section 45Q credit, thereby reducing the costs 
associated with tax equity transactions and in turn, further reducing 
the cost of CCUS projects. Ultimately, this commenter asserted that 
reducing the recapture period to three years would make the section 45Q 
credit more efficient and effective in inducing widespread investment 
in CCUS projects.
    One commenter noted that it takes less than three years for carbon 
dioxide injected into an underground reservoir to become stable. This 
commenter noted that once carbon dioxide has stabilized, the carbon 
dioxide is unlikely to escape to the atmosphere. Because injected 
carbon dioxide stabilizes in less than three years, this commenter 
advocated for a three-year recapture period as sufficient for purposes 
of recapture. Generally, commenters advocating for a shorter recapture 
period pointed out that the International Panel on Climate Change's 
2005 Special Report, available at http://www.ipcc.ch/report/carbon-dioxide-capture-and-storage/, stated that carbon dioxide retained in 
appropriately selected and managed geological reservoirs is very likely 
to exceed 99 percent secured storage over 100 years and is likely to 
exceed 99 percent secured storage over 1000 years. Therefore, the 
commenters suggested that no technical reasons exist for a

[[Page 4750]]

recapture period of greater than one year.
    However, one commenter suggested that the final regulations adopt a 
99-year recapture period, because a 99-year recapture period is 
practical and commercially feasible compared to geological time scales 
and other commercial transactions that occur over a span of 99 years, 
such as ground leases of land. The commenter stated that sequestration 
of carbon oxide for 99 years also furthers the policy intent of section 
45Q to have some real and measurable effect on global warming and 
global climate change.
    The final regulations revise the recapture period from five years 
to three years. The risk of qualified carbon oxide leakage leading to a 
recapture event is greatest in the years in which the qualified carbon 
oxide is injected, and the likelihood decreases over time as the 
qualified carbon oxide becomes stable and the likelihood of leakage 
decreases. A three-year recapture period sufficiently accounts for risk 
and reduces the compliance burden that would be imposed by a five-year 
recapture period.

B. Exceptions To Recapture

    In response to the proposed regulations, commenters recommended 
that the final regulations expand the limited exceptions to recapture 
(for volcanic activity and terrorist attacks) specified in the proposed 
regulations, to include such situations as seismic activity that was 
not caused by the injection operations; natural disasters, including 
but not limited to floods, droughts, earthquakes, volcanic eruptions, 
landslides, hurricanes, cyclones, typhoons, and tornados; and wars, 
civil disturbances, terrorist acts, military actions, epidemics, 
pandemics, famines, and actions of a governmental authority.
    A commenter suggested that the final regulations provide that the 
recapture exception include all events outside of the taxpayer's 
control. Another commenter suggested that the limited exceptions to 
recapture be eliminated entirely because any leakage of qualified 
carbon oxide for any reason should be subject to recapture.
    A commenter suggested that for Class VI permit holders (i.e., 
reporting under subpart RR with an MRV plan), leaked qualified carbon 
oxide should not be treated as related to the selection, operation, or 
maintenance of the storage facility.
    The final regulations do not expand the list of exceptions to 
recapture. The list of exceptions to recapture in the proposed 
regulations is illustrative only.

C. Recapture of Credit Carryforwards

    A commenter suggested that the final regulations should explain how 
credit carryforwards and tentative tax values applicable to section 38 
are accounted for when determining the actual tax benefit under section 
45Q. The commenter suggested that if the taxpayer has other available 
credits in the year in which the recapture event occurs, such other 
section 38 credits should apply to offset the recapture amount.
    A commenter suggested that the final regulations provide that the 
carryforward of the credit does not affect the recapture period, 
recommending that the final regulations revise Sec.  1.45Q-5(f) of the 
proposed regulations to clarify that the recapture period ends five 
years after the last taxable year in which the taxpayer claimed a 
section 45Q credit or was eligible to claim a section 45Q credit which 
it carried forward.
    The final regulations take the recapture of credit into account in 
the year in which the leakage occurs and is reported. The credit 
carryforwards should not be affected. In addition, the final 
regulations provide that the recapture period ends on the earlier of 
three years after the last taxable year in which the taxpayer claimed a 
section 45Q credit or was eligible to claim a credit that it elected to 
carry forward or the expiration of the monitoring period.

D. Recapture in the Event of Deliberate Removal from Storage

    Commenters requested clarification concerning when qualified carbon 
oxide is deliberately removed from secure geological storage. One 
commenter noted that neither the definition nor the examples detailed 
in Sec.  1.45Q-5 of the proposed regulations address whether qualified 
carbon oxide that is recycled and reinjected during EOR operations 
would be considered as having been intentionally removed from storage. 
The commenter recommended adding specific examples of using qualified 
carbon oxide as a tertiary injectant in EOR, the provisions for 
recycled and reinjected qualified carbon oxide, and the consequent 
last-in-first-out (LIFO) accounting basis for the qualified carbon 
oxide.
    CSA/ANSI ISO 27916:2019 provides guidance for determining the 
character of the removed carbon oxide. Consequently, this comment is 
addressed through subpart RR and ISO 27916:2019 and not addressed 
further in the final regulations.
    A commenter requested further clarity regarding the applicability 
of the recapture rules to the intentional removal of securely stored 
qualified carbon oxide, and the subsequent recapture and secure storage 
of that same qualified carbon oxide, noting that the total net release 
of qualified carbon oxide in this process is zero. The commenter 
provided an example of when a natural gas and oil company might 
undertake this process, such as when EOR injectors intentionally remove 
previously secured carbon dioxide and then subsequently reinject it 
into the ground after having completed the extraction of all 
commercially viable oil. The commenter requested the final regulations 
state this explicitly and provide an example to clarify that the net 
calculation yields no credit recapture.
    If a taxpayer intentionally removes qualified carbon oxide from a 
qualified enhanced oil or natural gas recovery project and reinjects it 
into the same qualified enhanced oil or natural gas recovery project, 
that intentional removal will not trigger a recapture event. However, 
if the qualified carbon oxide is instead injected into a different 
qualified enhanced oil or natural gas recovery project, such 
intentional removal would trigger a recapture event.
    Another commenter suggested that the final regulations be revised 
to state explicitly that each disposal well or EOR site is separately 
evaluated for recapture. Subpart RR and CSA/ANSI ISO 27916:2019 provide 
guidance for monitoring sites where qualified carbon oxide is securely 
stored. These standards identify the scope of a secure storage project. 
In addition, section 43(c)(2) defines the scope of an EOR project. The 
proposed regulations provided that recapture events are determined 
separately for each project involving the disposal or use of qualified 
carbon oxide as a tertiary injectant an EOR project. Because taxpayers 
disposing of or using qualified carbon oxide in such projects are 
required to follow the provisions of either Subpart RR or ISO 
27916:2019 and section 43, the term ``project'' provided in the 
proposed regulations is one that taxpayers are familiar with. The final 
regulations follow the rule in the proposed regulations, and thus, 
there is no need for revision in response to this comment.

E. Miscellaneous Recapture Issues

    A commenter requested that the final regulations clarify that 
recapture of section 45Q credits does not have any bearing upon the 
minimum threshold capture levels under section 45Q(d)(2), and, 
therefore, does not cause a facility to retroactively fail to be a 
qualified

[[Page 4751]]

facility. The recapture provisions apply to the amount of credit to 
which the taxpayer is entitled in a given year, and do not apply to 
determine how much qualified carbon oxide was captured and disposed of, 
used, or utilized in a given year. Because the amount of qualified 
carbon oxide is measured and verified using mass balance accounting, it 
is possible for a taxpayer to track the number of metric tons captured 
and disposed of or used as a tertiary injectant before netting to 
account for the amount of carbon that leaked in the year. The 
methodology of netting leaked carbon oxide against captured qualified 
carbon oxide in a given year does not preclude a facility from being 
considered a qualified facility, provided the capture threshold is 
satisfied before the netting occurs.
    A commenter suggested that leakage of both qualified and non-
qualified carbon oxide may need to be taken into account on a pro rata 
basis and recommended that the final regulations include examples to 
illustrate this. CSA/ANSI ISO 27916:2019 provides guidance regarding 
allocations when both qualified anthropogenic and natural carbon 
dioxide has been injected in prior or current years. Consequently, this 
comment is addressed through subpart RR and ISO 27916:2019 and not 
addressed further in the final regulations.
    A commenter disagreed with the use of the last-in-first-out method 
of calculating the recapture values, and recommended calculating 
recapture percentages based on apportioning leakage by year of 
injection. The final regulations do not adopt this comment, and instead 
retain the last-in-first-out method of calculation. The last-in-first-
out method promotes administrative ease, and further reflects the fact 
that carbon oxide is at the greatest risk of leakage shortly after it 
is initially disposed of or used as a tertiary injectant.
    One commenter requested that the final regulations provide that 
recapture does not apply to storage sites holding a valid Class VI 
permit. The commenter suggested that any loss of containment of 
qualified carbon oxide from a Class VI storage site should be treated 
as resulting from an action unrelated to the selection, operation or 
maintenance of the storage facility.
    The final regulations provide that a recapture event can occur for 
qualified carbon oxide that has been disposed of or used as a tertiary 
injectant, including at a Class VI storage site. The final regulations 
do not exempt Class VI permit holders from the possibility of 
experiencing a recapture event, even if the permit holder has complied 
with all of the requirements of maintaining a Class VI storage site.
    Commenters sought to clarify whether qualified carbon oxide is 
subject to the recapture provisions if it migrates or otherwise leaves 
its primary containment zone but does not leak into the atmosphere. 
These commenters suggested that a recapture event occurs only when the 
qualified carbon oxide has leaked to the atmosphere, but not when it 
has migrated from the containment zone.
    Subpart RR and CSA/ANSI ISO 27916:2019 each provide methodologies 
for monitoring and reporting the secure storage of qualified carbon 
oxide. Accordingly, this issue is addressed in subpart RR and CSA/ANSI 
ISO 27916:2019 and is not addressed further in the final regulations.
    A commenter suggested that the final regulations should include a 
limited remedial action and cure period to avoid credit recapture. The 
commenter requested an opportunity to dispose of or inject metric tons 
of qualified carbon oxide in secure geologic storage during the post-
credit-claiming period, not claim a section 45Q credit for those metric 
tons, and subtract those metric tons from the quantity of recaptured 
qualified carbon oxide. The commenter explained that allowing the 
operator the opportunity to cure a recapture event with remedial action 
during the post-credit-claiming period should be an alternative method 
to resolve a recapture event, and to resolve it in such a way that 
results in greater amounts of ultimate disposal and injection of 
qualified carbon oxide. The final regulations do not allow for 
taxpayers to perform remedial actions or otherwise cure a leak to avoid 
credit recapture because such a provision would significantly lessen 
the consequences faced by taxpayers that allow qualified carbon oxide 
to leak to the atmosphere.

VI. Miscellaneous Issues

A. Pre-Combustion of Coal, Biomass or Other Carbon-Based Fuel

    One commenter requested that the definition of ``industrial 
facility'' be clarified to include any facility designed for the 
purpose of capturing qualified carbon oxide as a part of its 
operations, including when upgrading coal, biomass or any other carbon-
based fuel. The commenter stated that given the evolving technologies 
in the carbon capture area, the final regulations should recognize that 
any type of pre-combustion, post-combustion, direct air capture or any 
combination thereof that captures qualified carbon oxide should qualify 
under section 45Q so long as such process (i) allows for quantities of 
qualified carbon oxide to be measured at the source of capture and 
verified at the point of disposal, injection or utilization and (ii) 
the taxpayer otherwise satisfies the requirements of section 45Q. The 
commenter described a facility that will substantially upgrade coal or 
biomass with higher quality volatile matter, increased BTU content, 
lower moisture content and lower amount of pollutants. With the 
upgraded fuel, a power plant will require approximately 20-25 percent 
less fuel to generate the same amount of electricity. The upgraded coal 
or biomass produced by the facility will be much a higher ranked and a 
much improved fuel type than what a supplier would otherwise supply to 
a power plant or industrial facility.
    Whether specific industries and processes may qualify for the 
section 45Q credit is highly factual and exceeds the scope of these 
final regulations. Generally, however, a process involving the 
manufacture of a product that does not produce an emission of carbon 
oxides that can be captured and disposed of, injected, or utilized 
until the product is consumed, would not qualify for the section 45Q 
credit. Conversely, a process involving the manufacture of a product 
that does produce an emission of carbon oxides that can be captured, 
and disposed of, injected, or utilized immediately may qualify for the 
section 45Q credit.

B. Additional Carbon Capture Capacity

    One commenter sought clarification concerning how to measure 
additional carbon capture capacity. The commenter suggested that the 
carbon dioxide capture capacity should be calculated on an annual basis 
and define carbon dioxide capture capacity as the capability (metric 
tons per year) to capture carbon dioxide less the annualized typical 
constraints with the industrial facility and carbon capture equipment. 
The commenter further suggested that the definition should provide that 
annualized typical constraints means the quotient of the total amount 
of all regular maintenance, scheduled or unscheduled facility downtime, 
seasonal fluctuations in outdoor temperature, and turn-arounds 
associated with both the industrial facility and carbon capture 
equipment occurring in the 60 months prior to the day before the date 
of the enactment of the BBA divided by five.
    The final regulations do not adopt this comment. Different units of 
carbon capture equipment operate at different efficiencies and their 
capture levels are

[[Page 4752]]

subject to operational variations of the qualified facilities at which 
they are installed. Applying a subjective standard that takes into 
account historical capture amounts rather than true potential capture 
capacity would make it difficult to apply the rules for additional 
carbon capture equipment in a consistent manner. The capture design 
capacity of carbon capture equipment reflects an objective measure of 
the equipment's carbon capture capacity. Accordingly, the final 
regulations provide that the carbon capture capacity of carbon capture 
equipment is its capture design capacity.

C. Capture and Utilization--Photosynthesis

    One commenter requested that the final regulations clarify that 
photosynthesis is both a qualified carbon oxide capture process and a 
qualified carbon oxide utilization under section 45Q. Further, the 
commenter urged the DOE and the IRS to recognize carbon that is 
verifiably retained in solid (organic or mineral) form in the top 48 
inches of the soil layer as ``disposed.'' The commenter stated that 
section 45Q(f)(5)(A)(i) provides that photosynthesis is a possible 
method of utilization, and section 45Q(e)(1)(B)(ii) specifically 
excludes photosynthesis from being considered a direct air capture 
facility. The Treasury Department and the IRS do not agree with the 
commenter. The final regulations do not address photosynthesis further 
because the Code makes clear the avenues, such as utilization, for 
using such process to qualify for the credit.

D. Beginning of Construction

    Several commentators requested changes to Notice 2020-12, 
concerning the beginning of construction, such as an extension of the 
continuity safe harbor from six to eight years, relaxation of the 
prohibition on combining methods to satisfy the continuing requirement, 
and revisions to the examples of physical work and the list of 
preliminary activities. Commenters also requested extending the 
deadline for beginning of construction by one year in response to the 
impact of COVID-19, as has been done for the investment tax credit and 
production tax credit.
    A commenter recommended that the IRS issue guidance providing that 
the work described in section 5.02(2)(d) of Notice 2020-12 be treated 
as on-site work of a significant nature only at the election of the 
taxpayer. Other commenters recommended harmonizing certain provisions 
of Notice 2020-12 and the proposed regulations.
    These comments exceed the scope of these final regulations, but the 
Treasury Department and the IRS will continue to consider these 
comments for purposes of potential future guidance regarding section 
45Q.

E. Partnerships and Economic Substance

    Commenters requested clarifications to the partnership guidance 
provided in Revenue Procedure 2020-12. Commenters recommended that, in 
the event of a section 45Q(f)(3)(B) election, Revenue Procedure 2020-12 
should apply to any credit claimant without presuming the person 
claiming the credit will always be the owner of the carbon capture 
equipment.
    A commenter recommended striking section 4.02(2)(b) of Revenue 
Procedure 2020-12, or for subsequent guidance to expand the definition 
of ``bona fide equity investment'' to include investors reasonably 
anticipating a return derived from tax credits and cash flow.
    These comments exceed the scope of these final regulations, but the 
Treasury Department and the IRS will consider these comments for 
purposes of potential future guidance regarding section 45Q.
    Commenters requested clarification of the application of the 
economic substance doctrine and the provisions of section 7701(e) to 
the section 45Q credit. Commenters recommended the final regulations 
provide that the economic substance doctrine and section 7701(o) do not 
apply to carbon capture projects eligible for the credit under section 
45Q. The final regulations do not deviate from well-established 
guidance regarding the economic substance doctrine.

Effect on Other Documents

    Sections 1 through 5 of Notice 2009-83, 2009-2 C.B. 588, as 
modified by Notice 2011-25, 2011-1 C.B. 604, are obsoleted. The 
remaining sections of Notice 2009-83 provide reporting and 
recordkeeping requirements associated with the limitation on credits 
available under section 45Q(a) (as in effect before February 9, 2018) 
and sections 45Q(a)(1) and (2). After the end of the calendar year in 
which the Secretary, in consultation with the Administrator of the EPA, 
certifies that a total of 75,000,000 metric tons of qualified carbon 
oxide have been taken into account under former section 45Q(a) (as in 
effect before February 9, 2018) and sections 45Q(a)(1) and (2), the 
remaining sections of Notice 2009-83 will be obsoleted.

Applicability Date

    The final regulations apply to taxable years beginning on or after 
January 13, 2021. However, a taxpayer may choose to apply the final 
regulations, provided that the taxpayer applies the final regulations 
in their entirety and in a consistent manner, for taxable years 
beginning on or after January 1, 2018, and before January 13, 2021. See 
section 7805(b)(7).

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563, 13771, and 12866 direct agencies to assess 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    These regulations have been designated by the Office of Management 
and Budget's Office of Information and Regulatory Affairs as 
economically significant under Executive Order 12866 pursuant to the 
Memorandum of Agreement (April 11, 2018) between the Treasury 
Department and the Office of Management and Budget regarding review of 
tax regulations.

A. Background and Overview

    Section 45Q was enacted on October 3, 2008 by section 115 of 
Division B of the Energy Improvement and Extension Act of 2008, Public 
Law 110-343, 122 Stat. 3765, 3829, to provide a credit for the 
sequestration of carbon dioxide. On February 17, 2009, section 45Q was 
amended by section 1131 of Division B of the American Recovery and 
Reinvestment Tax Act of 2009, Public Law 111-5, 123 Stat 115, 325. 
Section 45Q was further amended on December 19, 2014, by section 
209(j)(1) of Division A of the Tax Increase Prevention Act of 2014, 
Public Law 113-295, 128 Stat. 4010, 4030, and again on February 9, 
2018, by section 41119 of Division D of the Bipartisan Budget Act of 
2018 (BBA), Public Law 115-123, 132 Stat. 64, 162, to encourage the 
construction and use of carbon capture and sequestration projects. On 
December 27, 2020, section 45Q was amended by section 121 of the 
Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as 
Division EE of the Consolidated Appropriations Act, 2021,

[[Page 4753]]

Public Law 116-260, 134 Stat. 1182, 3051, to extend the beginning of 
construction deadline for qualified facilities and carbon capture 
equipment by two years.
    On June 2, 2020, the Treasury Department and the IRS published a 
notice of proposed rulemaking (REG-112339-19) in the Federal Register 
(85 FR 34050) containing proposed regulations under section 45Q 
(proposed regulations). The Treasury Department and the IRS received 
written and electronic comments responding to the proposed regulations. 
A public hearing on the Proposed Regulations was held on August 26, 
2020. In addition, the Treasury Department and the IRS published Rev. 
Proc. 2020-12, 2020-11 I.R.B. 511, and Notice 2020-12, 2020-11 I.R.B. 
495. Revenue Procedure 2020-12 provides a safe harbor under which the 
IRS will treat partnerships as properly allocating the section 45Q 
credit in accordance with section 704(b). Notice 2020-12 provides 
guidance on the determination of when construction has begun on a 
qualified facility or on carbon capture equipment that may be eligible 
for the section 45Q credit.
    Section 45Q generally allows a credit of an amount per metric ton 
of qualified carbon oxide captured by the taxpayer using carbon capture 
equipment and permanently isolated from the environment. This qualified 
carbon oxide must be securely stored according to the statute in one of 
three general manners. First, it may be disposed of in secure 
geological storage. This would occur if it were injected into a 
geologic formation, such as a deep saline formation, an oil and gas 
reservoir, or an unminable coal seam.
    Second, the qualified carbon oxide may be used as a tertiary 
injectant in a qualified enhanced oil or natural gas recovery project 
and disposed of in secure geological storage. A ``tertiary injectant'' 
is qualified carbon oxide that is injected into and stored in a 
qualified enhanced oil or natural gas recovery project and contributes 
to the extraction of crude oil or natural gas.
    Third, the qualified carbon oxide may be ``utilized'' by fixing it 
through photosynthesis or chemosynthesis, thus converting it to a 
material or chemical compound in which it is securely stored, or using 
it for any other purpose for which a commercial market exists. 
``Utilization'' generally means the qualified carbon oxide was captured 
and permanently isolated from the atmosphere, or displaced from being 
emitted into the atmosphere.
    The amount of the credit depends on the date the carbon capture 
equipment is placed in service and whether the qualified carbon oxide 
is disposed of in secure storage, injected, or utilized. Different 
rules and credit amounts apply to qualified carbon oxide capture 
projects placed in service before and after the date the enactment of 
the BBA on February 9, 2018. Based on annual reports filed with the IRS 
as of June 2020, the aggregate amount of qualified carbon oxide taken 
into account for purposes of section 45Q was 72,087,903 metric tons as 
published in Notice 2020-40. This is an increase of 9,935,153 metric 
tons from the preceding year. According to data reported to the EPA's 
Greenhouse Gas Reporting Program (GHGRP), there were 65 enhanced oil 
recovery (EOR) projects operating in the U.S. in 2018. As of 2019, the 
National Petroleum Council, an oil and natural gas advisory committee 
to the Secretary of Energy, reports that there were 10 carbon capture, 
utilization, and storage projects in the United States. DOE models 
project that the section 45Q credit may result in the sequestration of 
approximately 570 million metric tons of carbon oxide between 2018 and 
2036.

B. Need for the Final Regulations

    The final regulations provide guidance regarding the application of 
section 45Q. Section 45Q requires regulations for determining adequate 
security measures for the secure geological storage of qualified carbon 
oxide such that it does not escape into the atmosphere, standards for 
recapture of section 45Q credits, standards for determining what is a 
qualified facility for purposes of meeting certain minimum carbon 
capture thresholds, and standards for carbon oxide utilization.

C. Economic Analysis

1. Baseline
    In this analysis, the Treasury Department and the IRS assess the 
economic impacts of the final regulations relative to a no-action 
baseline reflecting anticipated Federal income tax-related behavior in 
the absence of these regulations.
2. Summary of Economic Effects
    These final regulations provide taxpayers with greater clarity 
regarding the definition of terms contained in the statute relative to 
the alternative of taxpayers having no further descriptions than the 
statute; more flexibility in methods to establish qualifications for 
the credit relative to prior guidance; and more transparency regarding 
business arrangements related to the section 45Q credit relative to the 
no-action baseline. These features may lower compliance burden and 
increase economic investment by lowering regulatory barriers to entry, 
compared to a baseline of having only the statute and not the 
regulations.
3. Economic Analysis of Specific Provisions
i. Standards for Secure Geological Storage
a. Background
    Section 45Q(f)(2) provides that the Secretary, in consultation with 
the Administrator of the EPA, the Secretary of Energy, and the 
Secretary of the Interior, must establish regulations for determining 
adequate security measures for the secure geological storage of 
qualified carbon oxide under section 45Q such that qualified carbon 
oxide does not escape into the atmosphere. Such term includes storage 
at deep saline formations, oil and gas reservoirs, and unminable coal 
seams under such conditions as the Secretary may determine under such 
regulations.
    Under existing law, injection of carbon oxide into any underground 
reservoir requires the operator to comply with Underground Injection 
Control (UIC) program regulations under the Safe Drinking Water Act and 
to obtain the appropriate UIC well permits. The UIC program is designed 
to protect underground sources of drinking water from underground 
injection. Operators that inject carbon dioxide underground are also 
subject to the EPA's GHGRP requirements set forth at 40 CFR part 98.
    Under 40 CFR part 98, facilities that inject carbon dioxide 
underground for long-term containment of carbon dioxide in subsurface 
geologic formations are specifically subject to 40 CFR part 98 subpart 
RR (Geologic Sequestration of Carbon Dioxide source category, referred 
to as ``subpart RR''). Facilities that are subject to subpart RR, 
including UIC Class VI wells, are required to report basic information 
on carbon dioxide received for injection, develop and implement an EPA-
approved site-specific Monitoring, Reporting, and Verification Plan 
(MRV Plans), and report the amount of carbon dioxide geologically 
sequestered using a mass balance approach and annual monitoring 
activities.
    Facilities that inject carbon dioxide underground for the purposes 
of enhanced oil (EOR) and gas recovery or any other purpose other than 
geologic sequestration are required to report basic information on 
carbon dioxide received for injection under 40 CFR part 98 subpart UU 
(Injection of Carbon

[[Page 4754]]

Dioxide source category, referred to as ``subpart UU''). At present, 
the EPA generally does not require facilities that conduct EOR to 
report under subpart RR. However, the owner or operator may choose to 
opt in to subpart RR. For both subparts RR and UU, annual reports are 
submitted under 40 CFR part 98 to the EPA's GHGRP and undergo 
verification by the EPA. Non-confidential data from these reports are 
published on the EPA's website.
b. Comments Received
    Commenters generally supported the continued use of subpart RR. 
Many commenters supported the adoption of the standard adopted by the 
International Organization for Standardization (ISO) and endorsed by 
the American National Standards Institute (ANSI), CSA/ANSI ISO 
27916:2019 standard, ``Carbon dioxide capture, transportation and 
geological storage--Carbon dioxide storage using enhanced oil recovery 
(CO2-EOR),'' (CSA/ANSI ISO 27916:2019) (the ``CSA/ANSI ISO 
27916:2019 standard'') as a viable alternative to subpart RR for 
establishing secure geological storage for the use of qualified carbon 
oxide for EOR. The CSA/ANSI ISO 27916:2019 standard was developed for 
the purpose of quantifying and documenting the total carbon dioxide 
that is stored in association with carbon dioxide-EOR. In general, 
reporting under CSA/ANSI ISO 27916:2019 (i) uses mass balance 
accounting, (ii) has established reporting and documentation 
requirements, and (iii) includes requirements for documenting a 
monitoring program and a containment assurance plan. ANSI, a not-for-
profit organization dedicated to supporting the U.S. voluntary 
standards and conformity assessment system, adopted the CSA/ANSI ISO 
27916:2019 standard in 2019.
c. Regulatory Alternatives and Analysis
    The Treasury Department and the IRS considered three options for 
defining standards for secure geological storage: (i) The requirements 
set forth in 40 CFR part 98 subpart RR; (ii) an election for the 
taxpayer to comply with either the subpart RR standards or the 
requirements set forth in CSA/ANSI ISO 27916:2019 and (iii) other 
alternatives to subpart RR, including allowing use of state programs.
    In evaluating option (ii), the Treasury Department and the IRS, in 
consultation with the EPA, the DOE, and the Interior Department, agree 
with commenters that CSA/ANSI ISO 27916:2019 is a viable quantification 
methodology that is adequate for the intent and purpose of the statute. 
Both subpart RR and CSA/ANSI ISO 27916:2019 require an assessment and 
monitoring of potential leakage pathways; quantification of inputs, 
losses and storage through a mass balance approach; and documentation 
of steps and approaches. Under option (ii), operators of UIC Class II 
wells that follow the CSA/ANSI ISO 27916:2019 standard could elect to 
report under subpart RR but would not be required to do so. Rather, 
they could continue to report to the EPA under subpart UU.
    The Treasury Department and the IRS, in consultation with the EPA, 
the DOE, and the Interior Department, disagree with commenters' 
suggestions to allow the reporting rules promulgated by states as an 
alternative to subpart RR or CSA/ANSI ISO 27916:2019. Reporting rules 
among states are not uniform and states may have different reporting 
requirements and different governing bodies to whom carbon dioxide 
injection projects are required to report. The adoption of such rules 
by the Treasury Department and the IRS would substantially increase the 
administrative burden on the IRS. The Treasury Department and the IRS 
did not attempt to determine to what extent particular states' 
standards would fulfill the intent and purpose of the statute.
    The ability for taxpayers to elect to use the CSA/ANSI ISO 
27916:2019 standard instead of subpart RR could yield economic 
differences in three ways. First, if the two standards are different in 
their costs of compliance, then allowing a choice allows EOR project 
operators to choose the less costly standard. This would reduce costs 
of compliance and regulatory burden. Second, to the extent that the 
difference in compliance costs between the two standards is high and 
that difference is a significant portion of start-up costs, then 
allowing a less expensive standard might lead to more investment and 
more new projects. Third, operators can use the option that best aligns 
with their project goals and timeframes. The Treasury Department and 
the IRS project that compliance costs for some taxpayers may be lower 
under the CSA/ANSI ISO 27916:2019 standard than under subpart RR. Some 
commenters stated that subpart RR may create a misalignment for UIC 
Class II wells with both state mineral property and natural resource 
conservation laws; and that such potential misalignment would be costly 
to taxpayers. This stated misalignment would not be implicated with the 
use of the ISO standards.
    The Treasury Department and the IRS recognize that the two 
standards differ in terms of who would be responsible for reviewing and 
approving a sequestration plan and for identifying leakage once a 
project is in place. In addition, the standards differ because unless 
otherwise required by law, the CSA/ANSI ISO 27916:2019 standard does 
not require public reports of the amount of qualified carbon oxide 
sequestered, whereas the subpart RR standard does entail the public 
provision of such data. The Treasury Department and the IRS did not 
attempt to analyze the economic consequences of these differences.
    The Treasury Department and the IRS did not attempt to provide 
quantitative estimates of the difference in compliance costs between 
the CSA/ANSI ISO 27916:2019 standard and a regulatory alternative of 
requiring only subpart RR because suitable data are not readily 
available at this level of detail. Further, the Treasury Department and 
IRS did not attempt to estimate the effects of compliance cost 
differences on investment or sequestration.
ii. Credit Recapture
    Section 45Q(f)(4) requires the Treasury Department and the IRS to 
promulgate regulations to provide for the recapture of section 45Q 
credits in the event of leakage. ``Recapture'' refers to the repayment 
of the tax credits claimed, and not to the capturing of carbon dioxide 
that may have leaked from the project after being injected. The final 
regulations provide clarification regarding credit recapture, including 
(i) when the tax would be due in relation to the year of a recapture 
event, (ii) how long the IRS can ``look back'' to recapture credits in 
the event of leakage (lookback period), and (iii) the length of time 
after ceasing to claim credits during which a leakage event would lead 
to recapture of credits.
    All of these issues require a definition of the recapture period. 
The proposed regulations provided that the recapture period begins on 
the date of the first injection of qualified carbon oxide for disposal 
in secure geological storage or use as a tertiary injectant and ends 
the earlier of a specified number of years after the last taxable year 
in which the taxpayer claimed a section 45Q credit or the date 
monitoring ends under subpart RR requirements or the CSA/ANSI ISO 
27916:2019 standard.
    Thus, under the proposed regulations, the recapture period consists 
of two sub-portions, the ``post-credit-claiming period'' and the 
``lookback period.'' The ``post-credit-claiming period'' is the lesser 
of a specified number of years after the last taxable year in which the 
taxpayer claimed a section 45Q credit or

[[Page 4755]]

the date monitoring ends under subpart RR requirements or the CSA/ANSI 
ISO 27916:2019 standard. Depending on the project's individual 
requirements, the post-credit-claiming period is therefore between zero 
and the specified number of years. The ``lookback period'' is the 
portion of the recapture period during which the IRS can recapture 
section 45Q credits after a leakage event. A leakage event that leads 
to recapture of credits can occur any time during the recapture period. 
A leakage event that occurs after the recapture period would not lead 
to recapture of credits.
    The proposed regulations provided that any recapture amount will be 
accounted for in the taxable year that it is identified and reported. 
The amount of credits that can be recaptured in the event of leakage 
depends on the length of the lookback period and the amount of the 
leakage.
    If, during the recapture period, it is determined that qualified 
carbon oxide has leaked to the atmosphere, the taxpayer will have a 
recapture amount if the leaked amount of qualified carbon oxide exceeds 
the amount of qualified carbon dioxide disposed of in secure geological 
storage, including used as a tertiary injectant, in that taxable year. 
That excess amount of leaked qualified carbon oxide will be recaptured 
at a credit rate calculated on a LIFO basis (that is, such excess 
leaked qualified carbon oxide will be deemed attributable first to the 
first preceding year, then to second preceding year, and so forth up to 
five years) for ease of administration. The taxpayer must add the 
amount of the recaptured section 45Q tax credit to the amount of tax 
due in the taxable year in which the recapture event occurs. This rule 
applies regardless of whether the project injected qualified carbon 
oxide in the taxable year. In the proposed regulations, the ``post-
credit-claiming period'' was specified to be the lesser of five years 
after the last taxable year in which the taxpayer claimed a section 45Q 
credit or the date monitoring ends under subpart RR requirements or the 
CSA/ANSI ISO 27916:2019 standard. In response to the proposed 
regulations, commenters expressed concerns with the length of the 
lookback period after the project operator stops claiming section 45Q 
credits (for example, if the project is finished or the period for 
claiming credits ends) that a leakage event can lead to recapture. 
Commenters were concerned that investors would deem the risk too high 
to invest in carbon capture equipment if the end of the recapture 
period extended too long after the final year of claiming section 45Q 
credits. To address this concern, the final regulations provide that 
the recapture period begins on the date of first injection of qualified 
carbon oxide for disposal in secure geological storage or use as a 
tertiary injectant and ends the earlier of three (instead of five) 
years after the last taxable year in which the taxpayer claimed a 
section 45Q credit or the date monitoring ends under subpart RR 
requirements or the CSA/ANSI ISO 27916:2019 standard.
    The Treasury Department and the IRS considered alternative 
specifications for the recapture period other than three years. Open-
ended or undefined recapture periods would increase the financial risk 
associated with the project and dissuade investors, particularly for 
projects for which the section 45Q credit would constitute a sizeable 
share of revenue. By allowing for a specific and finite lookback 
period, the final regulations will encourage more investment in 
projects relative to an unspecified or infinite period. The Treasury 
Department and the IRS, in consultation with the EPA, the DOE, and the 
Interior Department, have determined that for the period after the 
lookback period, existing environmental regulations and standards, such 
as subpart RR and CSA/ANSI ISO 27916:2019, which taxpayers will need to 
follow to be entitled to the section 45Q credit, will ensure integrity 
consistent with the intent and purpose of the statute. A three-year 
recapture period sufficiently accounts for risk and reduces the 
compliance burden that would be imposed by a five-year recapture 
period. Further, a three-year recapture period is consistent with the 
statutory period for assessing Federal income taxes.
    In examining possible recapture periods, the Treasury Department 
and the IRS have not developed a quantitative model to incorporate the 
costs of monitoring and the probability of leakage along with the tax 
administration burden involved in the recapture period.
iii. Aggregation of Qualified Facilities
    Section 45Q(d) requires that qualified facilities include carbon 
capture equipment that meet certain minimum carbon oxide capture 
thresholds. Electricity generating facilities that emit more than 
500,000 metric tons of carbon oxide each year must include carbon 
capture equipment that captures at least 500,000 metric tons of carbon 
oxide during the taxable year to qualify for the credit.
    Commenters sought additional guidance on whether and under what 
conditions emissions from multiple facilities may be aggregated for 
purposes of meeting the qualified carbon capture threshold amounts for 
qualified facilities. Commenters recommended various ways to aggregate 
including allowing aggregation for facilities owned within the same 
affiliated group or allowing aggregation based on existing ``single 
project'' factors used in the 45Q beginning of construction guidance. 
Such guidance allows multiple facilities to be treated as a single 
facility for purposes of beginning construction if various factors are 
present, such as: Same ownership; same physical location; developed 
under single plan; and constructed under single permit.
    The final regulations allow smaller carbon capture facilities to be 
aggregated into one project for purposes of claiming the section 45Q 
credit based on the facts and circumstances of each project consistent 
with section 8.01 of IRS Notice 2020-12, such as common ownership and 
location.
    By providing greater clarity regarding aggregation of smaller 
projects to be able to claim the credit, the final regulations generate 
an economic gain. The Treasury Department and the IRS project that this 
clarity will encourage additional investment in carbon sequestration 
projects relative to the no-action baseline.
iv. Utilization of Qualified Carbon Oxide
    Section 45Q(f)(5)(A) provides that ``utilization of qualified 
carbon oxide'' means (i) the fixation of such qualified carbon oxide 
through photosynthesis or chemosynthesis, such as through the growing 
of algae or bacteria; (ii) the chemical conversion of such qualified 
carbon oxide to a material or chemical compound in which such qualified 
carbon oxide is securely stored; or (iii) the use of such qualified 
carbon oxide for any other purpose for which a commercial market exists 
(with the exception of use as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project), as determined by the 
Secretary.
    Section 45Q(f)(5)(B) provides a methodology to determine the amount 
of qualified carbon oxide utilized by the taxpayer. Such amount is 
equal to the metric tons of qualified carbon oxide which the taxpayer 
demonstrates, based upon an analysis of lifecycle greenhouse gas 
emissions and subject to such requirements as the Secretary, in 
consultation with the Secretary of Energy and the Administrator of the 
EPA, determines appropriate, were (i) captured and permanently isolated 
from the atmosphere, or (ii) displaced from being emitted into the 
atmosphere,

[[Page 4756]]

through use of a process described in section 45Q(f)(5)(A). The term 
``lifecycle greenhouse gas emissions'' has the same meaning given such 
term under subparagraph (H) of section 211(o)(1) of the Clean Air Act 
(42 U.S.C. 7545(o)(1)(H)), as in effect on the date of enactment of the 
BBA on February 9, 2018, except that ``product'' is substituted for 
``fuel'' each place it appears in such subparagraph.
    The term ``lifecycle greenhouse gas emissions'' means the aggregate 
quantity of greenhouse gas emissions (including direct emissions and 
significant indirect emissions such as significant emissions from land 
use changes), related to the full product lifecycle, including all 
stages of product and feedstock production and distribution, from 
feedstock generation or extraction through the distribution and 
delivery and use of the finished product to the ultimate consumer, 
where the mass values for all greenhouse gases are adjusted to account 
for their relative global warming potential.
    Commenters proposed multiple methods for the Treasury Department 
and the IRS to allow for calculating ``utilization'' of qualified 
carbon oxide. The proposed regulations provide clarifications 
regarding: (i) Standards for the lifecycle analysis (LCA) of emissions 
that were captured or displaced for purposes of section 45Q(f)(5)(B); 
and (ii) the agency with responsibility to review the LCA.
    The Treasury Department and the IRS have determined that the LCA 
must be in writing and either performed or verified by a 
professionally-licensed third party that uses generally-accepted 
standard practices of quantifying the greenhouse gas emissions of a 
product or process and comparing that impact to a baseline. In 
particular, the analysis must contain documentation consistent with the 
International Organization for Standardization (ISO) 14040:2006, 
``Environmental management--Life cycle assessment--Principles and 
framework and ISO 14044:2006, ``Environmental management--Life cycle 
assessment--Requirements and guidelines,'' as well as a statement 
documenting the qualifications of the third party.
    The final regulations require a taxpayer submit an LCA report to 
the IRS and the DOE prior to the taxpayer claiming the section 45Q 
credit. The LCA report will be subject to a technical review by the 
DOE, and the IRS will determine whether to approve the LCA.
    The final regulations provide greater clarity for calculating 
qualified carbon oxide utilization. This enhanced clarity should 
increase transparency and lower compliance burden. In addition, the 
final regulations allow for oversight of the LCA plans by a third 
party, the DOE, and the IRS (in consultation with the DOE and the EPA); 
evaluation and approval of the plans before the taxpayer claims the 
credit will potentially reduce taxpayer compliance costs and IRS 
administrative costs. Following industry-specific standards will also 
increase clarity in qualifying for the section 45Q credit.
    The final regulations provide an economic gain arising from 
enhanced clarity regarding the rules of the section 45Q credit within 
the context of the intent and purpose of the statute. The Treasury 
Department and the IRS project that this clarity will encourage 
additional investment in carbon oxide utilization projects relative to 
the no-action baseline. The Treasury Department and the IRS have not 
estimated this gain because no data or models are readily available to 
predict (i) the interpretations that taxpayers might have made in the 
absence of this guidance, and (ii) the effect of such guidance on the 
investment that taxpayers would make, relative to alternative 
regulatory approaches or the no-action baseline.

II. Paperwork Reduction Act

    The collection of information in these final regulations for 
section 45Q are in Sec. Sec.  1.45Q-1(e), 1.45Q-1(h)(3)(iv), 1.45Q-
1(h)(2)(v), 1.45Q-2(h)(2), 1.45Q-3(d), and 1.45Q-4(c)(1).
    The collection of information in Sec.  1.45Q-1(e) is an election to 
have the dollar amounts applicable under Sec.  1.45Q-1(b) apply in lieu 
of the dollar amounts applicable under Sec.  1.45Q-1(d) for each metric 
ton of qualified carbon oxide that a taxpayer captures using carbon 
capture equipment which is originally placed in service at a qualified 
facility on or after February 9, 2018. A new section 45Q(f)(3)(B) 
election must be made for each taxable year that the taxpayer wishes to 
allow a credit claimant to claim section 45Q credits. The election must 
be made on a Form 8933, Carbon Oxide Sequestration Credit, and applies 
to all metric tons of qualified carbon oxide captured by the taxpayer 
at the qualified facility throughout the full 12-year credit period. 
The IRS is contemplating making additional changes to the Form 8933 to 
take these final regulations into account.
    The collection of information in Sec.  1.45Q-1(h)(3)(iv) is an 
election that a taxpayer (electing taxpayer) eligible for the section 
45Q credit may make to allow the person that disposes of the qualified 
carbon oxide, utilizes the qualified carbon oxide, or uses the 
qualified carbon oxide as a tertiary injectant to claim the credit 
(credit claimant). The electing taxpayer that makes the section 
45Q(f)(3)(B) election must file a statement of election containing the 
information described in Sec.  1.45Q-1(h)(3)(iv) with the electing 
taxpayer's Federal income tax return or Form 1065 for each taxable year 
in which the credit arises. The section 45Q(f)(3)(B) election must be 
made in accordance with Form 8933 no later than the time prescribed by 
law (including extensions) for filing the Federal income tax return for 
the year in which the credit arises. The election may not be filed with 
an amended Federal income tax return, an amended Form 1065, or an AAR, 
as applicable, after the prescribed date (including extensions) for 
filing the original Federal income tax return or Form 1065 for the 
year, with the exception of amended Federal income tax returns, amended 
Forms 1065, or AARs, as applicable, for any taxable year ending after 
December 31, 2017, and before taxable years beginning after the date of 
issuance of this final regulation. New section 45Q(f)(3)(B) elections 
must be made for each taxable year that the electing taxpayer wishes to 
allow credit claimants to claim section 45Q credits. The IRS is 
contemplating making additional changes to the Form 8933 to take these 
final regulations into account.
    The collection of information in Sec.  1.45Q-1(h)(2)(v) requires 
that if a taxpayer enters into a binding written contract with a third-
party that physically carries out the disposal, injection, or 
utilization of qualified carbon oxide, the existence of each contract 
and the parties involved must be reported to the IRS annually on a Form 
8933 by each party to the contract, regardless of the party claiming 
the credit. The IRS is contemplating making additional changes to the 
Form 8933 to take these final regulations into account.
    The collection of information in Sec.  1.45Q-2(h)(2) requires that 
a taxpayer that claims a section 45Q credit for qualified carbon oxide 
that is captured and then used as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project certify such qualified 
enhanced oil or natural gas recovery project as required under Sec.  
1.43-3. This requires that the taxpayer obtain a petroleum engineer's 
certification under Sec.  1.43-3(a)(3) for each project that must be 
attached to a Form 8933 and filed not later than the last date 
prescribed by law (including extensions) for filing the operator's or 
designated owner's Federal income tax return or Form 1065 for the first 
taxable year in which qualified

[[Page 4757]]

carbon oxide is injected into the reservoir. If a section 45Q credit is 
claimed on an amended Federal income tax return, an amended Form 1065, 
or an AAR, as applicable, the petroleum engineer's certification will 
be treated as filed timely if it is attached to a Form 8933 that is 
submitted with such amended federal income tax return, amended Form 
1065, or AAR. With respect to a section 45Q credit that is claimed on a 
timely filed Federal income tax return or Form 1065 for a taxable year 
ending after February 9, 2018, and beginning before the date of 
issuance of this final regulation, for which the petroleum engineer's 
certification was not submitted, the petroleum engineer's certification 
will be treated as filed timely if it is attached to an amended Form 
8933 for any taxable year ending after December 31, 2017, but not for 
taxable years beginning after June 2, 2020. Additionally, the taxpayer 
is required to provide an operator's continued certification under 
Sec.  1.43-3(b)(3) for each project that must be attached to a Form 
8933 and filed not later than the last date prescribed by law 
(including extensions) for filing the operator's or designated owner's 
Federal income tax return or Form 1065 for taxable years after the 
taxable year for which the petroleum engineer's certification is filed 
but not after the taxable year in which injection activity ceases and 
all injection wells are plugged and abandoned. The IRS is contemplating 
making additional changes to the Form 8933 to take these final 
regulations into account.
    The collection of information in Sec.  1.45Q-3(d) requires a 
taxpayer that claims a section 45Q credit for qualified carbon oxide 
that is captured and then used as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project to certify the volume of 
carbon oxide claimed for purposes of section 45Q. A taxpayer that 
reported volumes of carbon oxide to the EPA pursuant to subpart RR may 
self-certify the volume of carbon oxide claimed for purposes of section 
45Q. Alternatively, if the taxpayer determined volumes pursuant to CSA/
ANSI ISO 27916:2019, a taxpayer may prepare documentation as outlined 
in CSA/ANSI ISO 27916:2019 internally, but such documentation must be 
provided to a qualified independent engineer or geologist, who then 
must certify that the documentation provided, including the mass 
balance calculations as well as information regarding monitoring and 
containment assurance is accurate and complete. Taxpayers that capture 
carbon oxide giving rise to the section 45Q credit must file Form 8933 
with a timely filed tax return, including extensions. Taxpayers that 
dispose of, inject, or utilize qualified carbon oxide must also file 
Form 8933 with a timely filed Federal income tax return or Form 1065, 
including extensions. The IRS is contemplating making additional 
changes to the Form 8933 to take these regulations into account.
    The collection of information in Sec.  1.45Q-4(c)(1) requires a 
taxpayer that utilizes qualified carbon oxide to measure the amount of 
carbon oxide captured and utilized through a combination of direct 
measurement and life cycle analysis (LCA). The measurement and written 
LCA report must be performed by or verified by an independent third-
party. The report must contain documentation consistent with the 
International Organization for Standardization (ISO) 14040:2006, 
``Environmental management--Life cycle assessment--Principles and 
framework'' and ISO 14044:2006, ``Environmental management--Life cycle 
assessment--Requirements and guidelines,'' as well as a statement 
documenting the qualifications of the third-party, including proof of 
appropriate professional license or foreign equivalent, and an 
affidavit from the third party stating that it is independent from the 
taxpayer. The taxpayer must submit the written LCA report to the IRS 
and the DOE. The LCA report will be subject to a technical review by 
the DOE, and the IRS will determine whether to approve the LCA.
    For purposes of the Paperwork Reduction Act of 1995 (51087 U.S.C. 
3507(d)) (PRA), the reporting burden associated with proposed 
Sec. Sec.  1.45Q-1(e), 1.45Q-1(h)(3)(iv), 1.45Q-1(h)(2)(v), 1.45Q-
2(h)(2), 1.45Q-3(d), and 1.45Q-4(c)(1) will be reflected in the IRS 
Paperwork Reduction Act Submission for the Form 8933 (OMB control 
numbers 1545-0123 and 1545-2132). The IRS is anticipating making 
revisions to Form 8933 to take these final regulations into account. 
When available, drafts of IRS forms are posted for comment at 
www.irs.gov/draftforms.
    The current status of the Paperwork Reduction Act submissions 
related to the section 45Q credit and the tax forms that will be 
revised as a result of the information collections in the section 45Q 
regulations is provided in the following table. The section 45Q 
provisions are included in aggregated burden estimates for the OMB 
control numbers listed later which, in the case of 1545-0123, 
represents a total estimated burden time, including all other related 
forms and schedules for corporations, of 3.344 billion hours and total 
estimated monetized costs of $61.558 billion ($2019). The burden 
estimates provided in the OMB control numbers are aggregate amounts 
that relate to the entire package of forms associated with the OMB 
control number, and will in the future include but not isolate the 
estimated burden of only the section 45Q requirements. These numbers 
are therefore unrelated to the future calculations needed to assess the 
burden imposed by the final regulations. No burden estimates specific 
to the final regulations are currently available. The Treasury 
Department has not estimated the burden, including that of any new 
information collections, related to the requirements under the final 
regulations. Those estimates would capture both changes made to section 
45Q by the BBA and those that arise out of discretionary authority 
exercised in the final regulations. The Treasury Department and the IRS 
request comments on all aspects of information collection burdens 
related to the final regulations, including estimates for how much time 
it would take to comply with the paperwork burdens described earlier 
for each relevant form and ways for the IRS to minimize the paperwork 
burden.
    When available, drafts of IRS forms are posted for comment at 
www.irs.gov/draftforms. Forms will not be finalized until after they 
have been approved by OMB under the PRA.

----------------------------------------------------------------------------------------------------------------
               Form                       Type of filer           OMB No.(s)                 Status
----------------------------------------------------------------------------------------------------------------
Form 8933........................  Business...................       1545-2132  Sixty-day notice published in
                                                                                 the Federal Register on 10/21/
                                                                                 19 (84 FR 56283). Public
                                                                                 comment period closed on 12/20/
                                                                                 19. Thirty-day notice published
                                                                                 in the Federal Register on 1/31/
                                                                                 20 (85 FR 5776). Public comment
                                                                                 period closed on 3/2/20. OIRA
                                                                                 approval is pending.

[[Page 4758]]

 
Form 8933........................  Business (NEW Model).......       1545-0123  Sixty-day notice published in
                                                                                 the Federal Register on 9/30/19
                                                                                 (84 FR 51718). Public Comment
                                                                                 period closed on 11/29/19.
                                                                                 Thirty-day notice published in
                                                                                 the Federal Register on 12/19/
                                                                                 19 (84 FR 69825). Public
                                                                                 Comment period closed on 1/21/
                                                                                 20. Approved by OIRA on 1/30/
                                                                                 20.
                                  ------------------------------------------------------------------------------
                                    Link: https://hs_www_federalregister_gov.tickly.io/documents/2019/10/21/
                                            2019-22844/proposed-collection-comment-request-for-form-8933
----------------------------------------------------------------------------------------------------------------

III. Regulatory Flexibility Act

    It is hereby certified that these final regulations will not have a 
significant economic impact on a substantial number of small entities 
within the meaning of section 601(6) of the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.) (RFA). Although a substantial number of small 
entities may be affected, the economic impact of this rule is unlikely 
to be significant.
    The RFA imposes certain requirements with respect to Federal rules 
that are subject to the notice and comment requirements of section 
553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and 
that are likely to have a significant economic impact on a substantial 
number of small entities. Unless an agency determines that a proposal 
is not likely to have a significant economic impact on a substantial 
number of small entities, section 603 of the RFA requires the agency to 
present an initial regulatory flexibility analysis (IRFA) of the 
proposed rule. Therefore, the Treasury Department and the IRS presented 
an IRFA in connection with the proposed rule in order to invite 
comments on both the number of entities affected and the economic 
impact on small entities. No comments were received specific to these 
areas of inquiry. In the absence of comments, this final regulatory 
flexibility analysis (FRFA) is presented with the final rule.
    In addition, pursuant to section 7805(f) of the Code, the proposed 
rule preceding this final rule was submitted to the Chief Counsel for 
the Office of Advocacy of the Small Business Administration for comment 
on its impact on small business, and no comments were received from the 
Chief Counsel for the Office of Advocacy of the Small Business 
Administration.

1. Need for and Objectives of the Rule

    The final regulations will provide greater clarity to taxpayers for 
purposes of claiming the section 45Q credit for the capture and 
disposal, injection, or utilization of qualified carbon oxide. The 
final rule is expected to encourage taxpayers to invest in carbon 
capture technologies. Thus, the Treasury Department and the IRS intend 
and expect that the final rule will deliver benefits across the economy 
that will beneficially impact various industries and reduce emissions 
of carbon oxides that would otherwise be released into the atmosphere 
as industrial emission of greenhouse gasses or lead to such release.

2. Affected Small Entities

    The Small Business Administration estimates in its 2018 Small 
Business Profile that 99.9 percent of United States businesses meet its 
definition of a small business. The applicability of these proposed 
regulations does not depend on the size of the business, as defined by 
the Small Business Administration. As described more fully in the 
preamble to this final regulation and in this FRFA, these rules may 
affect a variety of different businesses across serval different 
industries.
    The section 45Q credit incentivizes three different categories of 
activities related to captured carbon oxide. First, the section 45Q 
credit is available to taxpayers who capture carbon oxide and dispose 
of it in secure geological storage. This would occur if it were 
injected into a geological formation, such as a deep saline formation, 
an oil and gas reservoir, or an unminable coal seam. The taxpayer 
claiming the credit for carbon oxide that is securely stored can be 
either the taxpayer who owns the capture equipment, or if an election 
is made, the taxpayer who disposes of the carbon oxide.
    Second, the section 45Q credit is also available for carbon oxide 
captured and used as a tertiary injectant in a qualified enhanced oil 
or natural gas recovery project and disposed of in secure geological 
storage. The taxpayer claiming the credit for carbon oxide that is used 
as a tertiary injectant in enhanced oil recovery projects can be either 
the taxpayer who owns the capture equipment, or if an election is made, 
the taxpayer who uses the carbon oxide as a tertiary injectant in a 
qualified enhanced oil or natural gas recovery project.
    And third, the section 45Q credit is available for carbon oxide 
``utilized'' by fixing it through photosynthesis or chemosynthesis, 
converted to a material or chemical compound in which it is securely 
stored, or used for any other purpose for which a commercial market 
exists. The taxpayer claiming the credit for utilization of carbon 
oxide can be either the taxpayer who owns the carbon capture equipment, 
or if an election is made, the taxpayer who utilizes the carbon oxide.
    Because the potential credit claimants in all three of these 
scenarios can vary, including potential tax equity investors from the 
financial services sector as credit claimants, it is difficult to 
estimate at this time the impact of the final rule, if any, on small 
businesses.
    The Treasury Department and the IRS expect to receive more 
information on the impact on small businesses when taxpayers start to 
claim the section 45Q credit using the guidance and procedures provided 
in these final regulations.

3. Issues Raised by Commenters

    As previously noted, no comments were received specifically related 
to the impact of the proposed rule on small entities or on the number 
of potentially impacted entities. The preamble to this final rule 
describes in detail the various technical issues raised by commenters 
in response to the proposed rule and further describes the ways in 
which the final rule is responsive to comments.

4. Reporting, Recordkeeping, and Other Compliance Requirements

    The final regulations will allow taxpayers to plan investments and 
transactions based on the ability to claim the section 45Q credit. The 
increased use of the section 45Q credit may lead to increased 
investment in infrastructure to transport carbon dioxide, and increased 
development of carbon capture technologies. In addition, the increased 
use of the section 45Q credit will incentivize the development of 
technologies for utilization of carbon oxide. The recordkeeping and 
reporting requirements will increase for taxpayers that claim the 
section 45Q credit. This includes costs associated with the taxpayer 
filing the Form 8933, as well as required election statements and 
maintaining records to substantiate

[[Page 4759]]

carbon capture of carbon oxide, disposal in secure geological storage, 
use as a tertiary injectant in a qualified enhanced oil or natural gas 
recovery project and disposal in secure geological storage, or 
utilization. Each taxpayer will be required to file a separate Form 
8933 for each year that a section 45Q credit is claimed or that an 
election is made with respect to a section 45Q credit. Although the 
Treasury Department and the IRS do not have sufficient data to 
determine precisely the likely extent of the increased costs of 
compliance, the estimated burden of complying with the recordkeeping 
and reporting requirements are described in the Paperwork Reduction Act 
section of the preamble.

5. Alternatives Considered

    As described in more detail in the Regulatory Impact Analysis of 
this preamble, the Treasury Department and the IRS considered 
alternatives to the final regulations. For example, in providing rules 
related to recapture of section 45Q credits the Treasury Department and 
the IRS considered, as suggested by commenters, whether a shorter 
recapture period was more appropriate given the available evidence 
regarding the secure storage of carbon oxide. In addition, in providing 
rules related to how to demonstrate secure geological storage in the 
case of tertiary injection and disposal through secure geological 
storage, the Treasury Department and the IRS considered whether to (i) 
require compliance with subpart RR, (ii) allow use of subpart RR or 
CSA/ANSI ISO 27916:19, or (iii) other alternatives to subpart RR 
including use of state programs. Commenters consistently recommended 
CSA/ANSI ISO 27916:19 as a potential alternative to subpart RR. The 
Treasury Department and the IRS, in consultation with the DOE, the EPA 
and the Interior Department, agreed that, in the case of tertiary 
injection and disposal through secure geological storage, allowing the 
use of subpart RR or CSA/ANSI ISO 27916:19 would sufficiently 
demonstrate secure geological storage for purposes of the statutory 
requirement, without creating or imposing undue burdens on taxpayers.

IV. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a state, 
local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2019, that threshold is approximately $154 million. These 
final regulations do not include any Federal mandate that may result in 
expenditures by state, local, or tribal governments, or by the private 
sector in excess of that threshold.

V. Executive Order 13132: Federalism

    Executive Order 13132 (entitled Federalism) prohibits an agency (to 
the extent practicable and permitted by law) from promulgating any 
regulation that has federalism implications, unless the agency meets 
the consultation and funding requirements of section 6 of the Executive 
Order, if the rule either imposes substantial, direct compliance costs 
on state and local governments, and is not required by statute, or 
preempts state law. These final regulations do not have federalism 
implications and does not impose substantial direct compliance costs on 
state and local governments or preempt state law within the meaning of 
the Executive Order.

VI. Congressional Review Act

    The Administrator of OIRA has determined that this is a major rule 
for purposes of the Congressional Review Act (5 U.S.C. 801 et seq.) 
(CRA). Under section 801(3) of the CRA, a major rule takes effect 60 
days after the rule is published in the Federal Register.
    Notwithstanding this requirement, section 808(2) of the CRA allows 
agencies to dispense with the requirements of section 801 when the 
agency for good cause finds that such procedure would be impracticable, 
unnecessary, or contrary to the public interest and the rule shall take 
effect at such time as the agency promulgating the rule determines. 
Pursuant to section 808(2) of the CRA, the Treasury Department and the 
IRS find, for good cause, that a 60-day delay in the effective date is 
unnecessary and contrary to the public interest.
    Following the amendments to section 45Q under the BBA, the Treasury 
Department and the IRS published the proposed regulations to provide 
certainty to taxpayers. In particular, as demonstrated by the wide 
variety of public comments in response to the proposed regulations, 
taxpayers and other stakeholders continue to express concerns about the 
uncertainty regarding the proper application of the statutory rules 
under section 45Q. This uncertainty extends to the application of a 
number of important provisions in section 45Q requiring determinations 
to be made by the Secretary, in consultation with the Administrator of 
the EPA, the Secretary of Energy, and the Secretary of the Interior, 
intended to provide certainty for taxpayers embarking on highly capital 
intensive projects intended to qualify for section 45Q credits. 
Certainty with respect to these provisions is essential so that 
taxpayers can accurately predict the economic return from making 
particular investments and make informed business decisions. Consistent 
with Executive Order 13924 (May 19, 2020) and bipartisan letters from 
numerous Members of Congress urging expeditious publication of these 
final regulations, the Treasury Department and the IRS have therefore 
determined that an expedited effective date of the final regulations 
would provide needed guidance on what the law requires for businesses 
to begin job-generating construction of capital intensive projects 
qualifying for section 45Q credits during a time of economic 
uncertainty and distress. See 85 FR 31353-4. Accordingly, the Treasury 
Department and the IRS have determined that the rules in this Treasury 
decision will take effect on the date of filing for public inspection 
in the Federal Register.

Statement of Availability for IRS Documents

    The IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

Drafting Information

    The principal authors of these final regulations are Maggie Stehn 
and Jennifer Bernardini of the Office of Associate Chief Counsel 
(Passthroughs & Special Industries) and Julie Holmes Chapel of the 
Office of Associate Chief Counsel (Large Business & International). 
However, other personnel from the Treasury Department and the IRS 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

[[Page 4760]]

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
    Sections 1.45Q-1, 1.45Q-2, 1.45Q-3, 1.45Q-4, and 1.45Q-5 also 
issued under 26 U.S.C. 45Q(h).
    Section 1.45Q-3 also issued under 26 U.S.C. 45Q(f)(2).
    Section 1.45Q-4 also issued under 26 U.S.C. 45Q(f)(5).
    Section 1.45Q-5 also issued under 26 U.S.C. 45Q(f)(4).
* * * * *
    Par. 2. Sections 1.45Q-0, 1.45Q-1, 1.45Q-2, 1.45Q-3, 1.45Q-4, and 
1.45Q-5 are added to read as follows:


Sec.  1.45Q-0  Table of Contents

    This section lists the captions contained in Sec. Sec.  1.45Q-1 
through 1.45Q-5.

Sec.  1.45Q-1 Credit for Carbon Oxide Sequestration.

    (a) In general.
    (b) Credit amount for carbon capture equipment originally placed 
in service before February 9, 2018.
    (1) In general.
    (2) Inflation adjustment.
    (c) Credit amount for carbon capture equipment originally placed 
in service on or after February 9, 2018.
    (d) Applicable dollar amount.
    (1) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2016 and before 2027 for qualified carbon oxide 
not used as a tertiary injectant or utilized.
    (2) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2026 for qualified carbon oxide not used as a 
tertiary injectant or utilized.
    (3) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2016 and before 2027 for qualified carbon oxide 
used as a tertiary injectant or utilized.
    (4) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2026 for qualified carbon oxide used as a 
tertiary injectant or utilized.
    (e) Election to apply the $10 and $20 credit amounts in lieu of 
the applicable dollar amounts.
    (f) Application of section 45Q for certain carbon capture 
equipment placed in service before February 9, 2018.
    (g) Installation of additional carbon capture equipment.
    (1) Allocation of section 45Q credits for facilities installing 
additional carbon capture equipment.
    (2) Additional carbon capture equipment.
    (3) New carbon capture equipment.
    (4) Examples.
    (i) Example 1.
    (ii) Example 2.
    (iii) Example 3.
    (h) Eligibility for the section 45Q credit.
    (1) Person to whom the section 45Q credit is attributable.
    (i) Equipment placed in service before February 9, 2018.
    (ii) Equipment placed in service on or after February 9, 2018.
    (iii) Reporting.
    (2) Contractually ensuring capture and disposal, injection, or 
utilization of qualified carbon oxide.
    (i) Binding written contract.
    (ii) Multiple binding written contracts permitted.
    (iii) Contract provisions.
    (iv) Pre-existing contracts.
    (v) Reporting of contract information.
    (vi) Relationship with election to allow section 45Q credit.
    (3) Election to allow the section 45Q credit to another 
taxpayer.
    (i) Example.
    (ii) Time and manner of making election.
    (iii) Annual election.
    (iv) Required information.
    (v) Requirements for section 45Q credit claimant.
    (vi) Failure to satisfy reporting requirements.
    (i) Applicability date.

Sec.  1.45Q-2 Definitions for Purposes of Sec. Sec.  1.45Q-1 through 
1.45Q-5.

    (a) Qualified carbon oxide.
    (b) Recycled carbon oxide.
    (c) Carbon capture equipment.
    (1) Use of carbon capture equipment.
    (2) Carbon capture equipment components.
    (3) Single process train.
    (d) Industrial facility.
    (1) Exclusion.
    (2) Industrial source.
    (3) Manufacturing process.
    (4) Examples.
    (i) Example 1.
    (ii) Example 2.
    (e) Electricity generating facility.
    (f) Direct air capture facility.
    (g) Qualified facility.
    (1) Emissions and capture requirements.
    (2) Examples.
    (i) Example 1.
    (ii) Example 2.
    (iii) Example 3.
    (iv) Example 4.
    (v) Example 5.
    (3) Annualization of first-year and last-year qualified carbon 
oxide emission and/or capture amounts.
    (i) In general.
    (ii) Calculation.
    (iii) Consequences.
    (4) Election for applicable facilities.
    (i) Applicable facility.
    (ii) Time and manner of making election.
    (iii) Retroactive credit revocations.
    (5) Retrofitted qualified facility or carbon capture equipment 
(80/20 Rule).
    (h) Qualified enhanced oil or natural gas recovery project.
    (1) Application of Sec. Sec.  1.43-2 and 1.43-3.
    (2) Required certification.
    (3) Natural gas.
    (4) Timely filing of petroleum engineer's certification.
    (5) Carbon oxide injected in oil reservoir.
    (6) Tertiary injectant.
    (i) Section 45Q credit.
    (j) Form 8933.
    (k) Applicability date.

Sec.  1.45Q-3 Secure Geological Storage.

    (a) In general.
    (b) Requirements for secure geological storage.
    (c) Documentation.
    (d) Certification.
    (e) Failure to submit complete documentation or certification.
    (f) Applicability date.

Sec.  1.45Q-4 Utilization of Qualified Carbon Oxide.

    (a) In general.
    (b) Amount utilized.
    (1) In general.
    (2) Limitation.
    (c) Lifecycle greenhouse gas emissions and lifecycle analysis 
(LCA).
    (1) In general.
    (2) LCA verification.
    (3) Standards of adequate lifecycle analysis.
    (4) Third-party independent review of LCA.
    (5) Submission of the LCA.
    (6) LCA review.
    (d) Commercial market.
    (e) Applicability date.

Sec.  1.45Q-5 Recapture of Credit.

    (a) Recapture event.
    (b) Ceases to be disposed of in secure geological storage or 
used as a tertiary injectant.
    (c) Leaked amount of qualified carbon oxide.
    (d) Qualified carbon oxide subject to recapture.
    (e) Recapture amount.
    (f) Recapture period.
    (g) Application of recapture.
    (1) In general.
    (2) Calculation.
    (3) Multiple units.
    (4) Multiple taxpayers.
    (i) In general.
    (ii) Partnerships.
    (A) General rule.
    (B) Terminated partnerships.
    (5) Reporting.
    (6) Examples.
    (i) Example 1.
    (ii) Example 2.
    (iii) Example 3.
    (iv) Example 4.
    (v) Example 5.
    (vi) Example 6.
    (h) Recapture in the event of deliberate removal from storage.
    (1) In general.
    (2) Recycled qualified carbon oxide.
    (i) Limited exceptions.
    (j) Applicability date.


Sec.  1.45Q-1  Credit for Carbon Oxide Sequestration.

    (a) In general. For purposes of section 38 of the Internal Revenue 
Code (Code), the carbon oxide sequestration credit is determined under 
section 45Q of the Code and this section (section 45Q credit). 
Generally, the amount of the section 45Q credit and the party that is

[[Page 4761]]

eligible to claim the credit depend on whether the taxpayer captures 
qualified carbon oxide using carbon capture equipment originally placed 
in service at a qualified facility before February 9, 2018, or on or 
after February 9, 2018, and whether the taxpayer disposes of the 
qualified carbon oxide in secure geological storage without using it as 
a tertiary injectant in a qualified enhanced oil or natural gas 
recovery project (disposal), uses it as a tertiary injectant in a 
qualified enhanced oil or natural gas recovery project and disposes of 
it in secure geological storage (injection), or utilizes it in a manner 
described in section 45Q(f)(5) and Sec.  1.45Q-4 (utilization). The 
section 45Q credit applies only with respect to qualified carbon oxide 
the capture and disposal, injection, or utilization of which is within 
the United States (within the meaning of section 638(1) of the Code) or 
a possession of the United States (within the meaning of section 
638(2)).
    (b) Credit amount for carbon capture equipment originally placed in 
service before February 9, 2018--(1) In general. For carbon capture 
equipment originally placed in service at a qualified facility before 
February 9, 2018, the amount of credit determined under section 45Q(a) 
and this section is the sum of--
    (i) $20 per metric ton of qualified carbon oxide that is--
    (A) Captured by the taxpayer at the qualified facility and disposed 
of by the taxpayer in secure geological storage, and
    (B) Not used by the taxpayer as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project or utilized by the 
taxpayer in a manner described in section 45Q(f)(5) and Sec.  1.45Q-4, 
and
    (ii) $10 per metric ton of qualified carbon oxide that is--
    (A) Captured by the taxpayer at the qualified facility and used by 
the taxpayer as a tertiary injectant in a qualified enhanced oil or 
natural gas recovery project, and disposed of by the taxpayer in secure 
geological storage, or
    (B) Captured by the taxpayer at the qualified facility and utilized 
by the taxpayer in a manner described in section 45Q(f)(5) and Sec.  
1.45Q-4.
    (2) Inflation adjustment. In the case of any taxable year beginning 
in a calendar year after 2009, there is substituted for each dollar 
amount contained in paragraphs (b)(1)(i) and (ii) of this section an 
amount equal to the product of--
    (i) Such dollar amount, multiplied by
    (ii) The inflation adjustment factor for such calendar year 
determined under section 43(b)(3)(B) for such calendar year, determined 
by substituting ``2008'' for ``1990.''
    (c) Credit amount for carbon capture equipment originally placed in 
service on or after February 9, 2018. For carbon capture equipment 
originally placed in service at a qualified facility on or after 
February 9, 2018, the amount of credit determined under section 
45Q(a)(3) and (4) and this section is the sum of--
    (1) The applicable dollar amount (as determined under paragraph 
(d)(1) and (2) of this section) per metric ton of qualified carbon 
oxide that is captured during the 12-year period beginning on the date 
the equipment was originally placed in service, and is--
    (i) Disposed of by the taxpayer in secure geological storage, and
    (ii) Not used by the taxpayer as a tertiary injectant in a 
qualified enhanced oil or natural gas recovery project or utilized by 
the taxpayer in a manner described in section 45Q(f)(5) and Sec.  
1.45Q-4; and
    (2) The applicable dollar amount (as determined under paragraph 
(d)(3) and (4) of this section) per metric ton of qualified carbon 
oxide that is captured during the 12-year period beginning on the date 
the equipment was originally placed in service and is--
    (i) Used by the taxpayer as a tertiary injectant in a qualified 
enhanced oil or natural gas recovery project and disposed of by the 
taxpayer in secure geological storage, or
    (ii) Utilized by the taxpayer in a manner described in section 
45Q(f)(5) and Sec.  1.45Q-4.
    (d) Applicable dollar amount. In general, the applicable dollar 
amount depends on whether section 45Q(a)(3) and paragraph (c)(1) of 
this section applies or section 45Q(a)(4) and paragraph (c)(2) of this 
section applies, and the calendar year in which the taxable year 
begins.
    (1) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2016 and before 2027 for qualified carbon oxide not 
used as a tertiary injectant or utilized. For purposes of section 
45Q(a)(3) and paragraph (c)(1) of this section, the applicable dollar 
amount for each taxable year beginning in a calendar year after 2016 
and before 2027 is:

                       Table 1 to Paragraph (d)(1)
------------------------------------------------------------------------
                                                              Applicable
                            Year                                dollar
                                                                amount
------------------------------------------------------------------------
2017.......................................................       $22.66
2018.......................................................        25.70
2019.......................................................        28.74
2020.......................................................        31.77
2021.......................................................        34.81
2022.......................................................        37.85
2023.......................................................        40.89
2024.......................................................        43.92
2025.......................................................        46.96
2026.......................................................        50.00
------------------------------------------------------------------------

    (2) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2026 for qualified carbon oxide not used as a 
tertiary injectant or utilized. For purposes of section 45Q(a)(3) and 
paragraph (c)(1) of this section, the applicable dollar amount for any 
taxable year beginning in any calendar year after 2026 is an amount 
equal to the product of $50 and the inflation adjustment factor for the 
calendar year determined under section 43(b)(3)(B) for the calendar 
year, determined by substituting ``2025'' for ``1990.''
    (3) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2016 and before 2027 for qualified carbon oxide 
used as a tertiary injectant or utilized. For purposes of section 
45Q(a)(4) and paragraph (c)(2) of this section, the applicable dollar 
amount for each taxable year beginning in a calendar year after 2016 
and before 2027 is:

                       Table 2 to Paragraph (d)(3)
------------------------------------------------------------------------
                                                              Applicable
                            Year                                dollar
                                                                amount
------------------------------------------------------------------------
2017.......................................................       $12.83
2018.......................................................        15.29
2019.......................................................        17.76
2020.......................................................        20.22
2021.......................................................        22.68
2022.......................................................        25.15
2023.......................................................        27.61
2024.......................................................        30.07
2025.......................................................        32.54
2026.......................................................        35.00
------------------------------------------------------------------------

    (4) Applicable dollar amount for any taxable year beginning in a 
calendar year after 2026 for qualified carbon oxide used as a tertiary 
injectant or utilized. For purposes of section 45Q(a)(4) and paragraph 
(c)(2) of this section, the applicable dollar amount for any taxable 
year beginning in any calendar year after 2026, is an amount equal to 
the product of $35 and the inflation adjustment factor for such 
calendar year determined under section 43(b)(3)(B) for such calendar 
year, determined by substituting ``2025'' for ``1990.''

[[Page 4762]]

    (e) Election to apply the $10 and $20 credit amounts in lieu of the 
applicable dollar amounts. For purposes of determining the carbon oxide 
sequestration credit under this section, a taxpayer may elect to have 
the dollar amounts applicable under section 45Q(a)(1) or (2) and 
paragraph (b) of this section apply in lieu of the dollar amounts 
applicable under section 45Q(a)(3) or (4) and paragraph (d) of this 
section for each metric ton of qualified carbon oxide which is captured 
by the taxpayer using carbon capture equipment which is originally 
placed in service at a qualified facility on or after February 9, 2018. 
The election must be made on a Form 8933 (as defined in Sec.  1.45Q-
2(j)), and applies to all metric tons of qualified carbon oxide 
captured by the taxpayer using carbon capture equipment which is 
originally placed in service at the qualified facility throughout the 
full 12-year credit period.
    (f) Application of section 45Q for certain carbon capture equipment 
placed in service before February 9, 2018. In the case of any carbon 
capture equipment placed in service before February 9, 2018, the 
credits under section 45Q(a)(1) and (2) and paragraph (b)(1)(i) and 
(ii) of this section apply with respect to qualified carbon oxide 
captured using such equipment before the end of the calendar year in 
which the Secretary of the Treasury or his delegate, in consultation 
with the Administrator of the Environmental Protection Agency (EPA), 
certifies that, during the period beginning after October 3, 2008, a 
total of 75,000,000 metric tons of qualified carbon oxide have been 
taken into account in accordance with section 45Q(a), as in effect on 
February 8, 2018, and section 45Q(a)(1) and (2). In general, a taxpayer 
may not claim credits under section 45Q(a)(1) and (2) in taxable years 
after the year in which the 75,000,000 metric ton limit is certified 
with respect to carbon capture equipment placed in service before 
February 9, 2018. However, see Sec.  1.45Q-2(g)(4) regarding the 
election for applicable facilities to treat certain carbon capture 
equipment as having been placed in service on February 9, 2018 (section 
45Q(f)(6) election).
    (g) Installation of additional carbon capture equipment. In 
general, the credit amounts for property placed in service before 
February 9, 2018, apply to a qualified facility at which carbon capture 
equipment was placed in service before February 9, 2018, subject to the 
limitations under paragraph (f) of this section. The same qualified 
facility may place additional carbon capture equipment in service on or 
after February 9, 2018. The additional carbon capture equipment is 
eligible to qualify for the section 45Q credit amounts for equipment 
placed in service on or after February 9, 2018.
    (1) Allocation of section 45Q credits for facilities installing 
additional carbon capture equipment. In the case of a qualified 
facility placed in service before February 9, 2018, for which 
additional carbon capture equipment is placed in service on or after 
February 9, 2018, the amount of qualified carbon oxide which is 
captured by the taxpayer is equal to--
    (i) For purposes of section 45Q(a)(1)(A) and (2)(A), and paragraphs 
(b)(1)(i) and (ii) of this section, the lesser of the total amount of 
qualified carbon oxide captured at such facility for the taxable year, 
or the total amount of the carbon dioxide capture capacity of the 
carbon capture equipment in service at such facility on February 8, 
2018, and
    (ii) For purposes of section 45Q(a)(3)(A) and (4)(A), and 
paragraphs (c)(1) and (2) of this section, an amount (not less than 
zero) equal to the excess of the total amount of qualified carbon oxide 
captured at such facility for the taxable year, over the total amount 
of the carbon dioxide capture capacity of the carbon capture equipment 
in service at such facility on February 8, 2018.
    (2) Additional carbon capture equipment. A physical modification or 
equipment addition that results in an increase in the carbon dioxide 
capture capacity of existing carbon capture equipment constitutes the 
installation of additional carbon capture equipment. Increasing the 
amount of carbon dioxide captured without physically modifying existing 
carbon capture equipment or adding new equipment, for example, by 
merely operating the existing carbon capture equipment above the carbon 
dioxide capture capacity, does not constitute the installation of 
additional carbon capture equipment. For purposes of this section, the 
term carbon dioxide capture capacity means capture design capacity. 
Section 45Q credits attributable to qualified carbon oxide captured by 
additional carbon capture equipment that is placed in service on or 
after February 9, 2018, are not subject to the 75,000,000 metric ton 
limitation described in section 45Q(g) and paragraph (f) of this 
section.
    (3) New carbon capture equipment. A physical modification or 
equipment addition with a cost that satisfies the 80/20 Rule provided 
in Sec.  1.45Q-2(g)(5) constitutes the installation of new carbon 
capture equipment rather than the installation of additional carbon 
capture equipment.
    (4) Examples. The following examples illustrate the rules of this 
paragraph (g):
    (i) Example 1. Taxpayer X owns qualified facility QF. In 2017, X 
placed in service three units of carbon capture equipment--CC1, CC2, 
and CC3--to capture carbon dioxide emitted by QF. Each of CC1, CC2, and 
CC3 are capable of capturing 50,000 metric tons of carbon dioxide. In 
2017, X entered into a binding written contract with Y to provide 
80,000 metric tons of carbon dioxide annually for Y to dispose of in 
secure geological storage. X operates CC1 and CC2 to capture carbon 
dioxide pursuant to the binding written contract with Y, leaving CC3 
idle. In 2020, X enters into a binding written contract with Z to 
provide 40,000 metric tons of carbon dioxide annually for Z to dispose 
of in secure geological storage. X operates CC3 to capture carbon 
dioxide pursuant to the binding written contract with Z. CC3 is not 
additional carbon capture equipment under paragraph (g)(2) of this 
section simply because it began operating CC3 in 2020. X merely 
increased the amount of carbon dioxide captured by existing carbon 
capture equipment. As a result, any section 45Q credits attributable to 
the carbon dioxide captured by CC3 and disposed of by Z are calculated 
under section 45Q(a)(1) and paragraph (b)(1)(i) of this section, and 
are subject to the 75,000,000 metric ton limitation described in 
section 45Q(g) and paragraph (f) of this section.
    (ii) Example 2. Assume the same facts as in Example 1, except that 
in 2019, X physically modified CC3 to enable CC3 to capture 100,000 
metric tons of carbon dioxide. The physical modification to upgrade CC3 
does not satisfy the 80/20 Rule in Sec.  1.45Q-2(g)(5). In 2020 X 
enters into a binding written contract with Z to provide 80,000 metric 
tons of carbon dioxide annually for Z to dispose of in secure 
geological storage. X operates CC3 to capture carbon dioxide pursuant 
to the binding written contract with Z. Because the physical 
modification to upgrade CC3 does not satisfy the 80/20 Rule, the 
physical modification to upgrade CC3 is considered the installation of 
additional carbon capture equipment under paragraph (g)(2) of this 
section, rather than new carbon capture equipment under paragraph 
(g)(3) of this section. As a result, any section 45Q credits 
attributable to the first 50,000 metric tons of carbon dioxide captured 
by CC3 and disposed of by Z are calculated under section 45Q(a)(1) and 
paragraph (b)(1)(i) of this section, and are subject to the 75,000,000 
metric ton limitation described in section 45Q(g) and paragraph (f) of 
this section. Any section 45Q credits attributable to

[[Page 4763]]

additional carbon dioxide captured by CC3 and disposed of by Z in 
excess of those first 50,000 metric tons are calculated under section 
45Q(a)(4) and paragraph (c)(2) of this section, and are not subject to 
the 75,000,000 metric ton limitation described in section 45Q(g) and 
paragraph (f) of this section.
    (iii) Example 3. Assume the same facts as in Example 2, except that 
the physical modification to CC3 satisfies the 80/20 Rule in Sec.  
1.45Q-2(g)(5). The physical modification to CC3 is considered the 
installation of new carbon capture equipment under paragraph (g)(3) of 
this section. As a result, any section 45Q credits attributable to 
carbon dioxide captured by CC3 and disposed of by Z are calculated 
under section 45Q(a)(4) and paragraph (c)(2) of this section, and are 
not subject to the 75,000,000 metric ton limitation described in 
section 45Q(g) and paragraph (f) of this section.
    (h) Eligibility for the section 45Q credit. The following rules 
determine who may claim the section 45Q credit.
    (1) Person to whom the section 45Q credit is attributable. In 
general, the person to whom the credit is attributable is the person 
who may claim the credit. Except as provided in paragraph (h)(3) of 
this section, the section 45Q credit is attributable to the following 
persons--
    (i) Equipment placed in service before February 9, 2018. In the 
case of qualified carbon oxide captured using carbon capture equipment 
that is originally placed in service at a qualified facility before 
February 9, 2018, the section 45Q credit is attributable to the person 
that captures and physically or contractually ensures the disposal, 
injection, or utilization of such qualified carbon oxide.
    (ii) Equipment placed in service on or after February 9, 2018. In 
the case of qualified carbon oxide captured using carbon capture 
equipment that is originally placed in service at a qualified facility 
on or after February 9, 2018, the section 45Q credit is attributable to 
the person that owns the carbon capture equipment and physically or 
contractually ensures the capture and disposal, injection, or 
utilization of such qualified carbon oxide. For each single process 
train of carbon capture equipment (as described in Sec.  1.45Q-
2(c)(3)), only one taxpayer will be considered the person to whom the 
credit is attributable under this paragraph (h)(1)(ii). That person 
will be the taxpayer who either physically ensures the capture and 
disposal, injection, or utilization of such qualified carbon oxide or 
contracts with others to capture and dispose, inject, or utilize such 
qualified carbon oxide.
    (iii) Reporting. The taxpayer described in this paragraph (h)(1) as 
eligible to claim the section 45Q credit must claim the credit on a 
Form 8933, ``Carbon Dioxide Sequestration Credit,'' with the taxpayer's 
Federal income tax return or Form 1065, ``U.S. Return of Partnership 
Income,'' for each taxable year for which the taxpayer is eligible. The 
taxpayer must provide the name and location of the qualified facilities 
at which the qualified carbon oxide was captured. If the taxpayer is 
claiming the section 45Q credit on an amended Federal income tax 
return, an amended Form 1065, or an administrative adjustment request 
under section 6227 (AAR), as applicable, the taxpayer must state 
AMENDED RETURN FOR SECTION 45Q CREDIT at the top of the amended Federal 
income tax return, the amended Form 1065, or the AAR, as applicable. 
The amended Federal income tax return or the amended Form 1065 must be 
filed, in any event, not later than the applicable period of 
limitations on filing an amended Federal income tax return or Form 1065 
is being filed. A BBA partnership may make a late election by filing an 
AAR on or before October 15, 2021, but in any event, not later than the 
period of limitations on filing an AAR under section 6227(c).
    (2) Contractually ensuring capture and disposal, injection, or 
utilization of qualified carbon oxide. In the case of qualified carbon 
oxide captured using carbon capture equipment which is originally 
placed in service at a qualified facility on or after February 9, 2018, 
a taxpayer is not required to physically carry out the capture and 
disposal, injection, or utilization of qualified carbon oxide to claim 
the section 45Q credit if the taxpayer contractually ensures in a 
binding written contract that the party that physically carries out the 
capture, disposal, injection, or utilization of the qualified carbon 
oxide does so in the manner required under section 45Q, this section 
and Sec. Sec.  1.45Q-2, 1.45Q-3, 1.45Q-4, and 1.45Q-5. A taxpayer may 
enter into a binding written contract with a general contractor that 
hires subcontractors to physically carry out the capture, disposal, 
injection, or utilization of the qualified carbon oxide, but the 
contract must bind the subcontractors to the requirements of this 
paragraph (h)(2). In the case of qualified carbon oxide captured using 
carbon capture equipment which is originally placed in service at a 
qualified facility before February 9, 2018, a taxpayer that 
contractually ensures the capture of the qualified carbon oxide is not 
eligible for the section 45Q credit. However, the taxpayer is not 
required to physically carry out the disposal, injection, or 
utilization of qualified carbon oxide to claim the section 45Q credit 
if the taxpayer contractually ensures in a binding written contract 
that the party that physically carries out the disposal, injection, or 
utilization of the qualified carbon oxide does so in the manner 
required under section 45Q, this section, and Sec. Sec.  1.45Q-2, 
1.45Q-3, 1.45Q-4, and 1.45Q-5.
    (i) Binding written contract. A written contract is binding only if 
it is enforceable under State law against both the taxpayer and the 
party that physically carries out the capture, disposal, injection, or 
utilization of the qualified carbon oxide, or a predecessor or 
successor of either, and does not limit damages to a specified amount 
(for example, by use of a liquidated damages provision). For this 
purpose, a contractual provision that limits damages to an amount equal 
to at least five percent of the total contract price will not be 
treated as limiting damages to a specified amount. For additional 
guidance regarding the definition of a binding written contract, see 
Sec.  1.168(k)-1(b)(4)(ii)(A)-(D).
    (ii) Multiple binding written contracts permitted. A taxpayer may 
enter into multiple binding written contracts with multiple parties for 
the capture, disposal, injection, or utilization of qualified carbon 
oxide. A party that physically carries out the capture, disposal, 
injection, or utilization of qualified carbon oxide may enter into 
multiple binding written contracts with multiple parties that own 
carbon capture equipment or capture or contractually ensure the capture 
of qualified carbon oxide.
    (iii) Contract provisions. Contracts ensuring the capture, 
disposal, injection, or utilization of qualified carbon oxide--
    (A) Must include commercially reasonable terms and provide for 
enforcement of the party's obligation to perform the capture, disposal, 
injection, or utilization of the qualified carbon oxide;
    (B) May, but are not required to, include long-term liability 
provisions, indemnity provisions, penalties for breach of contract, or 
liquidated damages provisions;
    (C) May, but are not required to, include information including how 
many metric tons of qualified carbon oxide the parties agree to dispose 
of, inject, or utilize;

[[Page 4764]]

    (D) May, but are not required to, include minimum quantities that 
the parties agree to dispose of, inject, or utilize;
    (E) Must, in the case of qualified carbon oxide that is intended to 
be disposed of in secure geological storage and not used as a tertiary 
injectant in a qualified enhanced oil or natural gas recovery project, 
obligate the disposing party to comply with Sec. Sec.  1.45Q-3(b)(1) 
and (c), and, in the case of a recapture event, promptly inform the 
capturing party of all information that is pertinent to the recapture 
(e.g., location of leak, leaked amount of qualified carbon oxide, 
dollar value of section 45Q credit attributable to leaked qualified 
carbon oxide);
    (F) Must, for qualified carbon oxide that is intended to be used as 
a tertiary injectant in a qualified enhanced oil or natural gas 
recovery, obligate the disposing party to comply with Sec.  1.45Q-
3(b)(2) and (c), and in the case of a recapture event, promptly inform 
the capturing party of all information that is pertinent to recapture 
of the section 45Q credit as listed in Sec.  1.45Q-5; and
    (G) Must, for qualified carbon oxide that is intended to be 
utilized in a manner specified in Sec.  1.45Q-4, obligate the utilizing 
party to comply with Sec.  1.45Q-4.
    (iv) Pre-existing contracts. If a taxpayer entered into a contract 
for the capture, disposal, injection, or utilization of qualified 
carbon oxide prior to January 13, 2021, and that contract does not 
satisfy all of the requirements of this paragraph (h)(2), the taxpayer 
must amend its existing contract or execute a new contract that 
satisfies all of the requirements of this paragraph (h)(2) by July 12, 
2021.
    (v) Reporting of contract information. The existence of each 
contract and the parties involved must be reported to the IRS annually. 
Each party to a contract must complete a signed Form 8933 (as defined 
in Sec.  1.45-2(j)) and provide information required by the 
instructions to Form 8933. The party that contracts with the taxpayer 
claiming the credit must also provide that taxpayer with a signed Form 
8933 in accordance with the instructions to Form 8933. The taxpayer 
claiming the credit must attach and file all other signed Forms 8933 
received by each other party to the contract to its own signed Form 
8933. Failure of the taxpayer claiming the credit to satisfy this 
reporting requirement in a taxable year will result in the inability of 
that taxpayer to claim the credit with respect to any qualified carbon 
oxide that is disposed of, injected, or utilized in that taxable year 
pursuant to that particular contract. In addition to any information 
stated as required on Form 8933, the report must include the following 
information--
    (A) The name and taxpayer identification number of the taxpayer to 
whom the credit is attributable;
    (B) The name and taxpayer identification number of each party with 
whom the taxpayer has entered into a contract to ensure the disposal, 
injection, or utilization of qualified carbon oxide;
    (C) The date each contract to ensure the disposal, injection, or 
utilization of qualified carbon oxide was entered into;
    (D) The number of metric tons of qualified carbon oxide each 
contracting party disposes of, injects, or utilizes on behalf of the 
contracting taxpayer each taxable year for reporting to the IRS; and
    (E) For contracts for the disposal of qualified carbon oxide in 
secure geological storage or the use of qualified carbon oxide as a 
tertiary injectant in enhanced oil or natural gas recovery, the name of 
the operator, the field, unit, and reservoir, location by county and 
state, and identification number assigned to the facility by the EPA's 
electronic Greenhouse Gas Reporting Tool (e-GGRT ID number) for 
submission of the facility's 40 CFR part 98 annual reports.
    (vi) Relationship with election to allow section 45Q credit. A 
taxpayer does not elect to allow all or a portion of the credit to any 
of the contracting parties merely by contracting with that party to 
ensure the disposal, injection, or utilization of qualified carbon 
oxide. Any election to allow all or a portion of the credit to be 
claimed by another party must be made separately pursuant to paragraph 
(h)(3) of this section.
    (3) Election to allow the section 45Q credit to another taxpayer. 
The taxpayer described in paragraph (h)(1) of this section as the 
person to whom the section 45Q credit is attributable (electing 
taxpayer) may elect to allow the person that enters into a contract 
with the electing taxpayer to dispose of the qualified carbon oxide 
(disposer), utilize the qualified carbon oxide (utilizer), or use the 
qualified carbon oxide as a tertiary injectant (injector) to claim the 
credit (credit claimant) (section 45Q(f)(3)(B) election). However, the 
electing taxpayer may not elect or otherwise allow the section 45Q 
credit to a contractor or subcontractor that physically captures carbon 
oxide on behalf of the taxpayer. For purposes of this paragraph (h)(3), 
the disposer or injector that is eligible to be a credit claimant is 
the party that obtains the permit to dispose of the qualified carbon 
oxide in secure geological storage. In the case of an injector that is 
itself a joint venture (not a federal tax partnership), only those 
taxpayers that hold a working interest in the joint venture may be 
credit claimants. A credit claimant may not allow the section 45Q 
credit to a subcontractor that performs the disposal, utilization, or 
injection for the credit claimant. The electing taxpayer may not claim 
any section 45Q credits that are allowable to a credit claimant. An 
electing taxpayer may elect to allow a credit claimant to claim the 
full amount or a partial amount of section 45Q credits arising during 
the taxable year. An electing taxpayer may elect to allow a single 
credit claimant or multiple credit claimants to claim section 45Q 
credits in the same taxable year. If an electing taxpayer elects to 
allow multiple credit claimants to claim section 45Q credits, the 
maximum amount of section 45Q credits allowable to each credit claimant 
is proportional to the amount of qualified carbon oxide disposed of, 
utilized, or used as a tertiary injectant by the credit claimant. A 
credit claimant may receive allowances of section 45Q credits from 
multiple electing taxpayers in the same taxable year. In the case of an 
electing taxpayer with multiple qualified facilities, the electing 
taxpayer must make a separate election for each qualified facility.
    (i) Example. Electing Taxpayer, E, captures 1,000,000 metric tons 
of qualified carbon oxide with carbon capture equipment that was placed 
in service in 2020. In 2021, E contracts with two companies, A and B, 
for the disposal of the qualified carbon oxide. E is eligible for a 
section 45Q credit at a rate of $22.68 per metric ton, for a total 
section 45Q credit of $22,680,000. E contractually ensures that A will 
dispose of 300,000 metric tons of qualified carbon oxide and that B 
will dispose of 700,000 metric tons of qualified carbon oxide. E may 
make a section 45Q(f)(3)(B) election to allow up to $6,804,000 of 
section 45Q credit to A and up to $15,876,000 of section 45Q credit to 
B, equal to the value of the number of metric tons each party has 
contracted to ensure disposal, multiplied by the credit value of the 
metric tons disposed of.
    (ii) Time and manner of making election. The electing taxpayer 
makes a section 45Q(f)(3)(B) election by filing a statement of election 
containing the information described in paragraph (h)(3)(iv) of this 
section with the taxpayer's Federal income tax return or Form 1065 for 
each taxable year in which the credit arises. The section 45Q(f)(3)(B) 
election must be made in accordance with Form 8933 no later than the 
time prescribed by law (including extensions) for filing the

[[Page 4765]]

Federal income tax return or Form 1065 for the year in which the credit 
arises. The election may not be filed with an amended Federal income 
tax return, an amended Form 1065, or an AAR, as applicable, after the 
prescribed date (including extensions) for filing the original Federal 
income tax return or Form 1065 for the year, with the exception of 
amended Federal income tax returns, amended Forms 1065, or AARs, as 
applicable, for any taxable year ending after February 9, 2018, and 
beginning on or before January 13, 2021. The amended Federal income tax 
return or the amended Form 1065 must be filed, in any event, not later 
than the applicable period of limitations on assessment for the taxable 
year for which the amended Federal income tax return or Form 1065 is 
being filed. A BBA partnership may make a late election by filing an 
AAR on or before October 15, 2021, but in any event, not later than the 
period of limitations on filing an AAR under section 6227(c).
    (iii) Annual election. A section 45(Q)(f)(3)(B) election is only 
effective for the taxable year for which it is made. A new section 
45Q(f)(3)(B) election must be made for each taxable year for which an 
electing taxpayer wishes to allow section 45Q credits to a credit 
claimant.
    (iv) Required information. For the section 45Q(f)(3)(B) election to 
be valid under paragraph (h)(3)(ii) of this section, the election 
statement of the electing taxpayer must be made on Form 8933 and must 
indicate that an election is being made under section 45Q(f)(3)(B). The 
electing taxpayer must provide each credit claimant with a copy of the 
electing taxpayer's Form 8933. The electing taxpayer must, in addition 
to any information required on Form 8933 set forth the following 
information--
    (A) The electing taxpayer's name, address, taxpayer identification 
number, location, and e-GGRT ID number(s) (if available) of each 
qualified facility where qualified carbon oxide was captured;
    (B) The full amount of credit attributable to the taxpayer prior to 
the election and the corresponding metric tons of qualified carbon 
oxide;
    (C) The name, address, and taxpayer identification number of each 
credit claimant, and the name and location and e-GGRT ID number(s) (if 
available) of:
    (i) Each secure geological storage site where the qualified carbon 
oxide is disposed of or injected, or
    (ii) Each site where the qualified carbon oxide is utilized;
    (D) The dollar amount of section 45Q credits the taxpayer is 
allowing each credit claimant to claim and the corresponding metric 
tons of qualified carbon oxide; and
    (E) The dollar amount of section 45Q credits retained by the 
electing taxpayer and the corresponding metric tons of qualified carbon 
oxide.
    (v) Requirements for section 45Q credit claimant. For a section 
45Q(f)(3)(B) election to be valid, the section 45Q credit claimant must 
include the following information on Form 8933--
    (A) The name, address, taxpayer identification number of the credit 
claimant;
    (B) The name, address, and taxpayer identification number of each 
taxpayer making an election under section 45Q(f)(3)(B) to allow the 
credit to the credit claimant;
    (C) The name and location and e-GGRT ID number(s) (if available) of 
each qualified facility where qualified carbon oxide was captured;
    (D) The name and location and e-GGRT ID number(s) (if available) 
of:
    (i) Each secure geological storage site where the qualified carbon 
oxide is disposed of or injected, or
    (ii) Each site where the qualified carbon oxide is utilized.
    (E) The full dollar amount of section 45Q credits attributable to 
each electing taxpayer prior to the election and the corresponding 
metric tons of qualified carbon oxide;
    (F) The dollar amount of section 45Q credits that each electing 
taxpayer is allowing the credit claimant to claim and the corresponding 
metric tons of qualified carbon oxide; and
    (G) A copy of the electing taxpayer's Form 8933. The credit 
claimant must include this Form 8933 with its timely filed Federal 
income tax return or Form 1065 (including extensions). The election may 
not be filed with an amended Federal income tax return, an amended Form 
1065, or an AAR, as applicable, after the prescribed date (including 
extensions) for filing the original Federal income tax return or Form 
1065 for the year, with the exception of amended Federal income tax 
returns, amended Forms 1065, or AARs, as applicable, for any taxable 
year ending after February 9, 2018, and beginning on or before January 
13, 2021. The amended Federal income tax return or the amended Form 
1065 must be filed, in any event, not later than the applicable period 
of limitations on filing an amended Federal income tax return or Form 
1065. In the case of a BBA partnership, the BBA partnership may make a 
late election by filing an AAR on or before October 15, 2021, but in 
any event, not later than the period of limitations on filing an AAR 
under section 6227(c).
    (vi) Failure to satisfy reporting requirements. With respect to any 
section 45Q(f)(3)(B) election, the failure of an electing taxpayer or a 
credit claimant to satisfy the requirements in paragraph (h)(3)(iv) or 
(v) in a taxable year will result in the inability to claim the credit 
with respect to any qualified carbon oxide that is disposed of, 
injected, or utilized in that taxable year pursuant to that particular 
election.
    (i) Applicability date. This section applies to taxable years 
beginning on or after January 13, 2021. Taxpayers may choose to apply 
this section for taxable years beginning on or after January 1, 2018, 
provided the taxpayer applies this section and Sec. Sec.  1.45Q-2, 
1.45Q-3, 1.45Q-4, and 1.45Q-5 in their entirety and in a consistent 
manner.


Sec.  1.45Q-2  Definitions for Purposes of Sec. Sec.  1.45Q-1 through 
1.45Q-5.

    (a) Qualified carbon oxide. The term qualified carbon oxide means--
    (1) Any carbon dioxide which--
    (i) Is captured from an industrial source by carbon capture 
equipment which is originally placed in service before February 9, 
2018,
    (ii) Would otherwise be released into the atmosphere as industrial 
emission of greenhouse gas or lead to such release, and
    (iii) Is measured at the source of capture and verified at the 
point of disposal, injection, or utilization; or
    (2) Any carbon dioxide or other carbon oxide which--
    (i) Is captured from an industrial source by carbon capture 
equipment which is originally placed in service on or after February 9, 
2018,
    (ii) Would otherwise be released into the atmosphere as industrial 
emission of greenhouse gas or lead to such release, and
    (iii) Is measured at the source of capture and verified at the 
point of disposal, injection, or utilization; or
    (3) In the case of a direct air capture facility, any carbon 
dioxide that is captured directly from the ambient air and is measured 
at the source of capture and verified at the point of disposal, 
injection, or utilization.
    (b) Recycled carbon oxide. The term qualified carbon oxide includes 
the initial deposit of captured carbon oxide used as a tertiary 
injectant. Qualified carbon oxide does not include carbon oxide that is 
recaptured, recycled, and re-injected as part of the enhanced oil or 
natural gas recovery process.
    (c) Carbon capture equipment. In general, carbon capture equipment

[[Page 4766]]

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. Except as described in paragraph (c)(2) of 
this section, carbon capture equipment generally does not include 
components of property used for transporting qualified carbon oxide for 
disposal, injection, or utilization. Carbon capture equipment that is 
originally placed in service at a qualified facility on or after 
February 9, 2018, may be owned by a taxpayer other than the taxpayer 
that owns the industrial facility at which the carbon capture equipment 
is placed in service.
    (1) Use of carbon capture equipment. Carbon capture equipment is 
equipment used for the purpose of--
    (i) Separating, purifying, drying, and/or capturing carbon oxide 
that would otherwise be released into the atmosphere from an industrial 
facility;
    (ii) Removing carbon oxide from the atmosphere via direct air 
capture; or
    (iii) Compressing or otherwise increasing the pressure of carbon 
oxide.
    (2) Carbon capture equipment components. 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. For purposes of this paragraph (c), carbon 
capture equipment includes a system of gathering and distribution lines 
that collect carbon oxide captured from a qualified facility or 
multiple qualified facilities that constitute a single project (as 
described in section 8.01 of Notice 2020-12, 2020-11 I.R.B. 495 (see 
Sec.  601.601(d)(1) and (2)(ii) of this chapter)) for the purpose of 
transporting that carbon oxide away from the qualified facility or 
single project to a pipeline used to transport carbon oxide to or from 
one or more taxpayers and projects.
    (3) Single process train. All 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.
    (d) Industrial facility. An industrial facility is a facility, 
including an electricity generating facility, that produces a carbon 
oxide stream from a fuel combustion source or fuel cell, a 
manufacturing process, or a fugitive carbon oxide emission source that, 
absent capture and disposal, injection, or utilization, would otherwise 
be released into the atmosphere as industrial emission of greenhouse 
gas or lead to such release.
    (1) Exclusion. An industrial facility does not include a facility 
that produces carbon dioxide from carbon dioxide production wells at 
natural carbon dioxide-bearing formations or a naturally occurring 
subsurface spring. For purposes of section 45Q, a carbon dioxide 
production well at natural carbon dioxide-bearing formations or a 
naturally occurring subsurface spring means a well that contains 90 
percent or greater carbon dioxide by volume (90 percent test).
    (2) Exception for wells at natural carbon dioxide-bearing 
formations or a naturally occurring subsurface spring that contain a 
product other than carbon dioxide. A well meeting the 90 percent test 
will not be treated as a carbon dioxide production well at natural 
carbon dioxide-bearing formations or a naturally occurring subsurface 
spring if:
    (i) The deposit contains a product, other than carbon oxide, that 
is commercially viable to extract and sell without taking into account 
the availability of a commercial market for the carbon oxide that is 
extracted or any section 45Q tax credit that might be available;
    (ii) The taxpayer provides an attestation to paragraph (d)(2)(i) of 
this section from an independent registered engineer with experience in 
feasibility studies for extraction of gases from the subsurface;
    (iii) A direct air capture facility (defined in section 
45Q(e)(1)(A)) is not used to capture carbon oxide from the gas stream; 
and
    (iv) Any carbon oxide extracted from the deposit is used as 
tertiary injectant in an enhanced oil or natural gas recovery project 
or as feedstock of a utilization project.
    (2) Industrial source. An industrial source is an emission of 
carbon oxide from an industrial facility.
    (3) Manufacturing process. A manufacturing process is a process 
involving the manufacture of one or more products, other than carbon 
oxide, that are intended to be sold at a profit, or are used for a 
commercial purpose (other than producing carbon oxide). All facts and 
circumstances with respect to the process and products are to be taken 
into account.
    (4) Examples. The following examples illustrate the rules of 
paragraph (d) of this section:
    (i) Example 1. A natural underground reservoir contains a gas that 
is comprised of 50 percent carbon dioxide and 50 percent methane by 
volume. The raw gas is not usable without the application of a 
separation process to create two gases that are primarily carbon 
dioxide and methane. Taxpayer B constructs processing equipment that 
separates the raw gas into carbon oxide and methane. The carbon dioxide 
is sold to a third party for use in a qualified enhanced oil recovery 
project. Some of the methane is used as fuel to power the processing 
equipment. The remainder of the methane is injected into the reservoir. 
The injection will increase the ultimate recovery of carbon dioxide. 
The injected methane can be produced later from the reservoir. At the 
end of the taxable year Taxpayer B has not secured a contract to sell 
methane and does not have any plans to use the methane for a commercial 
purpose other than producing carbon oxide. Because carbon dioxide is 
the only product manufactured that is intended to be sold at a profit 
or used for a commercial purpose, the separation process applied to the 
gases is not a manufacturing process within the meaning of paragraph 
(d)(3) of this section. The carbon dioxide captured by the process is 
not qualified carbon oxide.
    (ii) Example 2. (A) A natural underground reservoir contains a gas 
that is comprised of 95 percent carbon dioxide and 5 percent helium by 
volume. The raw gas is not usable without the application of a 
separation process to create two gases that are primarily carbon 
dioxide and helium. Taxpayer C determines that the extraction of helium 
is economically viable even if there were no commercial market for 
carbon dioxide or any section 45Q credit. An independent registered 
engineer attests to Taxpayer C's determination. Taxpayer C constructs 
processing equipment that separates the raw gas into carbon dioxide and 
helium. The helium is sold to various customers for use in commercial 
and industrial applications. The carbon dioxide is sold to a third 
party for use in a qualified enhanced oil recovery project. Any carbon 
dioxide which the third party cannot accept is returned to the 
reservoir or vented in accordance with applicable permits.
    (B) Because the extraction of helium is economically viable even if 
there were no commercial market for carbon dioxide or any section 45Q 
credit, the reservoir will not be considered a natural carbon dioxide-
bearing formation or a naturally occurring subsurface spring within the 
meaning of paragraph (d)(1) and the separation process applied to the 
gases is a manufacturing process within the meaning of paragraph 
(d)(3). Taxpayer C may claim the section 45Q credit with respect to the 
carbon dioxide sold to the third party and which the third party uses 
in a qualified enhanced oil

[[Page 4767]]

recovery project during the taxable year. Taxpayer C may not claim the 
section 45Q credit with respect to the carbon dioxide that is returned 
to the reservoir or vented.
    (e) Electricity generating facility. An electricity generating 
facility is a facility described in section 45Q(d)(2)(A) or (B) of the 
Internal Revenue Code (Code) that is subject to depreciation under 
MACRS Asset Class 49.11 (Electric Utility Hydraulic Production Plant), 
49.12 (Electric Utility Nuclear Production Plant), 49.13 (Electric 
Utility Steam Production Plant), or 49.15 (Electric Utility Combustion 
Turbine Production Plant).
    (f) Direct air capture facility. A direct air capture facility 
means any facility that uses carbon capture equipment to capture carbon 
oxide directly from the ambient air. It does not include any facility 
that captures carbon dioxide (1) that is deliberately released from 
naturally occurring subsurface springs or (2) using natural 
photosynthesis.
    (g) Qualified facility. A qualified facility means any industrial 
facility or direct air capture facility, the construction of which 
begins before January 1, 2026, and either at which construction of 
carbon capture equipment begins before that date, or the original 
planning and design for which includes installation of carbon capture 
equipment, and at which carbon capture equipment is placed in service 
that captures the requisite annual thresholds of carbon oxide described 
in paragraph (g)(1) of this section. See Notice 2020-12 (see Sec.  
601.601(d)(1) and (2)(ii) of this chapter), for guidance on the 
determination of when construction has begun on a qualified facility or 
on carbon capture equipment. For purposes of whether a facility 
satisfies the requisite annual carbon oxide capture thresholds 
described in paragraph (g)(1) of this section, a taxpayer may apply the 
rules of section 8.01 of Notice 2020-12 (see Sec.  601.601(d)(1) and 
(2)(ii) of this chapter) to treat multiple facilities as a single 
facility.
    (1) Emissions and capture requirements. The carbon capture 
equipment placed in service at the qualified facility must capture--
    (i) In the case of a facility, other than a direct air capture 
facility, which emits not more than 500,000 metric tons of carbon oxide 
into the atmosphere during the taxable year, at least 25,000 metric 
tons of qualified carbon oxide during the taxable year which is 
utilized in a manner consistent with section 45Q(f)(5) and Sec.  1.45Q-
4 (section 45Q(d)(2)(A) facility);
    (ii) In the case of an electricity generating facility which is not 
a section 45Q(d)(2)(A) facility (section 45Q(d)(2)(B) facility), not 
less than 500,000 metric tons of qualified carbon oxide during the 
taxable year; and
    (iii) In the case of a direct air capture facility or other 
facility that is not a section 45Q(d)(2)(A) facility or a section 
45Q(d)(2)(B) facility, at least 100,000 metric tons of qualified carbon 
oxide during the taxable year.
    (2) Examples. The following examples illustrate the rules of 
paragraph (g) of this section:
    (i) Example 1. During the taxable year, an ethanol plant emits 
200,000 metric tons of carbon dioxide. Carbon capture equipment located 
at the facility captures 35,000 metric tons of carbon dioxide, all of 
which are utilized in a manner consistent with section 45Q(f)(5) and 
Sec.  1.45Q-4. The ethanol plant is a qualified facility under section 
45Q(d)(2)(C) and Sec.  1.45Q-2(g)(1)(i) during the taxable year because 
it met the requirement to capture at least 25,000 metric tons of 
qualified carbon oxide during the taxable year which were utilized in a 
manner consistent with section 45Q(f)(5) and Sec.  1.45Q-4.
    (ii) Example 2. During the taxable year, an electricity generating 
facility emits 600,000 metric tons of carbon dioxide. Carbon capture 
equipment located at the facility captures a total of 450,000 metric 
tons of carbon dioxide. 50,000 metric tons of the captured carbon 
dioxide are utilized in a manner consistent with section 45Q(f)(5) and 
Sec.  1.45Q-4, and 400,000 metric tons of the carbon dioxide are 
disposed of in secure geological storage. The electricity generating 
facility is not a qualified facility under section 45Q(d)(2)(B) during 
the taxable year because it did not capture at least 500,000 metric 
tons of qualified carbon oxide during the taxable year. Further, 
because the electricity generating facility emitted greater than 
500,000 metric tons of carbon dioxide during the taxable year, but only 
captured 450,000 metric tons, it is not a qualified facility under 
section 45Q(d)(2)(A) and Sec.  1.45Q-2(g)(1)(ii).
    (iii) Example 3. During the taxable year, a cement manufacturing 
plant emits 110,000 metric tons of carbon dioxide. Carbon capture 
equipment located at the plant captures 100,000 metric tons of carbon 
dioxide. 10,000 metric tons of the amount captured are utilized in a 
manner consistent with section 45Q(f)(5) and Sec.  1.45Q-4, and 90,000 
metric tons of carbon dioxide, are disposed of in secure geological 
storage. The cement manufacturing plant is a qualified facility during 
the taxable year because the carbon capture equipment located at the 
plant met the requirement under section 45Q(d)(2)(C) and Sec.  1.45Q-
2(g)(1)(i) to capture at least 100,000 metric tons of qualified carbon 
oxide during the taxable year.
    (iv) Example 4. Taxpayer X owns and operates three natural gas 
processing facilities (A, B, and C) that separate carbon dioxide from 
natural gas. A, B, and C are all located within several miles of each 
other. X installed carbon capture equipment by A, B, and C. Carbon 
dioxide captured by A, B, and C is collected via a single system of 
gathering and distribution lines for delivery to a transportation 
pipeline. X contracts with third-party Z for the use of carbon dioxide 
captured by A, B, and C as a tertiary injectant pursuant to a single 
contract. During the taxable year, equipment at A captures 30,000 
metric tons of carbon dioxide, equipment at B captures 40,000 metric 
tons of carbon dioxide, and equipment at C captures 50,000 tons of 
carbon dioxide. All other factors listed in the single project rule in 
section 8.01 of Notice 2020-12 support the conclusion that A, B and C 
are a single facility. X may treat A, B, and C as a single facility 
under the rules of section 8.01 of Notice 2020-12 for purposes of 
determining whether the requirement under section 45Q(d)(2)(C) and 
Sec.  1.45Q-2(g)(1)(i), to capture at least 100,000 metric tons of 
qualified carbon oxide during the taxable year is satisfied. If X 
treats A, B, and C as a single facility, the minimum capture 
requirement will be satisfied for the taxable year.
    (3) Annualization of first-year and last-year qualified carbon 
oxide emission and/or capture amounts--(i) In general. For both the 
taxable year in which carbon capture equipment is placed in service at 
a qualified facility and the taxable year in which the 12-year period 
described in sections 45Q(a)(3)(A) and (4)(A) and Sec.  1.45Q-1(c)(1) 
and (2) ends, annualization of the amount of qualified carbon oxide 
emitted and captured (or captured directly from the ambient air in the 
case of a direct air capture facility) is permitted to determine if the 
threshold requirements under paragraph (g)(1) of this section are 
satisfied. Such annualization may result in a facility being deemed to 
satisfy the threshold requirements under paragraph (g)(1) of this 
section for the year and may permit a taxpayer to claim section 45Q 
credits even though the amount of qualified carbon oxide emitted or 
captured in the first year or last year of the 12-year period is less 
than the threshold requirements under paragraph (g)(1) of this section.
    (ii) Calculation. Annualization is only available for the taxable 
year in which

[[Page 4768]]

the carbon capture equipment is placed in service at the qualified 
facility and the taxable year in which the 12-year period described in 
sections 45Q(a)(3)(A) and (4)(A) and Sec.  1.45Q-1(c)(1) and (2) ends. 
Annualized amounts must be calculated by--
    (A) Determining the amount of qualified carbon oxide emitted and 
captured (or captured directly from the ambient air in the case of a 
direct air capture facility) during the taxable year in which the 
carbon capture equipment was placed in service at the qualified 
facility or the taxable year in which the 12-year period described in 
sections 45Q(a)(3)(A) and (4)(A) and Sec.  1.45Q-1(c)(1) and (2) ends,
    (B) Dividing the amount of qualified carbon determined under 
paragraph (g)(3)(ii)(A) of this section by the number of days in the 
period either (I) beginning with the date on which the carbon capture 
equipment was placed in service at the qualified facility and ending 
with the last day of the taxable year containing that date, or (II) 
beginning with the first day of the taxable year in which the 12-year 
period described in sections 45Q(a)(3)(A) and (4)(A) and Sec.  1.45Q-
1(c)(1) and (2) ends and ending with the last day of that 12-year 
period; and
    (C) Multiplying by 365.
    (iii) Consequences. If the annualized amounts of qualified carbon 
oxide emitted and captured (or captured directly from the ambient air 
in the case of a direct air capture facility) as calculated under this 
formula meet the threshold requirements under paragraph (g)(1) of this 
section, the threshold requirements under paragraph (g)(1) of this 
section are deemed satisfied for the taxable year in which the carbon 
capture equipment was placed in service at the qualified facility or 
the taxable year in which the 12-year period described in sections 
45Q(a)(3)(A) and (4)(A) and Sec.  1.45Q-1(c)(1) and (2) ends. The 
taxpayer may be eligible for a section 45Q credit for that taxable year 
but must calculate the credit based on actual amounts of qualified 
carbon oxide captured and disposed of, injected, or utilized during the 
taxable year.
    (4) Election for applicable facilities. In the case of an 
applicable facility, for any taxable year during which such facility 
captures not less than 500,000 metric tons of qualified carbon oxide, 
the taxpayer described in section 45Q(f)(3)(A)(ii) and Sec.  1.45Q-
1(h)(1)(ii) (that is, the person that owns the carbon capture equipment 
and physically or contractually ensures the capture and disposal, 
injection or utilization of such qualified carbon oxide), may elect to 
have such facility, and any carbon capture equipment placed in service 
at such facility, deemed as having been placed in service on February 
9, 2018 (section 45Q(f)(6) election). For purposes of whether a 
facility satisfies the 500,000 metric ton qualified carbon oxide 
capture threshold, a taxpayer may apply the rules of section 8.01 of 
Notice 2020-12 to treat multiple facilities as a single facility.
    (i) Applicable facility. An applicable facility means a qualified 
facility described in section 45Q(f)(6)(B) and Sec.  1.45Q-2(g) that 
was placed in service before February 9, 2018, for which no taxpayer 
claimed a section 45Q credit for qualified carbon oxide captured at the 
facility for any taxable year ending before February 9, 2018.
    (ii) Time and manner of making election. The taxpayer described 
Sec.  1.45Q-1(h)(1) makes a section 45Q(f)(6) election by filing a 
statement of election with the taxpayer's income tax return for each 
taxable year in which the credit arises. The section 45Q(f)(6) election 
must be made in accordance with Form 8933 filed with the taxpayer's 
Federal income tax return for each taxable year in which the taxpayer 
makes the section 45Q(f)(6) election. The statement of election must, 
in addition to any information required on Form 8933, set forth the 
electing taxpayer's name, address, taxpayer identification number, 
location, and e-GGRT ID number(s) (if available) of the applicable 
facility.
    (iii) Retroactive credit revocations. A taxpayer may not file an 
amended Federal income tax return, an amended Form 1065, or an AAR, as 
applicable, for any taxable year ending before February 9, 2018, to 
revoke a prior claim of section 45Q credits.
    (5) Retrofitted qualified facility or carbon capture equipment (80/
20 Rule). A qualified facility or carbon capture equipment may 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 percent of the qualified 
facility or carbon capture equipment's total value (that is, the cost 
of the new components of property plus the value of the used components 
of property) (80/20 Rule). In determining the value of the used 
components of property as compared to the new components, the general 
principles of Revenue Ruling 94-31 (see Sec.  601.601(d)(2)(i)(a) and 
(ii) of this chapter), will apply. The relevant unit of retrofitted 
carbon capture equipment for purposes of the 80/20 Rule is an 
independently functioning process train. For purposes of the 80/20 
Rule, the cost of a new qualified facility or carbon capture equipment 
includes all properly capitalized costs of the new qualified facility 
or carbon capture equipment. Solely for purposes of the 80/20 Rule, 
properly capitalized costs of a new qualified facility or carbon 
capture equipment may, at the option of the taxpayer, include the cost 
of new equipment for a pipeline (the cost of equipment for a new 
pipeline, not equipment used to repair an existing pipeline) owned and 
used exclusively by that taxpayer to transport carbon oxides captured 
by that taxpayer's qualified facility or carbon capture equipment that 
would otherwise be emitted into the atmosphere.
    (h) Qualified enhanced oil or natural gas recovery project. The 
term qualified enhanced oil or natural gas recovery project has the 
same meaning as a qualified enhanced oil recovery project under section 
43(c)(2) of the Code and Sec.  1.43-2, by substituting crude oil or 
natural gas for crude oil in section 43(c)(2)(A)(i) and Sec. Sec.  
1.43-2 and 1.43-3.
    (1) Application of Sec. Sec.  1.43-2 and 1.43-3. For purposes of 
applying Sec. Sec.  1.43-2 and 1.43-3 with respect to a qualified 
enhanced oil or natural gas recovery project, the term enhanced oil or 
natural gas recovery is substituted for enhanced oil recovery, and the 
term oil or natural gas is substituted for oil.
    (2) Required certification. The qualified enhanced oil or natural 
gas recovery project must be certified under Sec.  1.43-3, even if no 
credit related to enhanced oil or natural gas recovery is claimed for 
the taxable year. For purposes of a natural gas project--
    (i) The petroleum engineer's certification under Sec.  1.43-3(a)(3) 
and the operator's continued certification of a project under Sec.  
1.43-3(b)(3) must include an additional statement that the 
certification is for purposes of the section 45Q carbon oxide 
sequestration tax credit;
    (ii) The petroleum engineer's certification must be attached to a 
Form 8933 and filed not later than the last date prescribed by law 
(including extensions) for filing the operator's or designated owner's 
Federal income tax return or Form 1065 for the first taxable year in 
which qualified carbon oxide is injected into the reservoir; and
    (iii) The operator's continued certification of a project must be 
attached to a Form 8933 and filed not later than the last date 
prescribed by law (including extensions) for filing the operator's or 
designated owner's Federal income tax return or Form 1065 for taxable 
years after the taxable year for which the petroleum engineer's 
certification is filed but not after the

[[Page 4769]]

taxable year in which injection activity ceases and all injection wells 
are plugged and abandoned.
    (3) Natural gas. Natural gas has the same meaning as under section 
613A(e)(2) of the Code.
    (4) Timely filing of petroleum engineer's certification. For 
purposes of this paragraph (h), if a section 45Q credit is claimed on 
an amended Federal income tax return, an amended Form 1065, or an AAR, 
as applicable, the petroleum engineer's certification for a natural gas 
project will be treated as filed timely if it is attached to a Form 
8933 that is submitted with such amended Federal income tax return, 
amended Form 1065, or AAR. With respect to a section 45Q credit that is 
claimed on a timely filed Federal income tax return or Form 1065 for a 
taxable year ending after December 31, 2017, and beginning on or before 
January 13, 2021, for which the petroleum engineer's certification for 
a natural gas project was not submitted, the petroleum engineer's 
certification for a natural gas project will be treated as filed timely 
if it is attached to an amended Form 8933 for such taxable year.
    (5) Carbon oxide injected in oil reservoir. Carbon oxide that is 
injected into an oil reservoir that is not a qualified enhanced oil 
recovery project under section 43(c)(2) due to circumstances such as 
the first injection of a tertiary injectant occurring before 1991, or 
because a petroleum engineer's certification was not timely filed, 
cannot be treated as qualified carbon oxide, disposed of in secure 
geological storage, or utilized in a manner described in section 
45Q(f)(5). This rule will not apply to an oil reservoir if--
    (i) The reservoir has permanently ceased oil production;
    (ii) The operator has obtained an Underground Injection Control 
Class VI permit; and
    (iii) The operator complies with 40 CFR part 98 subpart RR.
    (6) Tertiary Injectant. For purposes of section 45Q, a tertiary 
injectant is qualified carbon oxide that is injected into and stored in 
a qualified enhanced oil or natural gas recovery project and 
contributes to the extraction of crude oil or natural gas. The term 
tertiary injectant has the same meaning as used in section 193(b)(1) of 
the Code.
    (i) Section 45Q credit. The term section 45Q credit means the 
carbon oxide sequestration credit determined under section 45Q of the 
Internal Revenue Code and Sec.  1.45Q-1.
    (j) Form 8933. The term Form 8933 means Form 8933, Carbon Oxide 
Sequestration Credit, any successor form(s), pursuant to instructions 
to any of the foregoing (see Sec.  601.602 of this chapter), or other 
guidance. This definition of Form 8933 applies to this section and to 
Sec. Sec.  1.45Q-1, 1.45Q-3, 1.45Q-4, and 1.45Q-5.
    (k) Applicability date. This section applies to taxable years 
beginning on or after January 13, 2021. Taxpayers may choose to apply 
this section for taxable years beginning on or after January 1, 2018, 
provided the taxpayer applies this section and Sec. Sec.  1.45Q-1, 
1.45Q-3, 1.45Q-4, and 1.45Q-5 in their entirety and in a consistent 
manner.


Sec.  1.45Q-3   Secure Geological Storage.

    (a) In general. To qualify for the section 45Q credit, a taxpayer 
must either physically or contractually dispose of captured qualified 
carbon oxide in secure geological storage in the manner provided in 
paragraph (b) of this section, or utilize qualified carbon oxide in a 
manner conforming with section 45Q(f)(5) of the Internal Revenue Code 
and Sec.  1.45Q-4. Secure geological storage includes, but is not 
limited to, storage at deep saline formations, oil and gas reservoirs, 
and unminable coal seams.
    (b) Requirements for secure geological storage. For purposes of the 
section 45Q credit, qualified carbon oxide is considered disposed of by 
the taxpayer in secure geological storage such that the qualified 
carbon oxide does not escape into the atmosphere if the qualified 
carbon oxide is--
    (1) Injected into a well that
    (i) Complies with applicable Underground Injection Control or other 
regulations, located onshore or offshore under submerged lands within 
the territorial jurisdiction of States or federal waters, and
    (ii) Is not used as a tertiary injectant in a qualified enhanced 
oil or natural gas recovery project, in compliance with applicable 
requirements under 40 CFR part 98 subpart RR; or
    (2) Injected into a well that
    (i) Complies with applicable Underground Injection Control or other 
regulations, is located onshore or offshore under submerged lands 
within the territorial jurisdiction of States or federal waters, and
    (ii) Is used as a tertiary injectant in a qualified enhanced oil or 
natural gas recovery project and stored in compliance with applicable 
requirements under 40 CFR part 98 subpart RR, or the International 
Organization for Standardization (ISO) standards endorsed by the 
American National Standards Institute (ANSI) under CSA/ANSI ISO 
27916:2019, Carbon dioxide capture, transportation and geological 
storage--Carbon dioxide storage using enhanced oil recovery 
(CO2-EOR) (CSA/ANSI ISO 27916:2019).
    (c) Documentation. Documentation must be filed in accordance with 
Form 8933.
    (d) Certification. For qualified enhanced oil or natural gas 
recovery projects in which the taxpayer reported volumes of carbon 
oxide to the Environmental Protection Agency pursuant to 40 CFR part 98 
subpart RR, the taxpayer may self-certify the volume of qualified 
carbon oxide claimed for purposes of section 45Q. For qualified 
enhanced oil or natural gas recovery projects in which the taxpayer 
determined volumes pursuant to CSA/ANSI ISO 27916:2019, a taxpayer may 
prepare documentation as outlined in CSA/ANSI ISO 27916:2019 
internally, but all such documentation must be provided to a qualified 
independent engineer or geologist, who then must certify that the 
documentation provided, including the mass balance calculations as well 
as information regarding monitoring and containment assurance, is 
accurate and complete. The qualified independent engineer or geologist 
certifying a project must be duly registered or certified in any State. 
The certification must contain an affidavit from the certifying 
engineer or geologist stating that he or she is independent from the 
taxpayer (and if a section 45Q(f)(3)(B) election has been made, the 
affidavit must state that he or she is independent from both the 
electing taxpayer and the credit claimant). Certifications must be made 
annually and under penalties of perjury. For any leaked amount of 
qualified carbon oxide (as defined in Sec.  1.45Q-5(c)) that is 
determined pursuant to CSA/ANSI ISO 27916:2019, the certification must 
also include a statement that the quantity was determined in accordance 
with sound engineering principles. Taxpayers that capture qualified 
carbon oxide giving rise to the section 45Q credit must file Form 8933 
with a timely filed Federal income tax return or Form 1065, including 
extensions or for the purpose of this rule, amendments to Federal 
income tax returns, Forms 1065, or on AARs, as applicable. Taxpayers 
that dispose of, inject, or utilize qualified carbon oxide must also 
file Form 8933 with a timely filed Federal income tax return or Form 
1065, including extensions or for the purpose of this rule, amendments 
to Federal income tax returns, Forms 1065, or on AARs, as applicable. 
If the volume of carbon oxide certified and reported is a negative 
amount, see Sec.  1.45Q-5 for rules regarding recapture.

[[Page 4770]]

    (e) Failure to submit complete documentation or certification. No 
section 45Q credit is allowed for any taxable year for which the 
taxpayer (including credit claimants) has failed to timely submit 
complete documentation and certification that is required by this 
regulation or Form 8933. The credit will be allowed only for a taxable 
year for which complete documentation and certification has been timely 
submitted. Certifications for each taxable year must be submitted by 
the due date of the federal income tax return or Form 1065 on which the 
section 45Q credit is claimed, including extensions. However, if a 
section 45Q credit is claimed on an amended Federal income tax return, 
an amended Form 1065, or an AAR, as applicable, certifications may also 
be submitted with such amended Federal income tax return, amended Form 
1065, or AAR. Further, if a section 45Q credit was claimed on a timely 
filed Federal income tax return or Form 1065 for a taxable year ending 
on or after January 1, 2018, and beginning on or before January 13, 
2021, for which certifications were not submitted, such certifications 
may be submitted with a timely filed amended Federal income tax return, 
an amended Form 1065, or an AAR, as applicable, for such taxable year.
    (f) Applicability date. This section applies to taxable years 
beginning on or after January 13, 2021. Taxpayers may choose to apply 
this section for taxable years beginning on or after January 1, 2018, 
provided the taxpayer applies this section and Sec. Sec.  1.45Q-1, 
1.45Q-2, 1.45Q-4, and 1.45Q-5 in their entirety and in a consistent 
manner.


Sec.  1.45Q-4   Utilization of Qualified Carbon Oxide.

    (a) In general. For purposes of this section, utilization of 
qualified carbon oxide means--
    (1) The fixation of such qualified carbon oxide through 
photosynthesis or chemosynthesis, such as through the growing of algae 
or bacteria,
    (2) The chemical conversion of such qualified carbon oxide to a 
material or chemical compound in which such qualified carbon oxide is 
securely stored, or
    (3) The use of such qualified carbon oxide for any other purpose 
for which a commercial market exists (with the exception of use as a 
tertiary injectant in a qualified enhanced oil or natural gas recovery 
project), as described in paragraph (d) of this section.
    (b) Amount utilized--(1) In general. For purposes of Sec.  1.45Q-
1(b) (ii) and (c)(2)(ii), the amount of qualified carbon oxide utilized 
by the taxpayer is equal to the metric tons of qualified carbon oxide 
which the taxpayer demonstrates, based upon an analysis of lifecycle 
greenhouse gas emissions (LCA), were--
    (i) Captured and permanently isolated from the atmosphere through 
use of a process described in paragraph (a) of this section, or
    (ii) Displaced from being emitted into the atmosphere through use 
of a process described in paragraph (a) of this section.
    (2) Limitation. The amount determined under paragraph (b)(1) of 
this section cannot exceed the amount of qualified carbon oxide 
measured at the source of capture.
    (c) Lifecycle greenhouse gas emissions and lifecycle analysis 
(LCA)--(1) In general. For purposes of paragraph (b) of this section, 
the term lifecycle greenhouse gas emissions means the aggregate 
quantity of greenhouse gas emissions (including direct emissions and 
significant indirect emissions such as significant emissions from land 
use changes) related to the full product lifecycle, including all 
stages of product and feedstock production and distribution, from 
feedstock generation or extraction through the distribution and 
delivery and use of the finished product to the ultimate consumer, 
where the mass values for all greenhouse gases are adjusted to account 
for their relative global warming potential according to Table A-1 of 
40 CFR part 98 subpart A. Such emissions are expressed in carbon 
dioxide equivalent (CO2-e).
    (2) LCA verification. The taxpayer verifies the amount of qualified 
carbon oxide utilized through an LCA. The LCA must demonstrate that the 
proposed process results in a net reduction of carbon dioxide 
equivalents when compared to a comparison system. The results of the 
LCA must be documented in a written LCA report.
    (3) Standards of adequate lifecycle analysis. The LCA report must 
be prepared in conformity with and contain documentation that conforms 
with International Organization for Standardization (ISO) 14040:2006, 
Environmental management--Life cycle assessment--Principles and 
framework and ISO 14044:2006, Environmental management--Life cycle 
assessment--Requirements and guidelines. The LCA may consist of direct 
and indirect data in conformity with ISO 14040:2006 and 14044:2006.
    (4) Third-party independent review of LCA. The LCA report must be 
performed or verified by an independent third party. The LCA report 
must provide a statement documenting the qualifications of the 
independent third party, including proof of appropriate U.S. or foreign 
professional license, an affidavit from the third party stating that it 
is independent from the taxpayer (if a section 45Q(f)(3)(B) election 
has been made, the affidavit must state that the third party is 
independent from both the electing taxpayer and the credit claimant), 
and the statement must be made under penalties of perjury. If an 
independent third-party review is conducted, then it must include an 
assessment of the model and supporting data.
    (5) Submission of the LCA. The taxpayer must submit the LCA report 
and third-party independent statement required by paragraph (c) of this 
section to the IRS and the Department of Energy. The taxpayer must also 
submit the model if the LCA is not verified by an independent third-
party review.
    (6) LCA review. The LCA report will be subject to a technical 
review by the DOE. The IRS will determine whether to approve the LCA 
and will notify the taxpayer. The taxpayer must receive approval of its 
LCA prior to claiming the section 45Q credits for such taxable year on 
any federal income tax return. In addition to receiving approval of its 
LCA, the taxpayer must satisfy all other requirements of section 45Q 
and Sec. Sec.  1.45Q-1, 1.45Q-2, and this section in order to be 
eligible to claim section 45Q credits.
    (d) Commercial market. A commercial market means a market in which 
a product, process, or service that utilizes carbon oxide is sold or 
transacted on commercial terms. A taxpayer must submit a statement 
attached to its Form 8933 substantiating that a commercial market 
exists for its particular product, process, or service.
    (e) Applicability date. This section applies to taxable years 
beginning on or after January 13, 2021. Taxpayers may choose to apply 
this section for taxable years beginning on or after January 1, 2018, 
provided the taxpayer applies this section and Sec. Sec.  1.45Q-1, 
1.45Q-2, 1.45Q-3, and 1.45Q-5 in their entirety and in a consistent 
manner.


Sec.  1.45Q-5  Recapture of Credit.

    (a) Recapture event. A recapture event occurs when qualified carbon 
oxide for which a section 45Q credit has been previously claimed ceases 
to be disposed of in secure geological storage (as described in Sec.  
1.45Q-3(b)), or used as a tertiary injectant during the recapture 
period. Recapture events are determined separately for each project 
involving the disposal or use of qualified carbon oxide as a tertiary 
injectant. A recapture event does not occur if some portion of 
qualified

[[Page 4771]]

carbon oxide disposed of in the current year does not remain in secure 
storage at the end of the year. The amount of such carbon oxide that is 
securely stored in the current year is determined according to the 
applicable requirements of 40 CFR part 98 subpart RR or CSA/ANSI ISO 
27916:2019.
    (b) Ceases to be disposed of in secure geological storage or used 
as a tertiary injectant. Qualified carbon oxide for which a section 45Q 
credit has been previously claimed ceases to be disposed of in secure 
geological storage (as described in Sec.  1.45Q-3(b)), or used as a 
tertiary injectant, if the leaked amount of qualified carbon oxide in 
the taxable year exceeds the amount of qualified carbon oxide securely 
stored in that same taxable year.
    (c) Leaked amount of qualified carbon oxide. When a taxpayer that 
claimed a section 45Q credit with respect to qualified carbon oxide 
stored at a secure storage site, operator of the secure storage site, 
or regulatory agency with jurisdiction over the site determines that 
the qualified carbon oxide that was disposed of in secure geological 
storage has leaked to the atmosphere, the taxpayer or the party with 
whom the taxpayer contracted to ensure the secure geological storage of 
the qualified carbon oxide must quantify the metric tons of qualified 
carbon oxide that has leaked to the atmosphere pursuant to the 
requirements of 40 CFR part 98 subpart RR or CSA/ANSI ISO 27916:2019. 
The quantity determined pursuant to CSA/ANSI ISO 27916:2019 must be 
certified by a qualified independent engineer or geologist, including a 
statement that the quantity was determined in accordance with sound 
engineering principles in the same manner as required in Sec.  1.45Q-3. 
The IRS will consider all available facts and circumstances, and may 
consult with the relevant regulatory agency with jurisdiction over such 
site, in verifying the amount of qualified carbon oxide that has leaked 
to the atmosphere. The verified amount is the leaked amount of 
qualified carbon oxide.
    (d) Qualified carbon oxide subject to recapture. The quantity of 
recaptured qualified carbon oxide (in metric tons) subject to recapture 
is the amount by which the leaked amount of qualified carbon oxide 
exceeds the amount of qualified carbon oxide securely stored in the 
taxable year. The leaked amount of qualified carbon oxide shall be 
subtracted from the amount of qualified carbon oxide that is securely 
stored in the taxable year. If the leaked amount does not exceed the 
amount of qualified carbon oxide that is securely stored in the taxable 
year, then the taxpayer is entitled to a credit equal to the amount of 
qualified carbon oxide securely stored less the leaked amount in the 
taxable year, multiplied by the appropriate statutory credit rate.
    (e) Recapture amount. The recapture amount is equal to the product 
of the quantity of recaptured qualified carbon oxide (in metric tons) 
subject to recapture and the appropriate statutory credit rate.
    (f) Recapture period. The recapture period begins on the date of 
first injection of qualified carbon oxide for disposal in secure 
geological storage or use as a tertiary injectant for which a section 
45Q credit was claimed. The recapture period ends on the earlier of 
three years after the last taxable year in which the taxpayer claimed a 
section 45Q credit or was eligible to claim a credit that it elected to 
carry forward or the date monitoring ends under the requirements of the 
standards described in Sec.  1.45Q-3(b)(1) or (2).
    (g) Application of recapture--(1) In general. Any recapture amount 
must be taken into account in the taxable year in which it is 
identified and reported. If the leaked amount of qualified carbon oxide 
does not exceed the amount of qualified carbon oxide securely stored in 
the taxable year reported, there is no recapture amount and no further 
adjustments to prior taxable years are needed. If the leaked amount of 
qualified carbon oxide does exceed the amount of qualified carbon oxide 
securely stored in the taxable year reported, then the taxpayer must 
add the recapture amount to the amount of tax due in the taxable year 
in which the recapture event occurs.
    (2) Calculation. Recapture amounts are calculated on a last-in-
first-out basis (LIFO), such that the leaked amount of qualified carbon 
oxide that exceeds the amount of qualified carbon oxide securely stored 
in the current taxable year will be deemed attributable first to the 
prior taxable year, then to taxable year before that, and then up to a 
maximum of the third preceding year.
    (3) Multiple units. In the event of a recapture event in which the 
leaked amount of qualified carbon oxide had been captured from multiple 
units of carbon capture equipment that were not under common ownership, 
the recapture amount must be allocated on a pro rata basis among the 
multiple units of carbon capture equipment. All taxpayers that claimed 
a section 45Q credit with respect to one or more of such units of 
carbon capture equipment are responsible for adding the recapture 
amount to their amount of tax due in the taxable year in which the 
recapture event occurs.
    (4) Multiple taxpayers--(i) In general. In the event of a recapture 
event involving a leaked amount of qualified carbon oxide that is 
deemed attributable to qualified carbon oxide for which multiple 
taxpayers claimed section 45Q credits (for example, if ownership of the 
carbon capture equipment was transferred, or if a taxpayer made an 
election under section 45Q(f)(3)(B) to allow one or more credit 
claimants to claim a portion of the section 45Q credit), the recapture 
amount must be allocated on a pro rata basis among the taxpayers that 
claimed the section 45Q credits.
    (ii) Partnerships--(A) General rule. For purposes of paragraph 
(g)(4)(i) of this section, if a partnership is one of the multiple 
taxpayers that claimed section 45Q credit amounts, the partnership and 
not its partners will be the taxpayer to which the pro rata recapture 
amount must be allocated. The partnership must allocate its pro rata 
recapture amount among its partners under Sec.  1.704-1(b)(4)(ii).
    (B) Terminated partnerships. If a partnership described in 
paragraph (g)(4)(ii)(A) of this section terminates under section 
708(b)(1) prior to a recapture event, the partners of that terminated 
partnership at the time the section 45Q credit was claimed will be the 
taxpayers to which the pro rata recapture amount must be allocated.
    (5) Reporting. If a recapture event occurs during a project's 
recapture period, any taxpayer that claimed a section 45Q credit for 
that project must report the following information on a Form 8933 filed 
with that taxpayer's Federal income tax return or Form 1065 for the 
taxable year for which the recapture event occurred--
    (A) The recapture amount (as defined in Sec.  1.45Q-5(e));
    (B) The leaked amount of qualified carbon oxide (in metric tons) 
(as defined in Sec.  1.45Q-5(c));
    (C) The statutory credit rate(s) at which the section 45Q credits 
were previously calculated; and
    (D) A statement that describes how the taxpayer became aware of the 
recapture event, how the leaked amount was determined, and the identity 
and involvement of any regulatory agencies.
    (6) Examples. The following examples illustrate the principles of 
this paragraph (g):
    (i) Example 1. (A) A owns direct air capture Facility X. No other 
taxpayer has owned Facility X, and A has never allowed another taxpayer 
to claim any section 45Q credits with respect to qualified carbon oxide 
captured by Facility X. Facility X captured 100,000 metric tons of 
carbon dioxide in each of

[[Page 4772]]

2021, 2022, and 2023. All captured carbon dioxide was sold to B for use 
a tertiary injectant in a qualified enhanced oil recovery project. B 
provided contractual assurance that the carbon dioxide would be 
disposed of in secure geological storage. A claimed section 45Q credit 
amounts of $2,268,000 in 2021, $2,515,000 in 2022, and $2,761,000 in 
2023 using the statutory rates in Sec.  1.45Q-1(d)(3). In 2024, A 
captured and sold another 100,000 metric tons of carbon dioxide to B, 
which B used as a tertiary injectant in a qualified enhanced oil 
recovery project. In late 2024, B determined that 10,000 metric tons of 
qualified carbon dioxide injected during 2021 had leaked from the 
containment area of the reservoir and were released into the 
atmosphere.
    (B) Because the leakage determined in 2024 (10,000 metric tons) did 
not exceed the presumed amount stored in 2024 (100,000 metric tons), a 
recapture event did not occur in 2024. B's actual storage in 2024 is 
90,000 metric tons of qualified carbon oxide. A's section 45Q credit 
for 2024 is $2,706,300 (net 90,000 metric tons of qualified carbon 
oxide captured, disposed of in secure geological storage, and used as a 
tertiary injectant multiplied by the statutory credit rate for 2024 of 
$30.07).
    (ii) Example 2. (A) Assume same facts as in Example 1. 
Additionally, in 2025, B determines that 190,000 metric tons of 
qualified carbon dioxide injected in 2021 and 2022 had leaked and were 
released into the atmosphere. No injection of carbon dioxide takes 
place in 2025.
    (B) Because the leakage determined in 2025 (190,000 metric tons) 
exceeds the amount stored in 2025 (0 metric tons), a recapture event 
occurred in 2025. A's credit for 2025 is $0 because the net amount of 
carbon dioxide captured, disposed of in secure geological storage, and 
used as a tertiary injectant in 2025 was 0 metric tons. The 2025 
recapture amount is calculated by multiplying the 190,000 metric tons 
of recaptured qualified carbon oxide by the appropriate statutory 
credit rate using the LIFO method. The first 90,000 metric tons of 
recaptured qualified carbon oxide is deemed attributable to 2024, and 
is recaptured at the 2024 statutory rate of $30.07 per metric ton. The 
remaining 100,000 metric tons of recaptured qualified carbon oxide are 
deemed attributable to 2023. The credits attributable to 2023 are 
recaptured at the 2023 statutory rate of $27.61 per metric ton. Thus, 
the total recapture amount is $5,467,300, and is added to A's tax due 
for 2025.
    (iii) Example 3. (A) Assume the same facts as in Example 2, except 
that A sells Facility X to C on January 1, 2024. C sells 100,000 metric 
tons of carbon dioxide captured by Facility X to B for use as a 
tertiary injectant in a qualified enhanced oil recovery project. C 
claims a section 45Q credit in 2024 of $2,706,300 (net 90,000 metric 
tons of qualified carbon oxide captured, disposed of in secure 
geological storage, and used as a tertiary injectant multiplied by the 
statutory credit rate for 2024 of $30.07).
    (B) The total recapture amount in 2025 is the same $5,467,300 as in 
Example 2, but is allocated between A and C. The first 90,000 metric 
tons of recaptured qualified carbon oxide are deemed attributable to 
2024. The credits that are attributable to 2024 are recaptured at the 
2024 statutory rate of $30.07 per ton (for a recapture amount of 
$2,706,300). Because C claimed that amount of section 45Q credit in 
2024, a recapture amount of $2,706,300 is added to C's tax due for 
2025. The remaining 100,000 metric tons of recaptured qualified carbon 
oxide are deemed attributable to 2023. The credits that are 
attributable to 2023 are recaptured at the 2023 statutory rate of 
$27.61 per ton (for a recapture amount of $2,761,000). Because A 
claimed that amount of section 45Q credit in 2023, a recapture amount 
of $2,761,000 is added to A's tax due for 2025.
    (iv) Example 4. (A) Assume the same facts as in Example 2, except 
that in 2023, A made a section 45Q(f)(3)(B) election to allow B to 
claim one-half of the section 45Q credit for 2023. A and B each claimed 
$1,380,500 of section 45Q credit in 2023 (50,000 metric tons each 
multiplied by the 2023 statutory rate of $27.61).
    (B) The total recapture amount in 2025 is the same $5,467,300 as in 
Example 2, but is allocated among A and B. The first 90,000 metric tons 
of recaptured qualified carbon oxide is deemed attributable to 2024. 
The section 45Q credit amounts attributable to 2024 are recaptured at 
the 2024 statutory rate of $30.07 per ton (for a recapture amount of 
$2,706,300). Because A claimed that amount of section 45Q credit in 
2024, $2,706,300 is added to A's tax due for 2025. The remaining 
100,000 metric tons of recaptured qualified carbon oxide is deemed 
attributable to 2023. The section 45Q credit amounts attributable to 
2023 are recaptured at the 2023 statutory rate of $27.61 per ton (for a 
recapture amount of $2,761,000). Because A and B each claimed half of 
that amount ($1,380,500) of section 45Q credit in 2023, $1,380,500 is 
added to both A's and B's tax due for 2025. Thus, a recapture amount of 
$4,086,800 is added to A's tax due for 2025, and a recapture amount of 
$1,380,500 is added to B's tax due for 2025.
    (v) Example 5. (A) Assume the same facts as in Example 2, except 
that the 100,000 metric tons of carbon dioxide sold to B in 2021, 2022, 
2023, and 2024 for use as a tertiary injectant in a qualified enhanced 
oil recovery project were captured equally (50,000 metric tons per 
year) from qualified facilities owned by J and K. Neither J nor K made 
a section 45Q(f)(3)(B) election to allow B to claim the credit.
    (B) Because the leakage determined in 2024 (10,000 metric tons) did 
not exceed the presumed amount stored in 2024 (100,000 metric tons) a 
recapture event did not occur in 2024. The total amount of section 45Q 
credit for 2024 is $2,706,300 (net 90,000 metric tons of qualified 
carbon oxide captured, disposed of in secure geological storage, and 
used as a tertiary injectant multiplied by the statutory credit rate 
for 2024 of $30.07). J and K may each claim half of this amount of 
section 45Q credit ($1,353,150) in 2024.
    (C) The total recapture amount in 2025 is the same $5,467,300 as in 
Example 2, but is allocated between J and K. The section 45Q credit 
amounts relating to the first 90,000 metric tons of recaptured 
qualified carbon oxide are deemed attributable to 2024 and are 
recaptured at the 2024 statutory rate of $30.07 per ton (for a 
recapture amount of $2,706,300). Because J and K each claimed half of 
that amount ($1,353,150) of section 45Q credit in 2024, $1,353,150 is 
added to both J's and K's tax due for 2025. The section 45Q credit 
amounts relating to the remaining 100,000 metric tons of recaptured 
qualified carbon oxide are deemed attributable to 2023 and are 
recaptured at the 2023 statutory rate of $27.61 per ton (for a 
recapture amount of $2,761,000). Because J and K each claimed half of 
that amount ($1,380,500) of section 45Q credit in 2023, an additional 
$1,380,500 is added to both J's and Ks tax due for 2025. Thus, a total 
recapture amount of $2,733,650 is added to both J's and K's tax due for 
2025.
    (vi) Example 6. (A) M owns Industrial Facility Z. No other taxpayer 
has ever owned Z, and M has never allowed another taxpayer to claim any 
section 45Q credits with respect to qualified carbon oxide captured 
from Z. M captured 1,000,000 metric tons of carbon dioxide annually in 
each of 2017, 2018, 2019, 2020, 2021, 2022, 2023, 2024, and 2025. All 
captured carbon dioxide was sold to N for use a

[[Page 4773]]

tertiary injectant in a qualified enhanced oil recovery project. N 
provided contractual assurance that the carbon dioxide would be 
sequestered in secure geological storage. M claimed section 45Q credit 
amounts of $12,830,000 in 2017, $15,209,000 in 2018, $17,760,000 in 
2019, $20,220,000 in 2020, $22,680,000 in 2021, $25,150,000 in 2022, 
$27,610,000 in 2023, $30,070,000 in 2024, and $32,540,000 in 2025 using 
the statutory rates in Sec.  1.45Q-1(d)(3). No injection of carbon 
oxides takes place in 2026. In 2026, N determined that 6,200,000 metric 
tons of qualified carbon dioxide previously injected had leaked from 
the containment area of the reservoir and were released into the 
atmosphere.
    (B) Because the leakage determined in 2025 (6,200,000 metric tons) 
exceed the amount stored in 2026 (0 metric tons) a recapture event 
occurred in 2026. A's credit for 2026 is $0 because the net amount of 
carbon dioxide captured and used as a tertiary injectant in 2026 was 0 
metric tons. The 2026 recapture amount is calculated by multiplying the 
6,200,000 metric tons of recaptured qualified carbon oxide by the 
appropriate statutory credit rate using the LIFO method. The first 
1,000,000 metric tons of recaptured qualified carbon oxide is deemed 
attributable to 2025, and is recaptured at the 2025 statutory rate of 
$32.54 per metric ton. The next 1,000,000 metric tons of recaptured 
qualified carbon oxide is deemed attributable to 2024, and is 
recaptured at the 2024 statutory rate of $30.07 per metric ton. The 
next 1,000,000 metric tons of recaptured qualified carbon oxide is 
deemed attributable to 2023, and is recaptured at the 2023 statutory 
rate of $27.16 per metric ton. The remaining 3,200,000 metric tons are 
not subject to recapture because of the three-year lookback limit in 
Sec.  1.45Q-1(g)(2). Thus, the total recapture amount is $89,770,000, 
and is added to A's tax due for 2026.
    (h) Recapture in the event of deliberate removal from storage--(1) 
In general. If qualified carbon oxide for which a credit has been 
claimed is deliberately removed from a secure geological storage site, 
then a recapture event would occur in the year in which the qualified 
carbon oxide is removed from the storage site pursuant to Sec.  1.45Q-
5(a).
    (2) Recycled qualified carbon oxide. If qualified carbon oxide for 
which a credit has been claimed is recaptured, recycled, and reinjected 
as part of the enhanced oil and natural gas recovery project, that 
qualified carbon oxide will be considered recycled carbon oxide under 
section 45Q(c)(2). If recycled carbon oxide is reinjected into the same 
qualified enhanced oil or natural gas recovery project it was 
originally injected into, it will not be considered deliberately 
removed from a secure geological storage site for purposes of paragraph 
(h)(1) of this section. If recycled carbon oxide is reinjected into a 
different qualified enhanced oil or natural gas recovery project from 
the one it was initially injected into, or used for any other purpose, 
that qualified carbon oxide will be considered deliberately removed 
from a secure geological storage site for purposes of paragraph (h)(1) 
of this section.
    (i) Limited exceptions. A recapture event is not triggered in the 
event of a loss of containment of qualified carbon oxide resulting from 
actions not related to the selection, operation, or maintenance of the 
storage facility, such as volcanic activity or terrorist attack.
    (j) Applicability date. This section applies to taxable years 
beginning on or after January 13, 2021. Taxpayers may choose to apply 
this section for taxable years beginning on or after January 1, 2018, 
provided the taxpayer applies this section and Sec. Sec.  1.45Q-1, 
1.45Q-2, 1.45Q-3, and 1.45Q-4 in their entirety and in a consistent 
manner.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: December 31, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2021-00302 Filed 1-13-21; 8:45 am]
BILLING CODE 4830-01-P