This article will dive deeper into the Inflation Reduction Act and how the latest legislation incentivizes CCUS projects. If you’ve tuned in to our previous articles this month, RR&A provides the latest information on the advantages of CCUS projects so that your company has every insight to guide it through a strategic plan to capitalize on carbon capture projects. So, what other ways is the Internal Revenue Code of 1986, as amended (IRC or Code), encouraging CCUS projects? 

To expand upon the 45Q tax credits that we discussed in our previous article, the Inflation Reduction Act (IRA) (PL 117-169, 136 Stat. 1818 (2022)) added new provisions to the Code that allow owners of qualifying eligible CCUS projects to qualify for additional opportunities for tax credits in a CCUS project and to elect for direct payment in lieu of the tax credit, if certain conditions are met (IRC § 6417). 

Under the Code, drafted in coordination with CCUS groups, the IRA significantly increased the 45Q tax credit value to $85 per metric ton for captured qualified carbon oxides (“QCO”) stored in geologic formations. QCOs include the initial deposit of captured carbon oxide used for EOR but do not include carbon oxide that is recaptured, recycled, and re-injected as part of the enhanced oil and natural gas recovery process. In addition, the IRA allows for $60 per metric ton for capturing carbon emissions and $60 per metric ton for QCO stored in oil and gas fields if specific wage and apprenticeship requirements are met. These credits require specialized documentation and coordination with a development team. These increases in applicable tax credits further incentivize incorporating CCUS into industrial facility projects, specifically focusing on emission reductions and developing new local workforces.

Beginning in 2023, but before January 1, 2033, “applicable entities,” including certain entities such as tax-exempt organizations like US governmental agencies or political subdivisions, and governmental agencies may take advantage of the 45V and 45X credits. Applicable entities that make a direct pay election are treated as making a payment against US federal income taxes for the taxable year related to which the credit was determined in an amount equal to the amount of that credit (26 CFR § 1.6417-1(h) and 26 CFR § 1.6417-2). The applicable entity receives a refund if the payment exceeds the taxes owed. Any election must be made for the entire amount of the credit. The foundation of this election is the understanding that by receiving the 45Q tax benefits by direct pay, project developers and sponsors will avoid the costly process of raising tax equity to utilize the traditional tax credits generated through 45Q. Therefore, direct payment can allow project developers and sponsors to reap more of the benefits of the 45Q tax credit instead of having to share or transfer those benefits to financial institutions with significant tax appetites. 

Alternatively, entities that do not qualify as applicable entities but do qualify for direct pay may be eligible for transferability of tax credits under the IRA. Before the passage of the IRA, CCUS project developers could not sell or otherwise transfer the federal tax credits relating to their renewable energy projects. If CCUS project developers did not have a sufficient tax liability to use these credits, they often entered into transactions with investors with such tax liabilities. However, now that direct pay is an option under the 45Q tax credit, in the case of a transfer, the cash payment received by the transferor will not be treated as taxable income, and the third-party transferee may not deduct the cash payment. On the contrary, once a 45Q credit is transferred to a third party under this rule, the third party may not share it again. The recent policy shift shows that the government is committed to establishing a framework for transferring tax credits for renewable energy.

While this article is a specific overview of the updates to the IRA, there are always additional details regarding qualifications and exclusions, as with any new statutory updates. We at RR&A are eager to discuss these opportunities with you and your team and guide you toward the optimal path to make the most of the new tax incentives.