4728 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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. 

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 §§ 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 tollfree 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 § 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 § 1.45Q–1(h)(1). Because the 

commenter’s suggested clarification 

improves the readability of the 

regulations, § 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 

4730 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 

§ 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 longterm 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 enforcementrelated 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 

§ 1.45Q–1(h)(2)(iii)(B) of the proposed 

regulations and the exclusion of 

contracts that limit damages to a 

specified amount in § 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 

§ 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 

§ 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 

§ 1.168(k)–1(b)(4)(ii)(A)–(D). 

2. Multiple Binding Written Contracts 

Permitted 

A commenter noted that while 

§ 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 

§ 1.45Q–1(h)(2)(ii): ‘‘A party that 

physically carries out the disposal, 

injection, or utilization of qualified 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 4731 

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 § 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 § 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 § 1.45Q–1(h)(2). The 

final regulations also permit multiple 

binding written contracts. Further, as 

long as all the requirements of § 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 § 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 

§ 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). 

4732 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 § 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 § 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 preBBA 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 

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

§ 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 § 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 § 1.45Q– 

4734 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 

§ 1.45Q–2(c)(2) as it results in more 

confusion in practice. Similarly, another 

commenter suggested deleting the 

proposed regulation § 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 § 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 brightline 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 functionalitybased 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. 

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

4736 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 tiein 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 § 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 

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

§ 1.45Q–2(g)(1)(ii) and (iii) of the 

proposed regulations, but also the 

maximum emission amounts in 

§ 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. 

4738 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 dioxidebearing 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 brightline 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 § 1.45Q–2(d)(4) of the 

proposed regulations to incorporate 

definitions and applications of 

industrial facility, natural carbon oxidebearing 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 § 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 § 1.45Q–2(d)(3) of the proposed 

regulations is not appropriately applied 

in the example at § 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 § 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 § 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-toelectricity, 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 § 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 

4740 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 §§ 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 EPAapproved 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-gasvalidation-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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 § 1.45Q–3 of the 

proposed regulations, regarding 

‘‘qualified independent engineer or 

geologist’’ for secure geological storage, 

and § 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 

§ 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 thirdparty stating that it is independent from 

the taxpayer. Therefore, the commenters 

recommended that the certification 

requirements under § 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 

§ 1.43–3 and limit § 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 

§ 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 

4742 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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, § 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 

§ 4.3) required prior to period of 

quantification; (2) Periodic 

documentation (as required by CSA/ 

ANSI ISO 27916:2019 § 4.4) required at 

least annually throughout the lifespan of 

the project; and (3) Termination 

documentation (as required by CSA/ 

ANSI ISO 27916:2019 § 10.4). 

Several commenters requested that 

§ 1.45Q–3(d) be revised to allow that a 

certification by a qualified independent 

engineer or geologist would be a onetime 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 § 1.45Q–2(h)(6) of the 

proposed regulations be revised because 

section 193(b)(1) does not define 

‘‘tertiary injectant,’’ and § 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 

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

4744 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 § 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-fitsall 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 

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

§ 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 safeharbor for taxpayers who have their 

LCAs approved by an accredited thirdparty verification entity. 

The final regulations require the LCA 

and the LCA report to be performed by 

4746 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 

§ 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 nationallyrecognized 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 preapproval 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 preapproval 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 

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

4748 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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-byproject 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 postcredit-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 thirdparty 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/carbondioxide-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 

4750 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 § 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 § 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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-firstout 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 postcredit-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 precombustion, 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 

4752 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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, 

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

4754 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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. Nonconfidential 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 subportions, 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 

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

4756 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 noaction 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 

§§ 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 

§ 1.45Q–1(e) is an election to have the 

dollar amounts applicable under 

§ 1.45Q–1(b) apply in lieu of the dollar 

amounts applicable under § 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 

§ 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 

§ 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 

§ 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 

§ 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 § 1.43–3. This 

requires that the taxpayer obtain a 

petroleum engineer’s certification under 

§ 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 

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

§ 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 

§ 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 

§ 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 §§ 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. 

4758 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

Form Type of filer OMB No.(s) Status 

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-requestfor-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 

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

4760 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

PART 1—INCOME TAXES 

■ 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: 

§ 1.45Q–0 Table of Contents 

This section lists the captions 

contained in §§ 1.45Q–1 through 1.45Q– 

5. 

§ 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. 

§ 1.45Q–2 Definitions for Purposes of 

§§ 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 §§ 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. 

§ 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. 

§ 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. 

§ 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. 

§ 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 

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

Year 

Applicable 

dollar 

amount 

2017 .......................................... $22.66 

2018 .......................................... 25.70 

2019 .......................................... 28.74 

2020 .......................................... 31.77 

2021 .......................................... 34.81 

TABLE 1 TO PARAGRAPH (d)(1)— 

Continued 

Year 

Applicable 

dollar 

amount 

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) 

Year 

Applicable 

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.’’ 

4762 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

(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 

§ 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 § 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 § 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 § 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 

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

4764 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

(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 §§ 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 § 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 § 1.45Q–5; and 

(G) Must, for qualified carbon oxide 

that is intended to be utilized in a 

manner specified in § 1.45Q–4, obligate 

the utilizing party to comply with 

§ 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 § 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 (eGGRT 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 eGGRT ID number(s) (if available) of each 

qualified facility where qualified carbon 

oxide was captured; 

(D) The name and location and eGGRT 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 §§ 1.45Q–2, 1.45Q–3, 

1.45Q–4, and 1.45Q–5 in their entirety 

and in a consistent manner. 

§ 1.45Q–2 Definitions for Purposes of 

§§ 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 

4766 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 

§ 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 § 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 § 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 § 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 § 1.45Q–4. The ethanol 

plant is a qualified facility under section 

45Q(d)(2)(C) and § 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 § 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 

§ 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 § 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 § 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 § 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 § 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 § 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 

4768 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 § 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 § 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 § 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 § 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 § 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 

§ 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 

§ 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 eGGRT 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 § 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 

§ 1.43–2, by substituting crude oil or 

natural gas for crude oil in section 

43(c)(2)(A)(i) and §§ 1.43–2 and 1.43–3. 

(1) Application of §§ 1.43–2 and 1.43– 

3. For purposes of applying §§ 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 

§ 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 § 1.43–3(a)(3) and 

the operator’s continued certification of 

a project under § 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 § 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 § 601.602 of this 

chapter), or other guidance. This 

definition of Form 8933 applies to this 

section and to §§ 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 §§ 1.45Q–1, 1.45Q–3, 

1.45Q–4, and 1.45Q–5 in their entirety 

and in a consistent manner. 

§ 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 § 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 § 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 § 1.45Q–5 for rules 

regarding recapture. 

4770 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

(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 §§ 1.45Q–1, 1.45Q–2, 

1.45Q–4, and 1.45Q–5 in their entirety 

and in a consistent manner. 

§ 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 § 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 

§§ 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 §§ 1.45Q–1, 1.45Q–2, 

1.45Q–3, and 1.45Q–5 in their entirety 

and in a consistent manner. 

§ 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 § 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 

Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 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 § 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 § 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 § 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 § 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 § 1.45Q–5(e)); 

(B) The leaked amount of qualified 

carbon oxide (in metric tons) (as defined 

in § 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 

4772 Federal Register / Vol. 86, No. 10 / Friday, January 15, 2021 / Rules and Regulations 

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 § 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 

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

§ 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 §§ 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