On July 24, 2024, the IRS issued Notice 2024-60, which sets forth the procedures for taxpayers to follow when claiming Section 45Q credits based on the “utilization” of carbon oxide. Taxpayers claiming credits based on utilization must demonstrate the metric tons of qualified carbon oxide that they utilize based on analysis of the lifecycle greenhouse gas emissions. The Notice identifies the information to be included and procedures for taxpayers to follow when submitting a greenhouse gas lifecycle analysis (LCA) report in support of Section 45Q Credits based on utilization of carbon oxide. At the same time, the Department of Energy (DOE) released its 45Q LCA Guidance Toolkit with details and a template for LCA reports. This new guidance will be critical for taxpayers seeking to claim Section 45Q credits for utilization of qualified carbon oxide (which is typically CO2) in producing marketable products.
Section 45Q provides taxpayers a credit for each metric ton of qualified carbon oxide captured from certain industrial sources or direct air capture facilities, and disposed of in secure geological storage, used as a tertiary injectant in certain enhanced oil or natural gas projects and disposed of in secure geological storage, or “utilized” by the taxpayer. Under the statute, “utilization” includes fixation through photosynthesis or chemosynthesis (e.g., growing algae or bacteria), chemical conversion, or use for any other purpose for which a market exists (except use as a tertiary injectant in a qualified enhanced oil or natural gas recovery project).
The statute further provides that the amount of carbon oxide utilized for purposes of determining the credit is equal to the metric tons of carbon oxide that the taxpayer demonstrates was captured and permanently isolated from the atmosphere, or displaced from being emitted into the atmosphere. This demonstration must be pursuant to a greenhouse gas LCA under requirements set by the IRS and Treasury in consultation the DOE and Environmental Protection Agency (EPA). 1
In 2021, the IRS and Treasury issued regulations on how taxpayers must verify utilization for purposes of the credit through submission of an LCA report. In particular, Section 1.45Q-4 of the regulations spelled out that the taxpayer must submit an LCA report establishing the aggregate quantity of greenhouse gas emissions (including direct, and significant indirect emissions (e.g., those from land use changes)) related to the full product lifecycle. This includes all stages of product and feedstock production, distribution and ultimate use by the consumer. The LCA report must be prepared in compliance with specific International Organization for Standardization (ISO) standards, produced or verified by a qualified independent third party, and submitted to the IRS and DOE for review. The taxpayer cannot claim the credit before IRS approval of the LCA report.
Notice 2024-60 provides additional details on the how taxpayers are to prepare and submit LCA reports to the IRS and DOE, and the process through which the IRS and DOE will review and approve or reject LCA reports. As noted, all of this must occur before the taxpayer claims credits for utilization.
Under the Notice, a taxpayer must submit a separate LCA report for each qualified facility for which it will claim utilization credits. In addition to the ISO standards (ISO Nos. 14040:2006 and 14044:2006), the Notice states that the LCA report must be prepared in conformity with the most current version of DOE’s National Energy Technology Laboratory’s (NETL) Carbon Dioxide Utilization (CO2U) Life Cycle Analysis Guidance for the U.S. DOE Office of Fossil Energy and Carbon Management and 45Q Addendum to the CO2U LCA Guidance Document (together, the “NETL 45Q LCA Guidance”). As noted above, the DOE posted the NETL 45Q LCA Guidance on July 19, 2024. It will become a key component of any taxpayer’s preparation of an LCA report and claim for Section 45Q credits based on utilization.
The Notice also spells out the requirements for third-party expert certification of the LCA report, format, penalty of perjury statement, and other formal requirements. It also describes the requirements for submitting an Approval Request for an LCA report to the IRS and DOE, including the required contents (e.g., LCA report, supplemental information supporting the LCA report, third-party statement, etc.). It also covers how to send the Approval request to the IRS and DOE.
The IRS and DOE accept Approval Requests for LCA reports on a rolling basis. The Notice sets a general target of completing the review within four months, which may be ambitious at least in the beginning of the program. The first phase of their review focuses on completeness and accuracy of the Approval Request. Second, the IRS sends the Approval Request to DOE for technical review. Either DOE or the IRS can request additional information, giving the taxpayer an opportunity to make supplemental submissions, which can extend the four-month review period.
Under the regulations, LCA reports are subject to DOE Technical Review. The notice explains that this review can take two forms: either a “Conformance Review,” or a “Critical Review.” A Conformance Review ensures that the LCA Approval Request follows the required ISO standards and the most recent NETL 45Q LCA Guidance requirements. DOE will conduct a Conformance Review where the taxpayer’s LCA Approval Request includes an LCA report verified by an independent third party as adhering to applicable standards and best practices. Upon performing a Conformance Review, the DOE may determine that a Critical Review is warranted.
DOE will conduct a Critical Review when the taxpayer’s LCA report has not been verified by an independent third party or, as noted above, when the DOE determines such review is warranted following a Conformance Review. Like a Conformance Review, a Critical Review also focuses on whether the taxpayer’s LCA Approval Request follows the required ISO standards and the most recent NETL 45Q LCA Guidance requirements. However, it is broader in scope and includes a detailed technical assessment of the taxpayer’s LCA model and supporting data. This significant procedural difference should motivate taxpayers to include third-party verifications in their LCA Approval Requests.
Once DOE review is completed, the IRS will decide whether to approve the LCA and notify the taxpayer. Only after receiving this approval may the taxpayer begin claiming its Section 45Q credits for utilization. The LCA approval applies to the year the LCA Approval Request was submitted and following two taxable years. After this three-year period, the taxpayer must submit a new LCA approval request (Periodic Resubmission). Approval of a Periodic Resubmission generally results in a new three-year period for claiming the credit. Each year, the taxpayer must determine whether there has been a material change in the “lifecycle displacement factor” as defined in the Notice and computed under the NETL 45Q LCA Guidance requirements. If there is a material change, the taxpayer must resubmit its LCA Approval Request to the IRS and DOE and receive approval before claiming additional credits.
Notice 2024-60 provides requisite guidance on how taxpayers can obtain the requisite approvals from the IRS and DOE before claiming Section 45Q credits based on utilization of carbon oxide. The DOE’s posting of its NETL 45Q LCA Guidance is a critical part of the overall guidance package. Going forward, the IRS and Treasury announced that they intend to issue proposed regulations adopting certain portions of the Notice.
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1 The statute defines “lifecycle greenhouse gas emissions” by cross referencing Section 211(o)(1)(H) of the Clean Air Act, 42 U.S.C. §7545(o)(1)(H), as of February 9, 2018.
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