The U.S. Department of the Treasury and IRS on Dec. 22, 2023, released proposed regulations regarding the production tax credit (PTC) for hydrogen under Section 45V of the Internal Revenue Code, as enacted by the Inflation Reduction Act. Comments to the proposed regulations are due 60 days after the proposed regulations are published (which is expected Dec. 26, 2023). In conjunction with the proposed regulations, the U.S. Department of Energy also released a whitepaper on the considerations related to the credit.
Under Section 45V, a PTC is available for each kilogram of clean hydrogen produced during the taxable year for the first 10 years after the hydrogen generation facility is placed into service. Alternatively, taxpayers may elect to claim the investment tax credit (ITC) under Section 48 in lieu of the Section 45V PTC.
The Section 45V credit equals $3 (adjusted for inflation) per kilogram of hydrogen produced, multiplied by the applicable rate. The applicable rate is based on the life cycle greenhouse gas emissions rate of the hydrogen produced as follows:
- 4 kilograms of CO2e per kilogram of hydrogen through 2.5 kilograms of CO2e per kilogram of hydrogen: 20 percent
- 5 kilograms of CO2e per kilogram of hydrogen through 1.5 kilograms of CO2e per kilogram of hydrogen: 25 percent
- 5 kilograms of CO2e per kilogram of hydrogen through 0.45 kilograms of CO2e per kilogram of hydrogen: 33.4 percent
- less than 0.45 kilograms of CO2e per kilogram of hydrogen: 100 percent
The $3 per kilogram amount is reduced to 60 cents per kilogram if prevailing wage and apprenticeship requirements are not satisfied. (See Holland & Knight's previous alert, "Highlights of the Proposed Regulations on IRA Prevailing Wage and Apprenticeship Requirements," Sept. 6, 2023.) To be eligible for the Section 45V credit, construction on the facility must begin before 2033.
Among other guidance, the proposed regulations provide rules requiring:
- defining "lifecycle greenhouse gas emissions" as having the same meaning as that in 42 U.S.C. 7545(o)(1)(H) as in effect on Aug. 16, 2022, and includes emissions through only the point of production (well-to-gate) as determined under the most recent Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model; it includes emissions associated with feedstock growth, gathering, extraction, processing and delivery to a hydrogen production facility, as well as emissions associated with the electricity used by the hydrogen production facility and any capture and sequestration of carbon dioxide generated by the hydrogen production facility
- use of the latest version of 45VH2-GREET to determine emissions rates for purposes of the Section 45V credit and under what conditions the taxpayer may seek a provisional emissions rate
- time matching of energy attribute certificates (EACs), with annual matching required through 2027 and transition to hourly matching beginning in 2028
- additionality, referred to as the "incrementality requirement," effective immediately for source electricity but providing for a lookback to allow facilities placed into service, or with an uprate, within the prior 36 month before the hydrogen production facility was placed into service can qualify
The Holland & Knight Energy Tax Team is reviewing the proposed regulations and will provide additional analysis.
