IRS defines ‘beginning of construction’ for CO2 capture tax credit

The Internal Revenue Service recently provided clarity on some of its rules for tax credits for projects that capture carbon dioxide and said it plans to issue further guidance to resolve remaining questions regarding eligibility for the credit.

For years, technologies that can capture and sequester CO2 from facilities such as power plants have been hailed as a way of reducing greenhouse gas emissions implicated in rising global temperatures.

Advocates of carbon capture say that providing a revenue stream for captured CO2 is key to the economic viability of the technology. Section 45Q of the U.S. tax code offers at least one potential revenue stream in the form of tax credits for capturing and storing CO2.

The Bipartisan Budget Act of 2018 expanded and reformed the 45Q tax credit and, after passage of the act, the Treasury Department requested comments from the public on the changes.

Treasury has now issued guidance on the meaning of “beginning of construction,” which is often viewed as a crucial milestone for developers seeking to qualify for the tax credit. The credit is only available for projects that begin construction before 2024.

Under the new guidance, the IRS provides two tests that can be used for developers seeking to qualify for a carbon capture tax credit. Under the 5% safe harbor rule, a project is deemed to have begun construction if the owner incurs 5% or more of the total cost of a project by the end of 2023.

Alternatively, a developer can use a second test by beginning significant physical work on a project, such as excavating a foundation or pouring concrete or performing off-site fabrication of project components or structures. Under either test, a developer is required to make “continuous progress” on a project once construction starts.

In deference to the complexity of carbon capture projects, the IRS grants projects six years to complete construction and begin capturing CO2. The construction period for renewable energy projects seeking similar tax credits is four years.

In its notice (2020-12), the IRS also offered guidance on transfers of ownership of a qualified facility, stating that there is “no statutory requirement that the taxpayer that places the facility in service also be the taxpayer that begins construction of the facility.” The notice did not address other questions, such as what kind of CO2 storage qualifies as secure.

The IRS said it “anticipates issuing further guidance in the near future” on issues ranging from secure geological storage to utilization to recapture of the credit for those claiming credits for carbon capture.

For CO2 that is stored geologically through enhanced oil recovery, Section 45Q currently calls for a tax credit that rises over 10 years from $10 per metric ton of CO2 to $35 per metric ton. For saline and other forms of geologic storage, the tax credit rises from $20 per metric ton to $50 per metric ton. For CO2 captured and put to uses other than enhanced oil recovery, that is, injecting CO2 into an oil well to improve production, the tax credit is $35 per metric ton.