Bulletin No. 2021–16

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2021–16

April 19, 2021

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

EMPLOYMENT TAX

INCOME TAX

Notice 2021-23, page 1113.

T.D. 9944, page 1062.

Notice 2021-23 provides guidance on the employee retention credit provided under Section 2301 of the Coronavirus

Aid, Relief, and Economic Security Act, as amended by section 207 of the Taxpayer Certainty and Disaster Tax Relief Act

of 2020, for qualified wages paid after December 31, 2020,

and before July 1, 2021. Notice 2021-23 amplifies Notice

2021-20 and provides employers with guidance on how to

determine their eligibility for and the amount of the employee

retention credit they may claim for the first and second calendar quarters of 2021.

Finding Lists begin on page ii.

This document contains final regulations regarding the credit for carbon oxide sequestration under section 45Q of the

Internal Revenue Code (Code). These final regulations will 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.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

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of the tax laws, including all rulings that supersede, revoke,

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internal practices and procedures that affect the rights and

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Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

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comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

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procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

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This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

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monthly indexes are cumulated on a semiannual basis, and are

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The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

April 19, 2021 

Bulletin No. 2021–16

Part I

26 CFR 1.45Q-1; 26 CFR 1.45Q-2; 26 CFR 1.45Q3; 26 CFR 1.45Q-4; 26 CFR 1.45Q-5

T.D. 9944

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

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 toll-free 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

April 19, 2021

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.

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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

Bulletin No. 2021–16

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 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

Bulletin No. 2021–16

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

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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), comment-

April 19, 2021

ers 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

April 19, 2021

for 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

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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 long-term 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

Bulletin No. 2021–16

enforcement-related 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).

Bulletin No. 2021–16

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 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

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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 other-

April 19, 2021

wise 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 entered

into before January 13, 2021, 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

April 19, 2021

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).

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.

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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.

Bulletin No. 2021–16

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 pre-BBA

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

Bulletin No. 2021–16

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 twelveyear 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 oth-

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erwise 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 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 car-

April 19, 2021

bon 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

April 19, 2021

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

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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-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

Bulletin No. 2021–16

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

Bulletin No. 2021–16

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

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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 functionality-based 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.

4. Unit of Property: Independently

Functioning Process Train

Commenters requested that the definition of carbon capture equipment be

April 19, 2021

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

April 19, 2021

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

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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,

Bulletin No. 2021–16

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.

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 tie-in 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 equip-

Bulletin No. 2021–16

ment. 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.

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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

April 19, 2021

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-butnew 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 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 clari-

April 19, 2021

fy 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 indus-

1072

trial 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

Bulletin No. 2021–16

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.

ferent 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.

4. Minimum Threshold Requirements –

Direct Air Capture Facilities

5. Aggregation

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 dif-

Bulletin No. 2021–16

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. Commenters suggested that the final

regulations provide that factors indicating

that multiple qualified facilities or units

of carbon capture equipment are operated

as part of a single project should include,

but should not be 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, construc-

1073

tion 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

April 19, 2021

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 dioxide-bearing

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 bright-line 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 oxide-bearing 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

April 19, 2021

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 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 met-

1074

ric 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

Bulletin No. 2021–16

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-to-electricity, 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

Bulletin No. 2021–16

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 defi-

1075

nition of direct air capture facility were

strictly interpreted to not allow for capture

of even nominal amounts of carbon 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

April 19, 2021

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 EPA-approved 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

April 19, 2021

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 par-

1076

ty 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-gas-validation-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 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 en-

Bulletin No. 2021–16

gineer 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 third-party 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

Bulletin No. 2021–16

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

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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 CO2EOR 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 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

April 19, 2021

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 one-time

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

April 19, 2021

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

1078

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 emit-

Bulletin No. 2021–16

ted 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 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

Bulletin No. 2021–16

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

1079

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 qual-

April 19, 2021

ified 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

industry-standard 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) 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 be-

April 19, 2021

ing 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-fits-all

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

1080

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

Bulletin No. 2021–16

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 endof-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 emissions consistently

with section 45Q(f)(5)(B)(ii). The defi-

Bulletin No. 2021–16

nition 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-tograve 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

1081

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. 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)

April 19, 2021

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

April 19, 2021

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 safe-harbor for taxpayers who have

their LCAs approved by an accredited

third-party verification entity.

The final regulations require the LCA

and the LCA report to be performed by

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

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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 nationally-recognized 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,

Bulletin No. 2021–16

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 pre-approval 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 pre-approval 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

Bulletin No. 2021–16

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 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.

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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

April 19, 2021

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 comment-

April 19, 2021

er 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,

plain-language 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 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.

1084

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

Bulletin No. 2021–16

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 provi-

Bulletin No. 2021–16

sions 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 ox-

1085

ide 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 f

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