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US Clean Fuel Tax Credit Offers Big Incentives for Biofuel Producers

US Clean Fuel Tax Credit Offers Big Incentives for Biofuel Producers

On May 31, the US Treasury Department and the Internal Revenue Service (IRS) rolled out guidelines detailing how to register for the Section 45Z Clean Fuel Production Tax Credit. This move is aimed at supporting fuel manufacturers who could potentially be eligible for the credit.

The agencies are advising these businesses to get started with the application process as quickly as possible. This will maximize the benefit they can potentially receive from the credit.

About the Clean Fuel Production Tax Credit

The Section 45Z Clean Fuel Production Tax Credit, established under the Inflation Reduction Act, is one of numerous clean energy tax credits. This technology-neutral credit aims to promote the manufacturing of low-emission transport fuel produced and sold in 2025, 2026, and 2027.

According to data from the US Department of Energy, the credit amount is 20 cents per gallon for non-aviation fuel and 35 cents for sustainable aviation fuel (SAF). For facilities meeting wage and apprenticeship requirements laid out by the IRA, that credit amount rises to $1.00 per gallon for non-aviation fuel and $1.75 for SAF.

The Clean Fuel Production Credit is equivalent to the applicable credit amount per gallon multiplied by the fuel's carbon dioxide emission factor. The exact number for the emission factor will be announced yearly by the Treasury Secretary starting January 1, 2025.

More Details to Come on 45Z Benefits

The IRS and the Treasury Department plan to provide additional guidance on other facets of the 45Z credit in the coming months.

The 45Z tax credit replaces the Section 40B SAF credit, formed under the IRA, which applies to 2023 and 2024. Updated guidance on the 40B SAF tax credit was released in April 2024 by the IRS, along with the introduction of the SAF Interagency Working Group's 40BSAF-GREET 2024 model. This model aids in calculating the reduction of greenhouse gas emissions for the purposes of the SAF tax credit.

A new 45Z-GREET model, specifically for the 45Z clean fuels tax credit, has also been announced by the agencies. The complete IRS guidelines on 45Z credit registration (Notice 2024-49) can be found on the IRS website.

How to Qualify for 45Z

According to IRS guidelines, the production credit will begin to take effect on January 1, 2025. To qualify, businesses must have a confirmation document from the IRS, signed and dated on or before that date.

With 2025 quickly approaching, businesses are strongly advised to apply for registration immediately. Early applications will afford the IRS ample time to process them and provide businesses the documents they need.

Per the IRS, delays in the registration process will likely affect the company's eligibility to claim the 45Z credit. For instance, if a business receives a letter of registration dated June 30, 2025, it won't be able to claim the 45Z credit for any fuel produced and sold prior to this date. This is true irrespective of whether all the other requirements for the 45Z credit were met before that date.

Submit Applications Immediately to Take Advantage of the Benefits

To secure a confirmation letter by January 1, 2025, businesses should submit applications by July 15, 2024. It’s not a formal deadline, but it’s important to finish to secure a confirmation letter.

The IRS stated that they intend to process completed applications received by July 15 to allow the January 1 start date. They also cautioned that businesses applying after this suggested deadline stand a lesser chance of getting their registration by January.

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