Reducing Inflation Act Expands Carbon Capture and Sequestration Tax Credit – Tax authorities

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The Reducing Inflation Act of 2022 (the “Act”), signed into law on August 16, 2022, enhances federal tax incentives for carbon capture projects. The law increases the amount of the tax credit, relaxes the eligibility requirements for the credit and gives promoters more options to monetize the credit.

The law breathes new life into Section 45Q, the federal carbon capture tax credit, available to taxpayers who capture and sequester carbon dioxide and other carbon oxides that are eligible and claimed over a period of 12 years. The credit was first enacted in 2008 but, despite several taxpayer-friendly changes in 2018, has not attracted as much investment in carbon capture projects as some had hoped. The Act seeks to remedy this problem by generally reorganizing credit as follows:

  • Larger credit. The law increases the maximum carbon monoxide capture and sequestration credit amount from $50 per metric ton to $85 per metric ton (and $180 per metric ton for carbon dioxide captured using direct air capture technology). If a project is financed by tax-exempt bonds, the credit is reduced by a maximum of 15%, compared to 50% under the previous law. However, these global credit amounts are subject to meeting applicable salary and apprenticeship requirements.

  • Eligible facilities. The law significantly reduces the annual threshold amount of carbon monoxide that must be captured for a facility to qualify for the credit. For direct air capture installations, the threshold is reduced from 100,000 tonnes to 1,000; for certain electricity production facilities, from 500,000 tonnes to 18,750 tonnes; and for other installations, from 100,000 metric tons to 12,500 metric tons.

  • Start of construction. The law extends the deadline for starting the construction of carbon capture facilities and equipment from December 31, 2025 to December 31, 2032.

  • Direct payment option. The law allows tax-exempt entities, including state and local governments, to claim credits as cash refunds (rather than offsets with taxes otherwise payable). The election is also available to other taxpayers, but only for a maximum of five years.

  • Credit sales. The Act allows taxpayers to sell credits tax-free by transferring the credits to other taxpayers in exchange for cash.

The amendments will generally come into effect for qualified installations and carbon capture equipment put into service after December 31, 2022.

The law is expected to stimulate interest in carbon capture projects that may not have been as economically viable under previous legislation. Additionally, the two new options for monetizing credits – the direct payment option and the transferability of credits – will give developers more flexibility to finance carbon capture projects and could reduce the need for these projects to depend on investors. benefiting from tax fairness.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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