Draft Guidance on the Section 45Z Clean Fuel Production Credit

Beginning January 1, 2025, taxpayers may claim a credit for producing transportation fuels such as ethanol, biodiesel, and renewable natural gas and selling them to unrelated buyers. The credit amount depends on the fuel's lifecycle greenhouse gas emissions rate: A net-zero emissions fuel can generate a $1.00-per-gallon credit ($1.75 for sustainable aviation fuel), with decreasing amounts as emissions rise. No credit is available at or above 50 kilograms of carbon dioxide equivalent per one million BTUs.

Unlike previous fuel credits, Section 45Z does not mandate specific feedstocks or fuel types. Producers may also sell these credits for cash under the IRA's transfer rules. Although Treasury was expected to release final regulations by January 1, 2025, the recent Notices instead offer only draft proposed regulations and a draft table of emissions rates.

The draft proposed regulations, if released, would provide as follows: 

• Lifecycle Greenhouse Gas Emissions Rate. If a feedstock and production pathway is listed in the emissions rate table, the taxpayer must determine the "well-to-wheels" emissions rate using the new 45ZCF-GREET model (or the CORSIA model for sustainable aviation fuel). 
• Requirements for Production. A taxpayer must produce the fuel, but ownership of a facility is not required. Blending or minimal activities do not qualify as "production."
• Definition of Fuel. A fuel must be fit for use in a highway vehicle or aircraft (or blendable into a fuel mixture for such use), but actual use is not required.
• Permitted Feedstocks. Treasury and the IRS plan rules to reduce emissions rates for climate-smart cultivation of corn, soybean, and sorghum, and may impose extra requirements for imported used cooking oil.
• Anti-Stacking. A taxpayer cannot claim Section 45Z credits from a facility for which credits under Section 48(a)(15) (the investment tax credit for hydrogen facilities), Section 45V (the hydrogen production tax credit), or Section 45Q (the carbon capture tax credit) have been claimed in the same taxable year. 
• Registration and Filing. The Notices outline registration procedures for clean fuel producers, including rules for disregarded entities.

The forthcoming proposed regulations are intended to become effective when published in the Federal Register, except the portions that relate to the emissions rate table and the 45ZCF-GREET model, which will be effective for taxable periods ending on or after January 10, 2025.

Taxpayers should be aware that the Notices do not preclude the Treasury and the IRS from revising the draft proposed regulations before they are published.