Refined Coal Tax Credits: Who Qualifies and How to Claim

The refined coal tax credit, established under Section 45 of the Internal Revenue Code, was a federal incentive for producing and selling a cleaner-burning form of coal. Its purpose was to encourage the adoption of technologies that reduce harmful emissions from coal-fired power plants. The credit, which has since expired, was designed to lower the environmental impact of coal combustion by making it financially advantageous for producers to invest in processes that treat raw coal. By offering a per-ton credit for qualifying coal, the policy sought to offset the costs of the refining process, making the resulting cleaner fuel more competitive with untreated coal.

Defining Refined Coal

For coal to be considered “refined” under the tax code, it had to be a fuel produced from coal or high-carbon fly ash and undergo a specific treatment process. This process had to result in a fuel that was sold with the reasonable expectation of being used to produce steam. The defining characteristic of refined coal lay in its certified ability to reduce specific emissions when burned compared to the original, untreated “feedstock” coal.

The core requirement was a “qualified emission reduction.” For facilities placed in service after December 31, 2008, the refined coal had to be certified by the producer as resulting in at least a 20 percent reduction in nitrogen oxide (NOx) emissions and at least a 40 percent reduction in either sulfur dioxide (SO2) or mercury emissions. An older, less stringent standard applied to facilities placed in service before January 1, 2009, which required a 20 percent reduction in NOx and a 20 percent reduction in either SO2 or mercury.

The comparison was made between the emissions profile of the refined coal and that of the feedstock coal used to produce it. This required careful testing and documentation to substantiate the claim of emission reductions. The methods for this testing could include continuous emission monitoring system (CEMS) field testing, which provided a direct measure of the pollutants released during combustion.

Taxpayer and Facility Eligibility

Eligibility for the refined coal tax credit hinged on two distinct sets of requirements: one for the taxpayer producing the coal and another for the facility where it was produced. The taxpayer claiming the credit was the entity that produced the refined coal and subsequently sold it to an unrelated party. The credit was tied to the act of production and sale, not merely ownership of the underlying assets.

A component of eligibility was the facility itself, which had to meet a “placed-in-service” deadline. To qualify, a refined coal production facility must have been originally placed in service before January 1, 2012. This provision grandfathered in a specific set of existing or soon-to-be-completed facilities, rather than creating an open-ended incentive for new construction.

Once a facility was deemed eligible, the taxpayer could claim the credit for qualified refined coal produced and sold during a 10-year period that began on the date the facility was originally placed in service. Because of these placed-in-service and 10-year window limitations, no facility could generate tax credits under this provision after December 31, 2021. The sale had to be to an “unrelated person,” a rule designed to prevent taxpayers from generating credits by simply moving coal between affiliated entities.

Calculating the Credit Value

The value of the refined coal tax credit was calculated on a per-ton basis for all qualifying refined coal produced and sold. The process began with a statutory base amount that was subject to annual adjustments for inflation, which meant the specific dollar value of the credit per ton changed from year to year. The IRS announced the inflation-adjusted credit amount annually in its publications.

The credit amount was multiplied by the number of tons of qualified refined coal the taxpayer produced and sold during the taxable year. The credit also included a phase-out mechanism based on the market price of coal. If the annual reference price of coal, as determined by the IRS, rose above a certain inflation-adjusted threshold, the value of the credit was reduced.

The reduction was calculated proportionally based on how much the reference price exceeded the threshold. This feature was designed to decrease the value of the tax incentive during periods when high coal prices already made production more profitable, ensuring the credit provided support primarily when market conditions were less favorable.

Claiming the Refined Coal Credit

To claim the refined coal tax credit, taxpayers were required to complete and file IRS Form 8835 with their annual income tax return. During the years the credit was active, the form was titled “Renewable Electricity, Refined Coal, and Indian Coal Production Credit.” Reflecting the expiration of these credits, the form was renamed “Renewable Electricity Production Credit” for tax years 2022 and later.

When completing Form 8835, the taxpayer had to provide specific details about their refined coal operations, including the facility’s location and the date it was originally placed in service. The form required the taxpayer to report the total tons of refined coal produced and sold during the tax year.

The taxpayer also had to attach a certification to their tax return for the fuel for which the credit was claimed. This certification had to state that the fuel would result in the required qualified emissions reduction when used to produce steam and indicate the testing method used to determine the emission reductions.