Section 29 Tax Credit for Nonconventional Fuels

The Section 29 tax credit was a federal incentive established to encourage the domestic production of fuel from nonconventional sources, aiming to lessen dependence on traditional energy supplies. This credit was originally detailed in Section 29 of the Internal Revenue Code but was later redesignated and is now found under Section 45K. While the credit itself has expired, its definitions are still referenced by other parts of the tax code.

Eligibility for the Credit

Eligibility for the nonconventional source fuel credit hinged on two factors: the specific type of fuel produced and strict timing requirements for the production facility and the fuel’s sale. A taxpayer had to be the one who both produced the fuel and sold it to an unrelated party to qualify.

Qualifying fuels under Section 45K included:

• Oil produced from shale and tar sands
• Gas produced from geopressured brine, Devonian shale, coal seams, or a tight formation
• Qualified processed wood fuels
• Steam generated from solid agricultural byproducts

The credit was subject to sunset provisions. For most qualified fuels, the facility or well must have been placed in service before January 1, 1993, and the fuel had to be sold before January 1, 2003. A later extension for facilities producing coke or coke gas expired for fuel sold after December 31, 2013, marking the end of the credit’s availability.

Calculating the Credit Amount

The calculation of the Section 45K credit began with a statutory base amount of $3 per barrel-of-oil equivalent (BOE) of qualifying fuel. The credit was directly tied to the volume of fuel a taxpayer produced and sold within a given tax year.

To standardize the credit across different types of fuels with varying energy content, the law defined a barrel-of-oil equivalent as a unit of energy equal to 5.8 million British thermal units (BTUs). This measurement allowed for a consistent application of the credit, whether the qualifying fuel was a gas, a liquid, or a solid.

The $3 base amount was adjusted annually to account for inflation, and the Internal Revenue Service (IRS) was responsible for publishing this inflation adjustment factor each year. The final calculation involved multiplying the total quantity of qualified fuel sold, measured in BOEs, by the inflation-adjusted credit amount for that tax year.

Limitations and Reductions

After calculating the gross credit amount, taxpayers had to consider several limitations that could reduce or eliminate the tax benefit. These reductions were based on external economic factors and the receipt of other government subsidies.

A primary limitation was the oil price phase-out. This was designed to be a market stabilizer, providing more benefit when oil prices were low and less when they were high. The credit began to phase out when the annual average wellhead price of domestic crude oil, known as the reference price, exceeded an inflation-adjusted threshold.

The credit was also reduced if the project received government-backed financial assistance, like federal grants or tax-exempt bonds. Finally, the Section 45K credit was a component of the general business credit and subject to an overall limitation based on the taxpayer’s tax liability.

The Modern Energy Credit Landscape

With the expiration of older incentives like the Section 45K credit, Congress has introduced new programs to encourage clean energy production. The Inflation Reduction Act established the Clean Fuel Production Credit under Section 45Z, which becomes available on January 1, 2025.

This new credit represents a shift in federal energy policy, moving the focus toward the production of low-emission transportation fuels. Rather than targeting specific fuel types, the Section 45Z credit is designed to reward producers based on the lifecycle greenhouse gas emissions of their fuel.