Section 45Q Tax Credit: Eligibility, Rates, and Claims
Understand the expanded 45Q tax credit after the IRA. This guide clarifies the new framework for valuing and monetizing carbon capture projects.
The Section 45Q tax credit offers a financial incentive for projects that capture and store or utilize carbon oxide emissions. Legislative changes within the Inflation Reduction Act of 2022 expanded the credit’s value and accessibility. These modifications introduced higher credit rates, lowered eligibility thresholds, and created new ways for project owners to monetize the credits.
Determining Project Eligibility
A project’s qualification for the Section 45Q credit depends on meeting facility, carbon oxide, and timing requirements. The type of facility determines the annual capture thresholds, which were lowered by the Inflation Reduction Act. An electric generating facility must capture at least 18,750 metric tons of carbon oxide annually and have a capture design capacity of at least 75% of the unit’s baseline carbon oxide production. Other facilities like those in ethanol or cement production have a threshold of 12,500 metric tons, while direct air capture (DAC) facilities only need to capture 1,000 metric tons annually.
The project must capture “qualified carbon oxide,” defined as carbon dioxide or carbon monoxide that would otherwise be released into the atmosphere. The captured carbon oxide must be measured at the source of capture and verified at the point of disposal or use.
An important eligibility component is the project’s timing. To be eligible for the credit, a facility must begin construction before January 1, 2033.
Calculating the Credit Amount
The monetary value of the Section 45Q credit varies based on what is done with the captured carbon oxide and the type of facility that captures it. The Inflation Reduction Act established a two-tiered system with a “base” credit rate and a higher “bonus” rate. To receive the bonus rate, which is five times the base rate, projects must satisfy specific prevailing wage and apprenticeship labor requirements.
For projects that meet the labor standards, carbon oxide captured from industrial or power generation sources and stored in deep saline geologic formations earns a bonus rate of $85 per metric ton. If that same carbon oxide is used for enhanced oil recovery (EOR) or other qualified utilization, the credit is $60 per metric ton.
A direct air capture (DAC) project that captures and sequesters carbon oxide can claim a bonus credit of $180 per metric ton. If the captured carbon is used for EOR or utilization, the credit for a DAC facility is $130 per metric ton.
Without meeting the labor requirements, projects receive lower base rates. For industrial and power facilities, the base rate is $17 per ton for secure sequestration and $12 per ton for utilization or EOR. For DAC facilities, the base rates are $36 per ton for sequestration and $26 per ton for utilization or EOR.
Meeting Labor Requirements for the Bonus Credit
To receive the bonus credit rate, projects must satisfy labor standards for prevailing wages and apprenticeships during the construction, alteration, or repair of the facility or its equipment. The prevailing wage requirement means all laborers and mechanics must be paid at least the prevailing rates for similar work in the project’s locality, as determined by the Department of Labor. Taxpayers must maintain records, including payroll information, to demonstrate compliance.
The apprenticeship requirement stipulates that for projects beginning construction in 2024 or later, 15% of total labor hours must be performed by qualified apprentices. These apprentices must be enrolled in a registered program recognized by the Department of Labor or a state apprenticeship agency.
A “good faith effort” exception is available if a taxpayer cannot meet the apprenticeship percentages despite requesting qualified apprentices from a registered program. To qualify for this exception, the taxpayer must document its request and the program’s denial or non-response. This provides some flexibility, but the documentation burden remains on the taxpayer.
Monetization and Claiming Procedures
The Inflation Reduction Act introduced two monetization pathways: direct pay and transferability. These options provide flexibility for entities to convert the credits to cash, which can help finance their projects.
Direct pay, or elective pay, allows entities to receive the credit’s value as a cash payment from the IRS. For Section 45Q, all taxpayers can elect direct pay for the first five years of the credit’s 12-year period, an option normally restricted to tax-exempt organizations.
Transferability permits a taxpayer to sell their earned credits to an unrelated third party for cash. The payment is not taxable income to the seller, and the buyer can use the credits to offset their own tax liability. This creates a market for project developers to partner with entities that have a tax liability. A credit cannot be subject to both a direct pay and a transfer election.
To claim the credit, taxpayers must file IRS Form 8933 with their annual tax return, providing details about the facility and the amount of carbon oxide captured and stored or used. Taxpayers seeking direct pay or intending to transfer credits must first complete a pre-filing registration with the IRS to get a registration number for each project.
A component of the claim is substantiating the amount of carbon oxide permanently stored. This requires a Monitoring, Reporting, and Verification (MRV) plan that meets the standards of the Environmental Protection Agency’s Greenhouse Gas Reporting Program, which provides the data to verify the captured carbon has been isolated from the atmosphere.