The Section 45V Clean Hydrogen Production Tax Credit

The Section 45V tax credit, introduced by the Inflation Reduction Act of 2022, is a production-based incentive designed to encourage the development of a clean hydrogen industry in the United States. The primary goal is to lower the production cost of hydrogen manufactured with minimal greenhouse gas emissions, making it a more competitive energy source. The value of the credit is tied to the environmental impact of the production process, rewarding cleaner methods more generously. The credit is available for a 10-year period for each qualifying facility, providing a long-term planning horizon for businesses.

Taxpayer and Facility Eligibility

To claim the Section 45V credit, a taxpayer must own a “qualified clean hydrogen production facility.” This includes various business structures, such as corporations, partnerships, and individuals, as long as they are the legal owners. A facility must produce “qualified clean hydrogen,” and its construction must begin before January 1, 2033. The 10-year credit period for a facility begins on its “placed-in-service” date, which is when it is ready for use.

Facilities placed in service before the Inflation Reduction Act was passed may still be eligible for a portion of the credit’s 10-year lifespan. For existing facilities, the law provides a pathway to qualification through retrofitting. A facility modified to produce qualified clean hydrogen can be treated as newly placed in service on the date the modifications are completed, which encourages investment in upgrading older energy infrastructure.

Calculating the Credit Amount

The Section 45V credit begins with a base amount adjusted for inflation, which is then multiplied by a percentage based on the carbon intensity of the production process. This lifecycle analysis includes all stages, from raw material extraction to hydrogen delivery. The credit is structured into four tiers based on the kilograms of carbon dioxide equivalent per kilogram of hydrogen (kg CO2e/kg H2):

• 2.5 to 4 kg CO2e/kg H2: Qualifies for 20% of the base credit.
• 1.5 to 2.5 kg CO2e/kg H2: Qualifies for 25% of the base credit.
• 0.45 to 1.5 kg CO2e/kg H2: Qualifies for 34% of the base credit.
• Less than 0.45 kg CO2e/kg H2: Qualifies for 100% of the base credit.

A multiplier can increase the final credit amount by a factor of five for taxpayers who satisfy prevailing wage and apprenticeship (PWA) requirements. Taxpayers must pay laborers the prevailing local wage for construction, alteration, or repair work during the 10-year credit period. The apprenticeship requirements apply only during the facility’s construction, alteration, or repair. Projects that began construction before January 29, 2023, may be eligible for the 5x multiplier without meeting the full apprenticeship standards.

Required Verification and Documentation

A verification process by an unrelated third party must be completed before a taxpayer can claim the Section 45V credit. The verifier must be an individual or firm with the appropriate professional qualifications and accreditation to review the facility’s operations and records. A verification report must be created that confirms the total qualified clean hydrogen produced, validates the lifecycle greenhouse gas emissions rate, and, if applicable, confirms that PWA requirements were met. This verified information is used to complete IRS Form 7210, Clean Hydrogen Production Credit.

On this form, the taxpayer reports the facility’s location, placed-in-service date, kilograms of hydrogen produced, and the verified GHG emissions rate. The completed Form 7210 and the full verification report must be attached to the taxpayer’s annual tax return. The lifecycle GHG emissions rate is determined using the 45VH2-GREET model. Taxpayers can make an irrevocable election to use the version of the model that was in effect when their facility’s construction began. If a production pathway is not in the GREET model, a taxpayer may petition the Department of Energy for a provisional emissions rate (PER) by demonstrating project maturity.

Claiming the Credit

Taxpayers have two primary methods for monetizing the Section 45V credit. The first is to apply the credit against their own federal income tax liability as a general business credit. Certain tax-exempt organizations, state and local governments, and other specified entities can use elective pay (or direct pay) to receive the credit’s value as a direct cash payment from the IRS, even without tax liability.

The second monetization method is to transfer the credit, which allows taxpayers to sell all or a portion of their eligible credits to an unrelated third party in exchange for cash. This transaction is not considered taxable income for the seller, nor is it a deductible expense for the buyer. This transferability option provides an immediate cash flow benefit for hydrogen producers who may not have enough tax liability to use the full value of the credits they generate.

A pre-filing registration with the IRS is required before a credit can be transferred or claimed via elective pay.

Interaction with Other Energy Credits

A taxpayer cannot claim both the Section 45V production tax credit and the Section 48 investment tax credit for the same facility. This choice must be made at the beginning of the project and is irrevocable. The Section 48 credit is a one-time, upfront credit based on the investment cost, while the Section 45V credit provides benefits over a 10-year production period. Taxpayers must model the potential value of each credit to determine which is more advantageous for their project.