What Is the 45U Tax Credit for Clean Fuel?

The Clean Fuel Production Credit, established under Section 45Z of the Internal Revenue Code, creates an incentive for the domestic production of low-emission transportation fuels. This tax credit is designed to support the transition to cleaner energy within the U.S. transportation sector by rewarding producers who reduce greenhouse gas emissions. It is available for qualifying fuels produced and sold in the calendar years 2025, 2026, and 2027. By providing a direct financial benefit, the policy aims to make the production of environmentally friendly fuels more economically viable and stimulate investment in clean fuel technology.

Eligibility for the Clean Fuel Production Credit

To qualify for the Clean Fuel Production Credit, a taxpayer must be the producer of the fuel, meaning the entity responsible for creating the final transportation fuel. The production must occur at a qualified facility, which is a facility located within the United States or a U.S. possession that produces a transportation fuel.

A central requirement is that the produced fuel must be sold to an unrelated party. This rule prevents companies from claiming the credit for fuel that is simply transferred between different divisions of the same corporate entity. The sale must be for the fuel’s end use in the transportation sector. An “unrelated person” is an entity that does not have a controlling ownership stake in the producer.

The type of fuel produced is also a determining factor. A “transportation fuel” is defined as a fuel suitable for use in highway vehicles or aviation. While sustainable aviation fuel (SAF) is eligible, it is subject to different credit rates and emissions modeling rules compared to non-aviation fuels.

A gatekeeping requirement for any fuel is its lifecycle greenhouse gas emissions rate. The fuel must have an emissions rate of less than 50 kilograms of CO2 equivalent per million British thermal units (kg of CO2e/mmBtu). This “well-to-wheels” analysis considers the total emissions from the fuel’s production, transport, and final use. If a fuel’s emissions rate does not fall below this 50 kg threshold, it is automatically ineligible.

Calculating the Credit Amount

The calculation of the Clean Fuel Production Credit uses the formula: Applicable Amount × Emissions Factor. This structure means that the cleaner the fuel, the higher the resulting tax credit will be for the producer.

The “applicable amount” is a per-gallon rate that depends on whether the producer meets certain labor standards. For non-aviation transportation fuel, the base credit rate is $0.20 per gallon. A bonus rate of $1.00 per gallon is available if the producer satisfies prevailing wage and apprenticeship (P&A) requirements. For producers of sustainable aviation fuel (SAF), the bonus rate is $1.75 per gallon.

To secure the bonus rate, producers must meet P&A requirements. Prevailing wage rules mandate that laborers and mechanics employed in the construction or alteration of the facility are paid at least the prevailing local wage for similar work, as determined by the Department of Labor. The apprenticeship requirement obligates the taxpayer to ensure that a certain percentage of total labor hours are performed by qualified apprentices from a registered program. These standards are designed to ensure that the move to a clean energy economy also supports well-paying jobs.

The second part of the credit formula is the “emissions factor.” This factor is calculated using the formula: (50 kg CO2e/mmBtu – Fuel’s GHG Emissions Rate) / 50 kg CO2e/mmBtu. The fuel’s specific emissions rate is subtracted from the 50 kg threshold and then divided by 50. This calculation results in a multiplier that scales from just above zero to a maximum of 1.0 for a fuel with a zero-emissions rating.

Required Information and Pre-Filing Registration

Before a producer can claim the credit, they must complete a mandatory pre-filing registration with the Internal Revenue Service (IRS). A taxpayer is not eligible to claim the credit for any fuel produced before their registration is officially approved and they have received a signed registration letter. According to IRS guidance, producers who hoped to claim the credit for fuel produced starting on January 1, 2025, needed to submit applications by July 15, 2024, to allow for processing time.

The registration process requires submitting details about the production operation through an online portal using Form 637, Application for Registration. Producers use Activity Letter “CN” for non-SAF transportation fuel or “CA” for SAF. This information allows the IRS to verify that the facility and its output meet the statutory requirements. Required details include:

• The physical location of the qualified facility
• The specific type of transportation fuel being produced
• The facility’s annual production capacity
• Details about the production process and technology used

A primary part of the process is obtaining a lifecycle greenhouse gas (GHG) analysis for the fuel, which determines the official emissions rate. The IRS requires this analysis to be conducted using a qualified model. For most fuels, this is the 45ZCF-GREET model from the Department of Energy. SAF producers may use either the 45ZCF-GREET model or certain Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) models.

Producers must also obtain a certification from a qualified, accredited certifier. This independent certification validates the producer’s claims regarding the volume of fuel produced and its sale to an unrelated person. This certification must be attached to the taxpayer’s income tax return for each year the credit is claimed.

How to Claim the Credit

The Clean Fuel Production Credit is claimed on a producer’s annual income tax return. The credit is calculated and reported by attaching the finalized Form 7218, Clean Fuel Production Credit, to the return for the tax year in which the qualifying fuel was produced and sold.

The calculated credit amount is then entered on the taxpayer’s main income tax return, such as Form 1120 for corporations or Form 1040 for individuals. As a general business credit, it offsets the amount of tax the producer owes to the government. This direct reduction in tax makes the production of clean fuels more profitable for the business.

For certain entities, such as tax-exempt organizations or state and local governments that may not have a large tax liability, a mechanism called elective pay, or direct pay, is available. This provision allows these eligible entities to treat the amount of the credit as a payment of tax. This can result in a direct refund from the IRS, even if they owe no federal income tax.