What Is the Carbon Oxide Sequestration Credit?

The Section 45Q tax credit, officially the Credit for Carbon Oxide Sequestration, offers a financial incentive for businesses to capture carbon oxide emissions from industrial processes or directly from the atmosphere. The primary goal is to reduce greenhouse gases by either permanently storing them underground or by using them to create commercially valuable products. Originally established in 2008, the credit was expanded by the Bipartisan Budget Act of 2018 and more recently by the Inflation Reduction Act of 2022 (IRA).

The IRA increased the monetary value of the credit, extended the project qualification timeframe, and introduced new ways for entities to benefit financially. These updates are expected to accelerate investment in carbon capture, utilization, and storage (CCUS) technologies. The framework is designed to reward the verified capture and subsequent management of carbon oxides.

Eligibility for the Credit

Qualified Facility

To qualify for the Section 45Q credit, a project must use a “qualified facility” where carbon capture equipment is installed. The IRA extended the construction deadline, stating that projects must begin construction before January 1, 2033. The rules differentiate between three main categories of facilities. The first is industrial facilities, such as cement plants. The second category is electricity generating facilities, and the third is direct air capture (DAC) facilities, which pull carbon dioxide from the air.

Minimum Capture Thresholds

A facility must capture a specific minimum amount of carbon oxide annually, and these thresholds were lowered by the IRA. For a direct air capture (DAC) facility, the requirement is to capture at least 1,000 metric tons per year. For electricity generating facilities, the threshold is 18,750 metric tons annually, and the capture equipment must absorb at least 75% of the carbon oxide that would otherwise be emitted. For all other industrial facilities, the annual capture threshold is 12,500 metric tons.

Qualified Carbon Oxide

The credit is available only for “qualified carbon oxide,” defined by its source and destination. The carbon oxide must be captured from an industrial source or directly from the air and measured at the point of capture. Once captured, it must be disposed of using one of three approved methods. The first is secure geological storage, where it is injected deep underground. The second method is utilization, using the captured carbon as a feedstock to produce a commercial product. The third pathway is enhanced oil recovery (EOR), where the carbon is injected into oil and gas wells and subsequently stored securely.

Calculating the Credit Amount

The value of the Section 45Q credit is calculated on a per-metric-ton basis of qualified carbon oxide that is captured and stored or utilized. The Inflation Reduction Act established a two-tiered system for credit values: a lower “base rate” and a higher “increased rate.” The ability to claim the increased rate, which is five times the base rate, is contingent upon satisfying specific prevailing wage and apprenticeship labor requirements.

Credit for Secure Geological Storage

For projects that dispose of carbon oxide in secure geological storage, credit amounts differ by capture source. When a direct air capture (DAC) facility captures carbon for permanent storage, the base credit is $36 per metric ton, while the increased credit is $180 per metric ton. For all other qualified facilities, the base credit for secure geological storage is $17 per metric ton, with the increased rate reaching $85 per metric ton.

Credit for Utilization

When captured carbon oxide is utilized to create a product, the credit values are lower than for storage. For carbon oxide captured by a DAC facility and then utilized, the base credit is $26 per metric ton, increasing to $130 per metric ton if labor requirements are met. For other industrial facilities, the base credit for utilization is $12 per metric ton, rising to $60 per metric ton with the satisfaction of labor standards.

Credit for EOR

For carbon oxide used in enhanced oil recovery (EOR), the credit values are the same as those for utilization. The base rate is $12 per metric ton, and the increased rate is $60 per metric ton.

Meeting Increased Credit Rate Requirements

To qualify for the increased credit rates, taxpayers must satisfy prevailing wage and apprenticeship (PWA) requirements established by the IRA. These rules apply to the construction, alteration, and repair of the qualified facility. The requirements are effective for facilities that began construction on or after January 29, 2023.

Prevailing Wage Requirements

The prevailing wage rules mandate that laborers and mechanics involved in the construction, alteration, or repair of the facility be paid at least the prevailing local rates. These rates are determined by the U.S. Department of Labor and include the hourly wage and fringe benefits. This requirement applies to alteration or repair work during the 12-year period after the facility is placed in service. If an audit reveals underpayment, the taxpayer can still claim the increased credit but must pay the workers the wage difference plus interest, along with a $5,000 penalty per worker.

Apprenticeship Requirements

The apprenticeship standards require using qualified apprentices from a registered program for a minimum percentage of total labor hours. For projects starting in 2023, this threshold was 12.5%, and for those beginning in 2024 or later, it is 15%. Taxpayers must also comply with apprentice-to-journeyworker ratios. The IRS provides a “good faith effort” exception if a taxpayer requests apprentices but none are available. If requirements are not met and the exception does not apply, the taxpayer can pay a penalty to the IRS to cure the failure.

Claiming the Credit

Once operational, the owner of the carbon capture equipment must follow specific steps to claim the Section 45Q credit. This process involves filing the correct tax form and deciding how to monetize the credit’s value. The rules allow the credit to be used by traditional taxpayers and by entities with little or no tax liability.

Information and Forms Needed

The credit is claimed on IRS Form 8933, Carbon Oxide Sequestration Credit, attached to the taxpayer’s annual tax return. The form requires documentation, including the facility’s name, location, and its Environmental Protection Agency (EPA) facility ID number. The taxpayer must report the metric tons of qualified carbon oxide captured for each disposal pathway. The form also requires a detailed credit calculation, and taxpayers must maintain certifications from parties that dispose of or utilize the carbon.

Submission and Monetization

While many businesses use the credit to reduce their income tax liability, the IRA introduced two monetization mechanisms that expand its utility.

Direct Pay

Direct pay allows certain tax-exempt entities, like non-profits and governmental bodies, to receive the credit’s full value as a cash refund from the IRS. For-profit entities can also elect direct pay for the first five years of a project’s credit period for equipment placed in service after 2022.

Transferability

Transferability permits an eligible taxpayer to sell their claimed credit to an unrelated third party for cash. This one-time transfer allows project developers to receive an immediate cash benefit. The election to transfer the credit must be made on the taxpayer’s return for the year the credit is generated.

Credit Recapture Provisions

The Section 45Q credit includes a “recapture” provision, requiring a taxpayer to pay back a portion of the credit if stored carbon oxide leaks into the atmosphere. This rule applies only to carbon stored in secure geological formations, not to utilized carbon. The recapture period begins on the date of the first injection and ends three years after the last tax year a credit was claimed.

If a leak is identified during this period, the recaptured amount is added to the taxpayer’s tax liability for that year. The amount is calculated by multiplying the metric tons of leaked carbon by the credit rate from the year the credit was originally claimed. The regulations apply a last-in, first-out (LIFO) accounting method, applying the leak against the most recently claimed credits first. A recapture event may not be triggered if the leakage in a year is less than the amount of carbon stored in that same year.