What Is the Section 45Z Clean Fuel Production Credit?

The Section 45Z Clean Fuel Production Credit is a tax incentive from the Inflation Reduction Act of 2022 (IRA) that encourages the domestic production of low-emission transportation fuels. This credit is available for qualifying fuels produced and sold between January 1, 2025, and December 31, 2027. It replaces several previous fuel-related tax credits with a single, technology-neutral program. Instead of targeting specific fuel types, Section 45Z focuses on the lifecycle greenhouse gas emissions of a fuel, rewarding producers based on the fuel’s cleanliness regardless of the production method. This approach is intended to foster innovation in cleaner transportation options.

Taxpayer and Fuel Eligibility

To claim the Section 45Z credit, a taxpayer must be the producer of the fuel. A producer is the entity that performs the operations to create the qualifying clean fuel at a facility in the United States or its possessions. The credit is earned when this domestically produced fuel is sold to an unrelated party.

Eligibility extends to two main categories of transportation fuel: non-aviation fuel and sustainable aviation fuel (SAF). To qualify, a fuel must be suitable for use in a highway vehicle or an aircraft. This can be met if the fuel is fit for such use on its own, or if it is blended with other substances to create a usable mixture.

Calculating the Credit Amount

The Section 45Z credit is calculated by multiplying the gallons of fuel sold by an applicable rate and an emissions factor. For non-aviation fuel, the base credit is $0.20 per gallon, and for sustainable aviation fuel (SAF), it is $0.35 per gallon. These amounts can be increased fivefold to a bonus rate of $1.00 for non-aviation fuel and $1.75 for SAF if the producer meets specific labor requirements.

The emissions factor (EF) is derived from the fuel’s lifecycle greenhouse gas (GHG) emissions, measured in kilograms of CO2 equivalent per million British thermal units (kgCO2e/mmBtu). The credit amount is inversely proportional to the emissions rate, meaning lower GHG emissions result in a higher credit. A fuel does not qualify for the credit if its emissions rate is greater than 50 kgCO2e/mmBtu.

To receive the higher bonus credit rates, producers must satisfy the Prevailing Wage and Apprenticeship (PWA) requirements. This involves paying all laborers and mechanics employed in the construction, alteration, or repair of a qualified facility a prevailing wage as determined by the Department of Labor. It also requires that a certain percentage of total labor hours for such projects are performed by qualified apprentices from registered apprenticeship programs.

Required Information and Third-Party Certification

To claim the credit, a producer must conduct a Lifecycle Analysis (LCA) to determine the fuel’s emissions factor. This analysis must use the 45Z-GREET model, a version of the Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) model from Argonne National Laboratory.

Producers of sustainable aviation fuel (SAF) must also obtain a certification from an unrelated third party. This verification validates the producer’s claims regarding the fuel’s lifecycle emissions. The qualified verifier must be an independent entity with expertise to review and confirm the accuracy of the producer’s production process and data using the approved 45Z-GREET model. The verifier’s report for SAF must confirm several specific details, including:

• The producer’s name
• The facility location
• The fuel type and volume sold
• The date of sale
• The fuel’s emissions factor

For other non-SAF transportation fuels, third-party verification is not required.

Registration and Filing Process

Producers wanting to claim the Section 45Z credit must first register with the Internal Revenue Service (IRS). This is accomplished by filing Form 637, Application for Registration (For Certain Excise Tax Activities), to be officially recognized as a clean fuel producer.

A producer must have a signed registration letter from the IRS dated on or before January 1, 2025, to claim credits for fuel produced starting on that date. If the registration is completed later, the producer can only claim credits for fuel produced and sold from that later date onward. After registering, producers must maintain all required documentation.

The credit is claimed on the producer’s annual income tax return by completing and attaching Form 7218, Clean Fuel Production Credit. This form is used to report the specific details for each production facility, including the type and volume of fuel sold and the final calculated credit amount for the tax year.