IRS Ruling Provides Guidance on Carbon Capture Equipment and Section 45Q Credit
On July 1, 2021, the US Internal Revenue Service (the “IRS”) released Revenue Ruling 2021-13 (the “Ruling”), which provides additional guidance on the definition of “carbon capture equipment” for purposes of the carbon capture tax credit under Section 45Q of the Internal Revenue Code of 1986, as amended (the “Code”). The Ruling also clarifies that a taxpayer need not own every piece of equipment within a single process train in order to claim the tax credit so long as the taxpayer owns at least one component. In addition, the Ruling provides helpful guidance on determining the placed-in-service date of the single process train for purposes of Section 45Q.1
Under Section 45Q of the Code, a taxpayer may receive a specified dollar amount of tax credit for every metric ton of carbon oxide the taxpayer captures and disposes, injects or utilizes using “carbon capture equipment” that is placed in service at a qualified facility on or after February 9, 2018. The specific credit amount depends on the use of the carbon oxide and the date of the capture. The credit is available during the 12-year period beginning on the date the equipment is originally placed in service.
Previously, the IRS issued final regulations on January 6, 2021 (the “Regulations”) providing significant guidance on many aspects of the Section 45Q credit, including on the definition of “carbon capture equipment.”2 The Regulations define carbon capture equipment generally to include all components of property that are used to capture or process carbon oxide up until it is transported for disposal, injection or utilization. With limited exceptions, however, carbon capture equipment does not include the components of property used for transporting carbon oxide for disposal, injection or utilization. All components that make up an independently functioning process train capable of capturing, processing and preparing carbon oxide for transport (a “single process train”) are treated as a single unit of carbon capture equipment.
The Ruling pertains to a methanol plant that produces methanol from petroleum coke. In the first part of the process, the petroleum coke is gasified to form a gas that includes several components, including CO2. The gas is then purified through an acid gas remover (“AGR”) unit that removes unwanted components, including CO2, which is then either released into the atmosphere or captured.
The AGR unit at the plant was placed into service on January 1, 2017, and, prior to 2021, the CO2 had simply been released into the atmosphere and no taxpayer had claimed a Section 45Q credit on the facility. In 2021, the taxpayer purchased and installed new components of carbon capture equipment necessary to create a single process train to capture, process and prepare for transport the CO2 that was being released from the methanol plant. The taxpayer did not, however, acquire an ownership interest in the AGR unit or the methanol plant itself.
The IRS first addressed the question of whether the AGR unit constitutes carbon capture equipment. After noting that the Regulations provide that carbon capture equipment includes equipment that is used for the purpose of, among other things, “separating, purifying, drying and/or capturing carbon oxide that would otherwise be released into the atmosphere from an industrial facility,” the IRS concluded that, because one of the functions of the AGR unit is to separate CO2 from a gas stream, it is carbon capture equipment for purposes of Section 45Q.
The IRS went on to conclude that the same taxpayer need not own every component of carbon capture equipment within a single process train in order to receive the Section 45Q credit so long as the taxpayer owns at least one component of carbon capture equipment in the single process train and physically or contractually ensures the capture and disposal of the carbon oxide. The Regulations provide that only one taxpayer is eligible to receive the credit from a single process train, and in the Ruling, the IRS reasoned that this requirement in the Regulations would be unnecessary if the same taxpayer were required to own all components of carbon capture equipment within a single process train to receive the credit. Therefore, the fact that the taxpayer did not own the AGR unit would not prevent the taxpayer from receiving the credit.
The IRS further clarified that, for purposes of the Section 45Q credit, the single process train (including the AGR unit) would be treated as a single unit of carbon capture equipment placed in service on the date that the single process train is placed in a condition or state of readiness and availability for the capture, processing and preparation of carbon oxide for transport for disposal, injection or utilization. Even though the AGR unit was placed in service in 2017, the IRS concluded that the single process train was not placed in such a condition until the new equipment was installed in 2021.
Finally, notwithstanding the foregoing, the IRS concluded that, for depreciation purposes under Sections 167 and 168 of the Code, the AGR unit and the new carbon capture equipment would be treated as separate pieces of equipment, with the AGR unit placed in service on January 1, 2017, and the new carbon capture equipment placed in service in 2021.
The Ruling provides clarity for taxpayers seeking to adapt existing property and equipment for use in conjunction with new carbon capture equipment. The ruling also highlights the structuring flexibility built into the Section 45Q credit, with taxpayers able to allocate the credits to any of the owners of equipment that make up a single process train.
1 The full text of Revenue Ruling 2021-13 is available here: https://www.taxequitytimes.com/wp-content/uploads/sites/15/2021/07/Rev-Rul-2021-13.pdf.
2 Our coverage of the final regulations under Section 45Q is available here: https://www.mayerbrown.com/en/perspectives-events/publications/2021/01/irs-issues-final-carbon-capture-regulations.