Treasury Issues Proposed Regulations for Section 45Z Clean Fuel Production Credit

On February 3, 2026, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued proposed regulations (REG–121244–23) regarding Section 45Z Clean Fuel Production Credits (the “Proposed Regulations”). This guidance integrates significant statutory amendments made by the One Big Beautiful Bill Act (“OBBBA”) of 2025, and provides long-awaited clarity on the use of the 45ZCF-GREET model, the treatment of sales to fuel resellers, and the exclusion of foreign feedstocks. To establish eligibility for the Section 45Z Clean Fuel Production Credit, taxpayers must adhere to specific procedural requirements regarding registration, emissions rate determination, and credit claiming, while maintaining robust diligence records.

The Proposed Regulations provide the administrative framework for the tax credit applicable to eligible transportation fuel produced after December 31, 2024, and sold before January 1, 2030. The Proposed Regulations respond to taxpayer concerns and provide additional market certainty for biodiesel and renewable diesel producers, with eligibility rules, emissions rates, and certification requirements spelled out. This Legal Update provides a summary of important guidance under the Proposed Regulations.

Determining Emissions Rates: New Models and Limits

The credit amount relies on an emissions factor calculated via the fuel’s lifecycle greenhouse gas emissions rate. Taxpayers must generally use the emissions rate table published annually by the Treasury Secretary that is in effect on the first day of the taxpayer’s taxable year of production. Previously, taxpayers faced uncertainty regarding which version of the GREET model to utilize and how to account for energy inputs. The Proposed Regulations mandate the use of the 45ZCF-GREET model for non-sustainable aviation fuels (“non-SAF fuels”)—and optionally for sustainable aviation fuels (“SAF fuels”)—to determine the emissions rates for fuels listed in the emissions rates tables.

If a specific fuel type or category is not listed in the annual table, the taxpayer must petition for a Provisional Emissions Rate (“PER”) as follows. First, taxpayers must submit an emissions value request (“EVR”) to the US Department of Energy (“DOE”). The DOE will then issue the taxpayer a calculated emissions value letter, which must be submitted to Treasury with the taxpayer’s PER determination request. Guidance and procedures for the EVR process will be separately published by the DOE.

OBBBA adjustments were made to exclude emissions attributed to indirect land use change (“ILUC”) from emissions rated for fuel produced after December 31, 2025. Also effective after 2025, emissions rates cannot be less than zero (preventing credit multipliers above the statutory maximum) unless the fuel is derived from animal manure.

Taxpayers are required to maintain records sufficient to establish eligibility for the credit and the amount of the credit claimed. Such records must include records to substantiate how the emissions rate was determined, among other required records. The Proposed Regulations offer a safe harbor pursuant to which a taxpayer’s records to substantiate the emissions rate for a non-SAF fuel will be considered sufficient if the taxpayer obtains certification from an accredited third-party certifier in a prescribed manner detailed in proposed Section 1.45Z-5.

The “Qualified Sale” Fix

To claim 45Z Credits, a taxpayer must make a “qualified sale” of an eligible transportation fuel to an unrelated person for use in a trade or business or for production of a fuel mixture or a retail fuel sale. In January 2025, the IRS released a notice of forthcoming proposed regulations (Notice 2025-10) that defined “sold for use in a trade or business” in a way that implied the buyer must actually use the fuel (e.g., combust it) in their business. This created ambiguity for producers selling to trading desks or wholesalers. In a welcome development, the proposed regulations confirm that a qualified sale includes a sale of transportation fuel to an unrelated person who resells the fuel in their trade or business, such as an intermediary wholesaler and distributor, eliminating concern among taxpayers about the narrower interpretation in Notice 2025-10. This “look-through” approach aligns with industry supply chains where producers rarely sell directly to end-users. For purposes of sufficient maintenance of records, to substantiate that a sale is a qualified sale, taxpayers may use a new safe harbor model certificate obtained from the purchaser that is “in substantially the same form” as the form certificate provided in the Proposed Regulations.

“Suitable for Use” Clarifications

Section 45Z credits are available only if a fuel is “suitable for use” as fuel in a highway vehicle or aircraft. However, Section 45Z of the Code does not define “suitable for use.” The Proposed Regulations confirm helpful guidance from Notice 2025-10, making clear that fuel is “suitable for use” if it has practical and commercial fitness for use in a highway vehicle or aircraft (or may be blended into a fuel mixture that has practical and commercial fitness for use as fuel in a highway vehicle or aircraft) and that actual use as a fuel in a highway vehicle or aircraft is not required. Therefore, for example, a diesel fuel that meets all other Section 45Z requirements would be considered suitable for use in a highway vehicle or aircraft even if it is sold to a customer that uses that fuel as marine diesel fuel.

“Producer” Definitions and Registration Requirements

The credit is claimed by filing Form 7218, Clean Fuel Production Credit, with the taxpayer’s timely filed federal income tax return. To claim the Section 45Z credit, a taxpayer must be registered as a producer of clean fuel under Section 4101 of the Code at the time of production. Registration is applied for using Form 637, Application for Registration (For Certain Excise Tax Activities), or a designated successor form. This registration is in addition to any registration requirement that may be applicable in order to transfer the credit pursuant to Section 6418 of the Code as discussed below.

Each business unit required to have a separate Employer Identification Number (“EIN”) is treated as a separate person under the Proposed Regulations and, therefore, disregarded entities (DREs) and qualified subchapter S subsidiaries (“QSubs”) must register separately from their owners if they produce the fuel. If a DRE owns the facility, the DRE (not the owner) must hold the Letter of Registration. For Renewable Natural Gas, the “producer” is the party that chemically processes the gas to make it interchangeable with pipeline gas. A party that merely compresses already interchangeable gas or performs only minimal processing is not a producer.

The IRS will only register applicants meeting three specific tests: the activity test (regularly engaged in production), the acceptable risk test (no history of wrongful acts or tax evasion), and the satisfactory tax history test (compliance with filing and deposit obligations). Taxpayers must reregister if there is a change in ownership (more than 50% of interests or assets) or a change in EIN.

Other Notable Items

Fuel produced after December 31, 2025, must be derived exclusively from feedstock produced or grown in the United States, Mexico, or Canada. Fuel production from foreign feedstock is no longer eligible.

The Proposed Regulations implement the OBBBA prohibited foreign entity rules by providing that “specified foreign entities” are not eligible for Section 45Z credits for taxable years beginning after July 4, 2025, and “foreign-influenced entities” are not eligible for section 45Z credits for taxable years beginning after July 4, 2027.

Each facility must obtain an IRS registration number annually before a Section 45Z Credit can be transferred, aligning Section 45Z compliance with other transferable credits.

Anti-stacking rules were put in place. A facility cannot claim Section 45Z credits if it claims credits under Sections 45V (clean hydrogen), 45Q (carbon capture), or 48(a)(15) (hydrogen storage) for the same taxable year.