The IRS provided guidance for businesses seeking to obtain carbon capture tax credits as a result of amendments made to the Bipartisan Budget Act of 2018 ("BBA"). In addition, the IRS created a related safe harbor for certain partnerships to get the credit.
The IRS stated that the broadened scope of section 45Q under the amended BBA now allows businesses to receive a tax credit for the sequestration of "qualified carbon oxide," in addition to the original provision that allowed credit only for "qualified carbon dioxide." In order to receive the credit, the IRS clarified, businesses must begin the construction of qualified facilities with carbon-capturing capabilities prior to January 1, 2024. The IRS outlined two standards to establish when construction has begun, which are to either:
- begin "physical work of a significant nature" (a/k/a the "Physical Work Test"); or
- pay or incur at least five percent of the total cost of the qualified facility or carbon capture equipment (a/k/a the "Five Percent Safe Harbor").
The IRS noted that businesses may choose to satisfy both methods, but explained that construction will be deemed to have begun as soon as one of the two standards is met. Further, the IRS made clear that in the event a business fails to meet the Five Percent Safe Harbor as a result of cost overruns, it will still be able to establish the start of construction using the Physical Work Test in the following year.
Separately, the IRS created a safe harbor by deeming partnerships as having properly allocated the section 45Q tax credit for carbon oxide sequestration under certain federal partnership tax provisions. According to the IRS, the safe harbor is intended to simplify the process of obtaining carbon capture credits for eligible partnerships only.
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