Proposed Rule2026-02246
Section 45Z Clean Fuel Production Credit
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 4, 2026
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding the clean fuel production credit enacted by the Inflation Reduction Act of 2022 and amended by the One, Big, Beautiful Bill Act (OBBBA). These proposed regulations would provide rules for determining clean fuel production credits, including credit eligibility rules, emissions rates, and certification and registration requirements. In addition, the proposed regulations would amend three sets of final regulations: the elective payment election regulations and the credit transfer election regulations, to clarify language relating to ownership of clean fuel production facilities, and the Federal excise tax registration regulations, to make them clearer and more consistent with the clean fuel production credit registration requirements in these proposed regulations. The proposed regulations would affect domestic producers of clean transportation fuel, taxpayers that may claim a credit for a related producer's fuel, and excise tax registrants.
Full Text
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<title>Federal Register, Volume 91 Issue 23 (Wednesday, February 4, 2026)</title>
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[Federal Register Volume 91, Number 23 (Wednesday, February 4, 2026)]
[Proposed Rules]
[Pages 5160-5207]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-02246]
[[Page 5159]]
Vol. 91
Wednesday,
No. 23
February 4, 2026
Part II
Department of the Treasury
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Internal Revenue Service
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26 CFR Parts 1 and 48
Section 45Z Clean Fuel Production Credit; Proposed Rule
Federal Register / Vol. 91 , No. 23 / Wednesday, February 4, 2026 /
Proposed Rules
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 48
[REG-121244-23]
RIN 1545-BR30
Section 45Z Clean Fuel Production Credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and public hearing.
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SUMMARY: This document contains proposed regulations regarding the
clean fuel production credit enacted by the Inflation Reduction Act of
2022 and amended by the One, Big, Beautiful Bill Act (OBBBA). These
proposed regulations would provide rules for determining clean fuel
production credits, including credit eligibility rules, emissions
rates, and certification and registration requirements. In addition,
the proposed regulations would amend three sets of final regulations:
the elective payment election regulations and the credit transfer
election regulations, to clarify language relating to ownership of
clean fuel production facilities, and the Federal excise tax
registration regulations, to make them clearer and more consistent with
the clean fuel production credit registration requirements in these
proposed regulations. The proposed regulations would affect domestic
producers of clean transportation fuel, taxpayers that may claim a
credit for a related producer's fuel, and excise tax registrants.
DATES: Written or electronic comments must be received by April 6,
2026. The public hearing is being held on May 28, 2026, at 10 a.m.
Eastern Time (ET). Requests to speak and outlines of topics to be
discussed at the public hearing must be received by April 6, 2026. If
no outlines are received by April 6, 2026, the public hearing will be
cancelled. Requests to attend the public hearing must be received by 5
p.m. ET on May 26, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-121244-23) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-121244-23),
Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044. A plain language summary of the proposed
regulations will be made available at <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Jennifer Golden or Danielle Mayfield of the Office of Associate Chief
Counsel (Energy, Credits, and Excise Tax) at (202) 317-6855 (not a
toll-free number); concerning submissions of comments or the public
hearing, Publications and Regulations Section at (202) 317-6901 (not a
toll-free number) or by email at <a href="/cdn-cgi/l/email-protection#78080d1a14111b101d190a11161f0b38110a0b561f170e"><span class="__cf_email__" data-cfemail="daaaafb8b6b3b9b2bfbba8b3b4bda99ab3a8a9f4bdb5ac">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) regarding sections 45Z, 1361, 4101, 6417,
and 6418 of the Internal Revenue Code (Code) as they relate to the
clean fuel production credit determined under section 45Z (proposed
regulations). This document also contains proposed amendments to the
Manufacturers and Retailers Excise Tax Regulations (26 CFR part 48)
regarding section 4101 as they relate to excise tax registration. The
proposed regulations would be issued under the authority granted by
sections 45Z, 1361(b)(3)(A), 4101(a)(1) and (c), 4222(c), 6001,
6417(h), 6418(h), and 7805(a) of the Code.
Section 45Z contains several delegations of authority to the
Secretary of the Treasury or the Secretary's delegate (Secretary).
Section 45Z(e) directs the Secretary to issue guidance no later than
January 1, 2025, regarding implementation of section 45Z, including
calculation of emissions factors of transportation fuel, the emissions
rate table described in section 45Z(b)(1)(B)(i), and the determination
of clean fuel production credits under section 45Z. Section 45Z(f)(2)
further authorizes the Secretary to issue regulations regarding the
fuel production attributable to the taxpayer in the case of a facility
with multiple owners, and section 45Z(f)(1)(A)(i)(II) authorizes the
Secretary to issue guidance on certification and other information with
respect to certain transportation fuels.
Section 45Z(f)(3) authorizes the Secretary to prescribe additional
related person rules for other entities similar to the rule described
for corporations that are members of an affiliated group of
corporations filing a consolidated return. This includes the authority
to prescribe rules for related persons with respect to which the
taxpayer has reason to believe will sell fuel to an unrelated person in
a manner described in section 45Z(a)(4).
Section 45Z(d)(5)(C) directs the Secretary to issue regulations or
other guidance as the Secretary determines necessary to carry out the
purposes of section 45Z(d)(5)(A)(iv), which excludes from the
definition of ``transportation fuel'' any fuel produced from a fuel for
which a credit under section 45Z is allowable.
Section 45Z(b)(1)(B)(ii) authorizes the Secretary to determine, in
the case of any transportation fuel that is not a sustainable aviation
fuel (SAF), whether a model is a successor model to the Greenhouse
gases, Regulated Emissions, and Energy use in Transportation model
developed by the Argonne National Laboratory (ANL). Additionally,
section 45Z(b)(1)(B)(i) directs the Secretary, subject to section
45Z(b)(1)(B)(ii) through (v), to annually publish a table setting forth
the emissions rate for similar types and categories of transportation
fuels based on the amount of lifecycle greenhouse gas (GHG) emissions
as described in section 211(o)(1)(H) of the Clean Air Act (CAA) (42
U.S.C. 7545(o)(1)(H)), as in effect on August 16, 2022 (CAA-2022) for
such fuels, expressed as kilograms of equivalent carbon dioxide
(CO<INF>2</INF>e) per 1,000,000 British thermal units (mmBTU), which a
taxpayer must use for purposes of section 45Z. The proposed regulations
cite to the CAA-2022 as enacted by section 1501(a)(2) of the Energy
Policy Act of 2005, Public Law 109-58, 119 Stat. 594, 1067 (2005),
amended by section 202(a)(1) of the Energy Independence and Security
Act of 2007, Public Law 110-140, 121 Stat. 1492, 1521-22 (2007).
Section 45Z(b)(1)(B)(iv) authorizes the Secretary to determine the
regulations or methodologies for emissions rate adjustments to exclude
any emissions attributed to indirect land use change.
Section 45Z(b)(1)(B)(v)(I) requires the Secretary to provide a
distinct emissions rate with respect to any transportation fuel derived
from animal manure. The emissions rate must be based on the specific
animal manure feedstock, which may include dairy manure, swine manure,
poultry manure, and any other sources that the Secretary determines to
be appropriate.
[[Page 5161]]
Section 45Z(b)(1)(B)(v)(II) authorizes the Secretary to provide an
emissions rate less than zero with respect to any transportation fuel
derived from animal manure.
Section 1361(b)(3)(A) authorizes the Secretary to prescribe
regulations providing exceptions to the subparagraph's treatment of a
qualified subchapter S subsidiary (as defined in section 1361(b)(3)(B))
for purposes of the Code.
Section 4101(a)(1) authorizes the Secretary to prescribe
regulations related to any registration required under section 4101,
including the time, form, manner, and terms and conditions of such
registration.
Section 4101(c) provides that rules similar to the rules of section
4222(c) apply to registration under section 4101. Section 4222(c)
authorizes the Secretary to prescribe regulations related to the
denial, revocation, or suspension of any registration under section
4222 if the Secretary determines that a registrant has used such
registration to avoid the payment of tax or to postpone or interfere
with the collection of tax, or that such denial, revocation, or
suspension is needed to protect the revenue.
Section 6001 authorizes the Secretary to prescribe regulations
related to recordkeeping, statements, and special returns.
Section 6417(h) directs the Secretary to issue such regulations or
other guidance as may be necessary to carry out the purposes of section
6417.
Section 6418(h) directs the Secretary to issue such regulations or
other guidance as may be necessary to carry out the purposes of section
6418.
These regulations would also be issued under the express delegation
of authority under section 7805(a) of the Code, which authorizes the
Secretary to prescribe all needful rules and regulations for the
enforcement of the Code, including all rules and regulations as may be
necessary by reason of any alteration of law in relation to Internal
Revenue.
Background
I. Overview
Section 45Z, added to the Code by section 13704 of Public Law 117-
169, 136 Stat. 1818, 1997 (August 16, 2022), commonly known as the
Inflation Reduction Act (IRA), and amended by section 70521 of Public
Law 119-21, 139 Stat. 72, 276 (July 4, 2025), commonly known as the
OBBBA, provides an income tax credit (section 45Z credit) for clean
transportation fuel produced domestically after December 31, 2024, and
sold by December 31, 2029. See section 13704(c) of the IRA; section
70521(d) of the OBBBA; section 45Z(g). The section 45Z credit is a
general business credit under section 38 of the Code.
The section 45Z credit replaces an assortment of prior fuel
incentives. Those incentives consisted of income tax credit, excise tax
credit, and excise tax payment provisions for various biofuels and
other alternative fuels sold for use as a fuel or used as a fuel,
including biodiesel, renewable diesel, compressed natural gas, second
generation biofuel, and SAF. See sections 40(b)(6); 40A(b)(1) and (2);
40B; 6426(c) through (e) and (k); and 6427(e).
Section 4101 authorizes the Secretary to require registration with
respect to the section 4041 and section 4081 fuel excise taxes, and
requires registration with respect to certain fuel tax credits,
including the section 45Z credit. Section 4101(a)(1), as amended by
section 70521(i) of the OBBBA, and section 45Z(f)(1)(A)(i)(I) impose a
registration requirement under section 4101 (section 4101 registration)
on a taxpayer claiming the section 45Z credit.
Section 6417, added to the Code by section 13801(a) of the IRA, and
amended by sections 70512(j)(2) and 70522(c) of the OBBBA, allows an
applicable entity to elect to treat applicable credits (as defined in
section 6417(b)), including the section 45Z credit, as a payment
against the tax imposed by subtitle A of the Code.
Section 6418, added to the Code by section 13801(b) of the IRA, and
amended by sections 70512(h), 70513(b)(3)(B)(ii), and 70521(j)(2) of
the OBBBA, allows an eligible taxpayer to elect to transfer eligible
credits (as defined in section 6418(f)(1)), including the section 45Z
credit.
A taxpayer making a section 6417 or section 6418 election must also
complete pre-filing registration, as provided in regulations under
those provisions. This pre-filing registration is distinct from the
registration required for the section 45Z credit, which is done under
section 4101.
II. The Section 45Z Credit
A. Credit Eligibility
Under section 45Z(a)(1)(A), if a taxpayer qualifies for a section
45Z credit, the taxpayer is eligible to claim a section 45Z credit for
the taxable year in which the taxpayer sells a transportation fuel. To
qualify for a section 45Z credit, a taxpayer must: (i) produce a
transportation fuel that meets the requirements for suitability,
emissions rate, coprocessing, and prevention of double crediting; (ii)
produce the fuel at a qualified facility in the United States,
including in any U.S. territories; (iii) be registered as a producer of
clean fuel under section 4101 at the time of production; and (iv) sell
the fuel to an unrelated person in a qualified sale during the taxable
year. See section 45Z(a)(1) and (4), (d)(4), (d)(5)(A), and (f)(1).
Transportation fuel produced after December 31, 2025, must be
exclusively derived from a feedstock that was produced or grown in the
United States, Mexico, or Canada. See section 45Z(f)(1)(A)(iii);
section 70521(a)(2) of the OBBBA.
A taxpayer also cannot be: (i) a specified foreign entity, for
taxable years beginning after July 4, 2025; or (ii) a foreign-
influenced entity (other than a foreign-influenced entity described in
section 7701(a)(51)(D)(i)(II) of the Code), for taxable years beginning
after July 4, 2027. See sections 45Z(f)(8) and 7701(a)(51).
Section 45Z(d)(4) defines ``qualified facility'' as a facility used
for the production of transportation fuels. However, the term
``qualified facility'' excludes any facility for which one of the
following credits is allowed under section 38 for the taxable year: (i)
the credit for production of clean hydrogen under section 45V of the
Code (section 45V credit); (ii) the credit determined under section 46
of the Code to the extent that such credit is attributable to the
energy credit determined under section 48 of the Code with respect to
any specified clean hydrogen production facility for which an election
is made under section 48(a)(15) (section 48(a)(15) election); and (iii)
the credit for carbon oxide sequestration under section 45Q of the Code
(section 45Q credit). Because these credits cannot be stacked with the
section 45Z credit, this preamble refers to the section 45V credit, the
section 48(a)(15) election, and the section 45Q credit collectively as
the ``anti-stacking credits'' and individually as an ``anti-stacking
credit.''
Section 45Z(d)(5)(A) defines ``transportation fuel'' as a fuel that
meets four requirements. First, the fuel must be suitable for use as a
fuel in a highway vehicle or aircraft. Second, the fuel must have a
lifecycle GHG emissions rate (emissions rate) of not greater than 50
kilograms (kg) of CO<INF>2</INF>e per mmBTU. Section 45Z(d)(1) defines
``mmBTU'' to mean 1,000,000 British thermal units; section 45Z(d)(2)
defines ``CO<INF>2</INF>e'' to mean, with respect to any GHG, the
equivalent carbon dioxide (as determined based on relative global
warming potential). Third, the fuel must
[[Page 5162]]
not be derived from coprocessing an applicable material (or materials
derived from an applicable material) with a feedstock that is not
biomass. Section 45Z(d)(5)(B)(i) defines ``applicable material'' to
mean monoglycerides, diglycerides, and triglycerides; free fatty acids;
and fatty acid esters. Section 45Z(d)(5)(B)(ii) defines ``biomass'' to
have the same meaning as in section 45K(c)(3) of the Code, which
provides that biomass means any organic material other than oil and
natural gas (or any product thereof), and coal (including lignite) or
any product thereof. Fourth, the fuel must not be produced from a fuel
for which a section 45Z credit is allowable.
In the case of a taxpayer producing a transportation fuel that is
SAF, section 45Z(f)(1)(A)(i)(II) requires the taxpayer to provide
certification from an unrelated person.\1\ For this purpose, section
45Z(a)(3) defines ``sustainable aviation fuel,'' which these proposed
regulations refer to as a ``SAF transportation fuel,'' to mean the non-
kerosene portion of liquid fuel that is a transportation fuel, is sold
for use in an aircraft, is not derived from palm fatty acid distillates
or petroleum, and meets the requirements of either: (i) ASTM
International Standard D7566 or (ii) the Fischer Tropsch (FT)
provisions of ASTM International Standard D1655, Annex A1.
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\1\ Both the preamble to the proposed regulations and the
proposed regulations use the term ``unrelated person'' when
describing the certification required by section
45Z(f)(1)(A)(i)(II). Section 45Z(f)(1)(A)(i)(II) refers to an
``unrelated party,'' which is synonymous with an unrelated person as
used in section 45Z(a)(4) and (f)(3).
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Section 45Z(a)(4) requires a taxpayer to sell transportation fuel
to an unrelated person: (i) for use by such person in the production of
a fuel mixture; (ii) for use by such person in a trade or business; or
(iii) who sells such fuel at retail to another person and places such
fuel in the fuel tank of such other person. Section 45Z(f)(3) provides
that persons are treated as related to each other if they would be
treated as a single employer under the regulations prescribed under
section 52(b) of the Code.\2\ Section 45Z(f)(3) further provides that
if a corporation is a member of an affiliated group of corporations
filing a consolidated return, such corporation is treated as selling
fuel to an unrelated person if another member of the group sells the
fuel to an unrelated person. Section 45Z(f)(3) also authorizes the
Secretary to prescribe similar sale attribution rules for other related
entities, including rules for related persons with respect to which the
taxpayer has reason to believe will sell fuel to an unrelated person in
a manner described in section 45Z(a)(4).
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\2\ In determining eligibility for the section 45Z credit, a
taxpayer must apply the controlled group rules under section 52
consistent with the statutory purpose of section 45Z.
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Section 45Z(f)(1)(A)(i)(II) requires a taxpayer producing a SAF
transportation fuel to provide certification (in such form and manner
as the Secretary prescribes) from an unrelated person demonstrating
compliance with: (i) any general requirements, supply chain
traceability requirements, and information transmission requirements
established under the Carbon Offsetting and Reduction Scheme for
International Aviation (CORSIA); or (ii) for any methodology similar to
CORSIA that satisfies the criteria under section 211(o)(1)(H) of the
CAA-2022, requirements similar to the requirements described for
CORSIA. A taxpayer producing a SAF transportation fuel must also
provide such other information as the Secretary may require for
purposes of carrying out section 45Z.
B. Credit Amount
Under section 45Z(a)(1), a taxpayer calculates the amount of the
section 45Z credit by multiplying the applicable amount per gallon or
gallon equivalent with respect to a transportation fuel produced by the
taxpayer and sold in a qualified sale by the emissions factor for such
fuel. Per section 45Z(a)(5), if the credit amount is not a multiple of
one cent, then it is rounded to the nearest cent. A taxpayer's total
section 45Z credit for a taxable year is the sum of the section 45Z
credit for each transportation fuel sold during the taxable year.
1. Applicable Amount
For fuel produced after December 31, 2025, the applicable amount
for any transportation fuel is either $0.20 or $1.00. See section
45Z(a)(2); section 70521(g)(2) of the OBBBA.
For fuel produced on or before December 31, 2025, the applicable
amount varies depending on whether the transportation fuel is a SAF
transportation fuel or is not a SAF transportation fuel (non-SAF
transportation fuel) and is higher for SAF transportation fuel than for
non-SAF transportation fuel. For non-SAF transportation fuel, the
applicable amount is either $0.20 or $1.00. Section 45Z(a)(2). For SAF
transportation fuel, the applicable amount is either $0.35 or $1.75.
Section 45Z(a)(3) (repealed for fuel produced after December 31, 2025,
by section 70521(g)(2) of the OBBBA).
The increased applicable amount is available if the taxpayer
produces the transportation fuel at a qualified facility that satisfies
the prevailing wage and apprenticeship (PWA) requirements.
Section 45Z(c)(1) provides that for calendar years beginning after
2024, the applicable amount must be adjusted by multiplying such amount
by the inflation adjustment factor for the calendar year in which the
sale of the transportation fuel occurs. Section 45Z(c)(2) provides that
the inflation adjustment factor for the section 45Z credit is the
inflation adjustment factor determined and published by the Secretary
pursuant to section 45Y(c), determined by substituting ``calendar year
2022'' for ``calendar year 1992'' in section 45Y(c)(3). The inflation
adjustment factor for purposes of section 45Z means, with respect to a
calendar year, a fraction the numerator of which is the gross domestic
product (GDP) implicit price deflator for the preceding calendar year
and the denominator of which is the GDP implicit price deflator for the
calendar year 2022. In this context, the term ``GDP implicit price
deflator'' means the most recent revision of the implicit price
deflator for the GDP as computed and published by the Department of
Commerce before March 15 of the calendar year.
If any inflation-adjusted applicable amount is not a multiple of
one cent, it must be rounded to the nearest multiple of one cent.
Section 45Z(c)(1).
Section 45Z(f)(6)(A) provides that rules similar to the prevailing
wage requirements of section 45(b)(7) apply. Section 45Z(f)(6)(B)
provides a special rule for qualified facilities placed in service
before January 1, 2025, under which such a facility need only satisfy
prevailing wage requirements for any alteration or repair in taxable
years beginning after December 31, 2024. Section 45Z(f)(7) provides
that rules similar to the apprenticeship requirements of section
45(b)(8) apply. Section 1.45Z-3 provides additional rules on the PWA
requirements under section 45Z.
2. Emissions Factor and Emissions Rate
Under section 45Z(b)(1)(A), a transportation fuel's emissions
factor measures the reduction in a fuel's emissions rate, expressed as
kg of CO<INF>2</INF>e per mmBTU, relative to the statutory baseline
emissions rate of 50 kg of CO<INF>2</INF>e per mmBTU, expressed as a
fraction of the statutory baseline. Expressed mathematically, the
emissions factor calculation is as follows:
(50 kg CO<INF>2</INF>e per mmBTU-emissions rate) / 50 kg
CO<INF>2</INF>e per mmBTU
[[Page 5163]]
Under section 45Z(b)(2), any emissions factor determined under
section 45Z(b)(1)(A) that is not a multiple of 0.1 must be rounded to
the nearest multiple of 0.1.
A taxpayer determines a fuel's emissions rate by either using the
annual emissions rate table published by the Secretary or obtaining a
provisional emissions rate (PER) determination from the Secretary. See
section 45Z(b)(1)(B) and (D). The emissions rate may not be less than
zero for any transportation fuel produced after December 31, 2025,
except for fuel derived from animal manure. See section 45Z(b)(1)(B)(v)
and (b)(1)(E); section 70521(b) and (c)(1) of the OBBBA.
Section 45Z(b)(1)(B)(i) directs the Secretary, subject to section
45Z(b)(1)(B)(ii) through (v), to annually publish a table setting forth
the emissions rates for similar types and categories of transportation
fuels based on the amount of lifecycle GHG emissions as described in
section 211(o)(1)(H) of the CAA-2022 for such fuels, expressed as kg of
CO<INF>2</INF>e per mmBTU. Section 211(o)(1)(H) of the CAA-2022 defines
lifecycle GHG emissions as ``the aggregate quantity of greenhouse gas
emissions (including direct emissions and significant indirect
emissions such as significant emissions from land use changes), as
determined by the Administrator [of the Environmental Protection Agency
(EPA)], related to the full fuel lifecycle, including all stages of
fuel and feedstock production and distribution, from feedstock
generation or extraction through the distribution and delivery and use
of the finished fuel to the ultimate consumer, where the mass values
for all greenhouse gases are adjusted to account for their relative
global warming potential.'' See also 42 U.S.C. 7602(a). Section
45Z(d)(3) provides that ``greenhouse gas'' has the same meaning as
under section 211(o)(1)(G) of the CAA-2022.
Section 45Z divides transportation fuel into two categories for
purposes of emissions rates: non-SAF transportation fuel and SAF
transportation fuel. Section 45Z(b)(1)(B)(ii) and (iii) provides the
methods for determining emissions rates in each case.
Section 45Z(b)(1)(B)(ii) provides that for non-SAF transportation
fuel, the lifecycle GHG emissions of such fuel must be based on the
most recent determinations under the Greenhouse gases, Regulated
Emissions, and Energy use in Transportation model developed by the ANL,
or a successor model as determined by the Secretary.
Section 45Z(b)(1)(B)(iii) provides that for SAF transportation
fuel, the lifecycle GHG emissions of such fuel is determined in
accordance with: (i) the most recent CORSIA methodologies that have
been adopted by the International Civil Aviation Organization (ICAO)
with the agreement of the United States; or (ii) any methodology
similar to the most recent CORSIA methodologies that satisfies the
criteria under section 211(o)(1)(H) of the CAA-2022.
Section 45Z(b)(1)(B)(iv) provides that for transportation fuel
produced after December 31, 2025, notwithstanding section
45Z(b)(1)(B)(i) through (iii), the emissions rate must be adjusted to
exclude any emissions attributed to indirect land use change. See
section 70521(c) of the OBBBA.
Section 45Z(b)(1)(B)(v) provides that for any transportation fuel
derived from animal manure and produced after December 31, 2025, a
distinct emissions rate must be provided with respect to such fuel
based on the specific animal manure feedstock. Such an emissions rate
may be less than zero. See section 70521(c) of the OBBBA.
In the case of any transportation fuel for which an emissions rate
has not been established in the annual emissions rate table under
section 45Z(b)(1)(B), a taxpayer producing such fuel may file a
petition with the Secretary for determination of the PER with respect
to such fuel. See section 45Z(b)(1)(D).
C. Other Rules
Section 45Z(f)(2) provides that, if a facility has more than one
owner, production from the facility will be allocated among the owners
in proportion to their respective ownership interests in the gross
sales from such facility, except to the extent provided in regulations
prescribed by the Secretary.
Section 45Z(f)(4) provides that under regulations prescribed by the
Secretary, rules similar to the rules of section 52(d) will apply to a
pass-thru in the case of estates and trusts.
Section 45Z(f)(5) provides that rules similar to the rules of
section 45Y(g)(6) will apply for the allocation of the credit to
patrons of an agricultural cooperative.
III. Section 4101 Registration
Section 4101 of the Code generally provides rules for taxpayer
registration. Section 4101(a)(1) provides a specific delegation of
authority to the Secretary to prescribe the form and manner of
registration by requiring every person required to register under
section 4101 to register with the Secretary at such time, in such form
and manner, and subject to such terms and conditions, as the Secretary
may by regulations prescribe. Section 4101(a)(1) further provides that
a section 4101 registration may be used only in accordance with
regulations prescribed under section 4101. Section 4101(a)(5) requires
reregistration under regulations prescribed by the Secretary in the
event of certain changes in ownership.
A. Section 45Z Registration Requirement
Section 45Z(f)(1)(A)(i)(I) provides that no section 45Z credit
shall be determined unless the taxpayer is registered as a producer of
clean fuel under section 4101 at the time of production. Section
4101(a)(1) requires registration by ``every person producing a fuel
eligible for the clean fuel production credit (pursuant to section
45Z),'' effective for transportation fuel produced after December 31,
2024.\3\
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\3\ See section 13704(b)(5) of the IRA, as amended by section
70521(i) of the OBBBA.
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B. Denial, Revocation, or Suspension of Registration
Under section 4101(c), rules similar to the rules of section
4222(c) apply for purposes of denial, revocation, or suspension of
registration under section 4101. Section 4222 generally requires
registration for certain tax-free sales under section 4221. Section
4222(c) provides that under regulations prescribed by the Secretary,
the registration of any person under section 4222 may be denied,
revoked, or suspended if the Secretary determines: (i) that such person
has used such registration to avoid the payment of any tax imposed by
chapter 32 of the Code (chapter 32), or to postpone or in any manner to
interfere with the collection of any such tax, or (ii) that such
denial, revocation, or suspension is necessary to protect the revenue.
The flush language of section 4222(c) provides that denial, revocation,
or suspension under section 4222(c) is in addition to any penalty
provided by law for any act or failure to act.
Section 48.4222(a)-1 provides rules for registration, including
application instructions. Section 48.4222(c)-1 provides rules for
revocation or suspension of registration and authorizes the IRS in
certain circumstances to revoke or temporarily suspend, upon written
notice, the registration of any person under section 4222.
IV. Section 6417
Section 6417 permits an applicable entity to elect to treat an
applicable credit determined with respect to the
[[Page 5164]]
applicable entity for the taxable year as a payment against Federal
income taxes imposed by subtitle A of the Code equal to the amount of
the credit. Section 6417(b)(9) provides that the 45Z credit is an
applicable credit.
V. Section 6418
Section 6418 permits an eligible taxpayer to elect to transfer all
or a portion of an eligible credit determined with respect to such
taxpayer for any taxable year to an unrelated taxpayer. Section
6418(f)(1)(A)(viii) provides that the section 45Z credit is an eligible
credit.
VI. Prior Guidance and Publications
A. Notice 2022-58 (Request for Feedback)
Notice 2022-58, 2022-47 I.R.B. 483 (released November 3, 2022),
requested stakeholder feedback on questions arising under section 45Z
that should be addressed in guidance.
B. Treasury Decision 9988 (Elective Payment Election Regulations)
The Treasury Department and the IRS published Treasury Decision
9988 in the Federal Register (89 FR 17546, March 11, 2024), which
finalized regulations concerning the election to treat applicable
credits as a payment of Federal income tax under section 6417 (Elective
Payment Election Regulations). The Elective Payment Election
Regulations contain rules on section 6417 that apply with respect to an
applicable credit, including the section 45Z credit. Section 1.6417-
2(c)(4) requires an applicable entity or electing taxpayer to own the
underlying eligible credit property except in the case of the advanced
manufacturing production credit under section 45X.
C. Treasury Decision 9993 (Credit Transfer Election Regulations)
The Treasury Department and the IRS published Treasury Decision
9993 in the Federal Register (89 FR 34770, April 30, 2024), which
finalized regulations concerning the transfer election with respect to
eligible credits under section 6418 (Credit Transfer Election
Regulations). The Credit Transfer Election Regulations contain rules on
section 6418 that apply with respect to an eligible credit, including
the section 45Z credit. Section 1.6418-2(d)(1) requires an eligible
taxpayer to own the underlying eligible credit property except in the
case of the advanced manufacturing production credit under section 45X.
D. Notice 2024-49 (Registration Requirement)
Notice 2024-49, 2024-26 I.R.B. 1781 (released May 31, 2024),
provides guidance on the section 45Z registration requirements,
including the time, form, and manner of registration. Section 3 of
Notice 2024-49 also provides general definitions, initial definitions
of SAF and non-SAF transportation fuels, and an initial, non-exclusive
list of primary feedstocks, to help taxpayers applying for registration
identify fuels and primary feedstocks that may qualify for the section
45Z credit. Notice 2025-10, 2025-6 I.R.B. 682 (released January 10,
2025), discussed later in this Background section, modifies and
supersedes these definitions, and replaces them with the definitions in
the Appendix to Notice 2025-10.
E. Treasury Decision 9998 (PWA Regulations)
The Treasury Department and the IRS published Treasury Decision
9998 in the Federal Register (89 FR 53184, June 25, 2024), which
finalized regulations concerning the PWA requirements under several
sections of the Code (PWA Regulations), including section 45Z. Section
1.45Z-3 provides rules on the application of the PWA requirements to
section 45Z. The preamble to the PWA Regulations contains a detailed
discussion of the PWA requirements, including applicability dates and
transition rules with respect to the section 45Z credit. These proposed
regulations only address Sec. 1.45Z-3 for context and to the extent
necessary to clarify the rules herein. The PWA Regulations are
otherwise outside the scope of this rulemaking.
F. Fact Sheet FAQs
A section 45Z Fact Sheet, FS-2024-25 (released July 10, 2024),
provides answers to certain frequently asked questions (FAQs) on the
section 45Z registration requirements. This Fact Sheet is available at
<a href="https://www.irs.gov/newsroom/frequently-asked-questions-about-applying-for-registration-for-the-clean-fuel-production-credit-under-ss-45z">https://www.irs.gov/newsroom/frequently-asked-questions-about-applying-for-registration-for-the-clean-fuel-production-credit-under-ss-45z</a>.
G. Notice 2025-10 (Notice of Intent To Propose Rules)
Notice 2025-10 announced that the Treasury Department and the IRS
intended to propose regulations (forthcoming proposed regulations)
addressing the section 45Z credit. In addition to providing background
on the section 45Z credit, Notice 2025-10 explains the intended rules
to be included in forthcoming proposed regulations and requests public
feedback on the draft regulatory text in the Appendix to the notice.
These proposed regulations are the forthcoming proposed regulations
announced in Notice 2025-10.
H. Notice 2025-11 (Emissions Rate Guidance)
Notice 2025-11, 2025-6 I.R.B. 704 (released January 10, 2025),
provides guidance regarding methodologies for determining emissions
rates under section 45Z and provides the initial emissions rate table
required by section 45Z(b)(1)(B)(i). Notice 2025-11 also requests
feedback related to emissions rates for the section 45Z credit.
The public feedback received in response to Notice 2025-10, Notice
2025-11, and Notice 2022-58 was carefully considered in the development
of these proposed regulations.
I. Notice 2025-37 (2025 Inflation Adjustment Factor)
Notice 2025-37, 2025-30 I.R.B. 198 (July 21, 2025), provides the
calendar year 2025 inflation adjustment factor and applicable amounts
for the section 45Z credit.
Explanation of Provisions
I. Overview
A. Section 45Z Regulations
These proposed regulations include six sections relating to section
45Z, proposed Sec. Sec. 1.45Z-1, 1.45Z-2, 1.45Z-4 through 1.45Z-6, and
1.4101-1. These sections, together with existing Sec. 1.45Z-3,
comprise the ``section 45Z regulations'' referenced in this Explanation
of Provisions. The section 45Z regulations would set forth provisions
to determine the eligibility for, and the amount of, the section 45Z
credit for the production of clean transportation fuel. These proposed
regulations would also provide rules for registration and for filing
claims for the section 45Z credit.
Proposed Sec. 1.45Z-1 would provide the definitions of terms
generally applicable for purposes of the section 45Z regulations.
Proposed Sec. 1.45Z-2 would provide general rules applicable to
section 45Z, such as rules for determining the amount and timing of the
credit, including rules for the emissions factor and emissions rate for
transportation fuel and the PER process. Proposed Sec. 1.45Z-4 would
provide special rules applicable to section 45Z, including required
registration, anti-stacking, anti-abuse, production attribution,
facility ownership, foreign feedstock and prohibited foreign entity
restrictions, and recordkeeping and
[[Page 5165]]
substantiation rules. Proposed Sec. 1.45Z-5 would provide the
procedures for certification of emissions rates for SAF transportation
fuel. Proposed Sec. 1.45Z-6 would provide procedures for claiming a
section 45Z credit. Proposed Sec. 1.4101-1 would provide rules for
registration under section 4101.
B. Amendments to Existing Sections 6417, 6418, and 4101 Regulations
The proposed regulations would amend Sec. Sec. 1.6417-2(c),
1.6418-2(d), and 48.4101-1. The proposed amendments to Sec. Sec.
1.6417-2(c)(4) and 1.6418-2(d)(1) would clarify that sections 45Z and
45(d)(3)(C) do not require a taxpayer to own the underlying eligible
credit property. Proposed Sec. 48.4101-1(a)(7) would provide that a
letter of registration is not a determination of tax treatment under
the Code or a determination letter. Proposed Sec. 48.4101-1(a)(8)
would provide rules for reregistration in the event of a change of
ownership or a change of employer identification number (EIN).
II. Definitions
Proposed Sec. 1.45Z-1 would provide definitions that apply for
purposes of section 45Z and the proposed regulations. In addition,
proposed Sec. 1.45Z-1 would clarify key statutory terms as discussed
in Parts II.A. through II.M. of this Explanation of Provisions. The
definitions would also adopt the statutory language for the terms
``applicable amount'' (section 45Z(a)), ``applicable material''
(section 45Z(d)(5)(B)(i)), ``biomass'' (section 45Z(d)(5)(B)(ii)
(citing section 45K(c)(3))), ``CO<INF>2</INF>e'' (section 45Z(d)(2)),
``emissions factor'' (section 45Z(b)(1)(A)), ``greenhouse gas (GHG)''
(section 45Z(d)(3)), ``lifecycle GHG emissions'' (section
45Z(b)(1)(B)(i)), and ``mmBTU'' (section 45Z(d)(1)), and identify
abbreviations used in the proposed regulations, such as ``ASTM,''
``Code,'' U.S. Department of Energy (DOE), EPA, ``Secretary,'' IRS,
``section 45Z credit,'' and ``section 45Z regulations.'' Further, the
definitions would specify the relevant CORSIA methodologies, define an
emissions rate in accordance with section 45Z(b)(1), and define terms
associated with the PER process (see Part III.F.2. of this Explanation
of Provisions).
A. 45ZCF-GREET Model
Proposed Sec. 1.45Z-1(b)(1) would define ``45ZCF-GREET model'' as
the model by that name developed by the ANL and published by the DOE
for use in determining the amount of lifecycle GHG emissions for
purposes of section 45Z. The 45ZCF-GREET model is a user interface
designed to accept input related to a transportation fuel production
facility, execute calculations in the background, and display the full
lifecycle (in other words, well-to-wheel) carbon intensity of produced
transportation fuel, measured in kg of CO<INF>2</INF>e per mmBTU.\4\
The 45ZCF-GREET model is currently available at <a href="https://www.energy.gov/eere/greet">https://www.energy.gov/eere/greet</a>. All publicly available versions of the 45ZCF-GREET model,
the accompanying user manual, additional information including FAQs,
and any log of changes to the model are available at <a href="https://www.energy.gov/eere/greet">https://www.energy.gov/eere/greet</a>. Part III.E.3. of this Explanation of
Provisions discusses the use of the 45ZCF-GREET model for purposes of
section 45Z(b)(1)(B).
---------------------------------------------------------------------------
\4\ As used in the preamble to these proposed regulations, the
term ``well-to-wheel'' includes well-to-wake with respect to
aviation fuel.
---------------------------------------------------------------------------
B. Claim
Proposed Sec. 1.45Z-1(b)(7) would define ``claim'' to mean a
completed Form 7218, Clean Fuel Production Credit, including all
required information and documentation that a taxpayer files with its
Federal income tax return or Federal information return for the taxable
year for which the section 45Z credit is determined. A ``claim'' would
include the making of an election under section 6417 or section 6418.
The proposed regulation would also define ``Form 7218'' to mean Form
7218 and any successor form(s). These defined terms, coupled with the
claim filing procedures in proposed Sec. 1.45Z-6, would explain how a
taxpayer may claim a section 45Z credit.
C. Fuel
Proposed Sec. 1.45Z-1(b)(19) would define ``fuel'' as any liquid
or gaseous substance that can be consumed to supply heat or power.
Therefore, for purposes of section 45Z, the term ``fuel'' would not
include electricity. For an additional explanation, see Part II.I.2. of
this Explanation of Provisions.
D. Gallon Equivalent
Section 45Z(a)(1)(A) bases the section 45Z credit on a gallon (or
gallon equivalent) of transportation fuel without defining the terms or
providing a baseline for non-liquid fuels. The proposed regulations
would use a gallon measurement for liquid fuels and a gallon equivalent
for non-liquid fuels. Proposed Sec. 1.45Z-1(b)(20)(i) would define
``gallon equivalent'' for purposes of section 45Z(a)(1)(A) to mean,
with respect to any non-liquid fuel, the amount of such fuel that has
the energy equivalent of a gallon of gasoline, which refers to the
amount of such fuel that has a Btu content of 116,090 (lower heating
value). The proposed regulations would use gasoline as the most
appropriate baseline fuel for determining gallon equivalency because
gasoline is the most common transportation fuel in the United States,
and section 45Z is designed to incentivize domestic production of
transportation fuels that may serve as alternatives to existing fossil
fuels. The use of a gasoline gallon equivalent is also consistent with
the gasoline gallon equivalent requirement in section 6426(d)(3), which
provided an excise tax credit for many of the same types of fuel that
are eligible for the section 45Z credit. Using the gasoline gallon
equivalent standard in section 6426(d)(3) in the section 45Z context is
further supported by the fact that section 45Z replaced section
6426(d). Proposed Sec. 1.45Z-1(b)(20)(ii) would provide that a fuel is
considered non-liquid if it is in a gaseous state at ambient pressure
and temperature of 1 atmosphere and 60 degrees Fahrenheit,
respectively.
To facilitate implementation of a gallon equivalent standard for
non-liquid fuels, it is necessary to specify whether the standard is
based on a lower heating value or a higher heating value of the
baseline fuel, as the two types of heating values have different energy
contents. The proposed regulations would use a lower heating value,
rather than a higher heating value, because it is a better
representation of the useful energy provided by a transportation fuel.
Proposed Sec. 1.45Z-1(b)(20)(iii) would explain that the gallon
equivalent for a non-liquid fuel is calculated by dividing the lower
heating value of that fuel (measured in Btu) by the lower heating value
of a gallon of gasoline (116,090 Btu), rounded to 5 decimal places.
Proposed Sec. 1.45Z-1(b)(20)(iv) and (v) would provide the lower
heating values of some non-liquid fuels and an example of the
calculation of a gallon equivalent, respectively.
E. Producer and Taxpayer Treated as a Producer
1. In General
Proposed Sec. 1.45Z-1(b)(26)(i) would generally define the term
``producer'' for purposes of section 45Z as the person that engages in
the production of a transportation fuel. Proposed Sec. 1.45Z-
1(b)(26)(iii) would provide examples illustrating the application of
the definition. Section 45Z requires the taxpayer to be registered as a
producer of clean fuel but does not specify who
[[Page 5166]]
the producer is if the production process involves multiple persons and
multiple steps. The proposed regulations would clarify this point.
2. Producer of Alternative Natural Gas
Proposed Sec. 1.45Z-1(b)(26)(ii) would provide that the
``producer'' of alternative natural gas, including renewable natural
gas (RNG), for purposes of section 45Z is the person that processes the
untreated sources of alternative natural gas (processor) to remove
water, carbon dioxide, and other impurities such that it is
interchangeable with fossil natural gas. This definition would be
consistent with the purpose of section 45Z because the processor is the
most active participant in the production process, and section 45Z
incentivizes production. The definition of ``producer'' would therefore
exclude any person that removes conventional or alternative natural gas
(CANG) from a pipeline, compresses it further after removal, and then
sells such further-compressed CANG (compressor). Compression of CANG
that is already interchangeable with fossil natural gas also would not
meet the proposed definition of ``production'' (see Part II.F. of this
Explanation of Provisions).
Several stakeholders have raised questions about who should be
considered the producer of RNG for purposes of section 45Z. The
Treasury Department and the IRS understand that the processor and the
compressor are typically different persons, and that the processor
typically performs most of the active production and owns (or uses) a
facility, as that term is defined in proposed Sec. 1.45Z-1(b)(18). The
Treasury Department and the IRS further understand that the compressor
typically performs the final compression step before a fuel is used in
a vehicle and typically owns (or uses) only compression equipment
rather than a facility. As a result, the compressor is not engaging in
production of a transportation fuel under section 45Z(a)(1) and the
production standard in proposed Sec. 1.45Z-1(b)(27), and would be
unable to meet the requirement that transportation fuel be produced at
a qualified facility as provided in section 45Z(d)(4) and proposed
Sec. 1.45Z-1(b)(28).
F. Production
Proposed Sec. 1.45Z-1(b)(27)(i) would define ``production''
(except for purposes of section 45Z(a)(4)(A)) as all steps and
processes used to make a transportation fuel. Production would begin
with the processing of primary feedstock(s) and end with a
transportation fuel ready to be sold in a qualified sale. Production
would not include instances in which a person uses a primary feedstock
to produce a fuel that meets the same ASTM standard as the primary
feedstock. The definition of ``production'' would also incorporate the
rules in section 45Z(f)(1)(A)(ii) and (f)(1)(B) requiring production to
occur in the United States.
The definition of ``production'' would further clarify that minimal
processing would not qualify as production for purposes of the section
45Z credit. Minimal processing would generally include creating a fuel
mixture or otherwise engaging in activities that do not result in a
chemical transformation. However, with respect to CANG, production
would include processing untreated sources of alternative natural gas
to remove water, carbon dioxide, and other impurities such that it is
interchangeable with fossil natural gas. Production of CANG would not
include compressing CANG that is already interchangeable with fossil
natural gas to a higher pressure.
Under the proposed regulations, the blending of a transportation
fuel into another fuel to create a fuel mixture, regardless of whether
the fuel mixture itself satisfies the requirements of section
45Z(d)(5)(A), would not constitute production of a transportation fuel
because the blending process would constitute minimal processing. For
example, the blending of ethanol and gasoline would not constitute
production of a transportation fuel.
Further, importing fuel that is largely finished fuel and undergoes
only minimal processing in the United States would not constitute
production. Proposed Sec. 1.45Z-1(b)(27)(ii) would provide examples of
minimal processing, including instances in which the same person
engages in production and subsequent blending.
In enacting section 45Z, Congress replaced fuel credits and
payments that specifically incentivize blending (including the credits
under sections 40B and 6426(k), and the payment under section 6427(e))
with the section 45Z production credit. Congress's shift from blending
incentives to a production incentive demonstrates that Congress no
longer intended to incentivize blending. Therefore, equating production
with blending would be contrary to Congress's purpose in enacting
section 45Z.
G. Qualified Facility
1. Facility
Proposed Sec. 1.45Z-1(b)(18) would define a ``facility,'' as used
in section 45Z(d)(4) and the proposed regulations, to mean a single
production line that produces a transportation fuel and would include
all components that function interdependently to produce a
transportation fuel. The definition of ``facility'' would also clarify
the treatment of indirect, post-production, and multipurpose equipment.
The definition would, for instance, exclude CANG compression equipment
from a facility because it is post-production equipment. The definition
would include examples involving carbon capture equipment and SAF
transportation fuel.
The proposed definition of ``facility'' is neutral as to geographic
proximity of the components of the production line and focuses instead
on interdependent pieces of equipment used to produce transportation
fuel. This definition is consistent with how provisions of the Code
under which similar tax credits are determined define ``facility.'' It
is also consistent with stakeholders' requests that a facility be
narrowly defined to minimize overlap with other credits and their
concerns that physical boundaries may be inadequate. Accordingly, the
proposed definition considers that a section 45Z facility may be co-
located with another credit-eligible facility, and that some production
equipment may be located upstream or downstream from, or in a different
building than, other equipment.
2. Qualified Facility
Proposed Sec. 1.45Z-1(b)(28)(i) would incorporate the definitions
of ``qualified facility'' in section 45Z(d)(4) and ``facility'' in
proposed Sec. 1.45Z-1(b)(18) and clarify that a ``qualified facility''
must satisfy the anti-stacking rules in section 45Z(d)(4)(B) and
proposed Sec. 1.45Z-4(b). Proposed Sec. 1.45Z-1(b)(28)(ii) would
define the term ``anti-stacking credit'' to mean any of the three
credits listed in section 45Z(d)(4)(B).
H. Qualified Sale
The draft regulatory text in the Appendix to Notice 2025-10 used
the term ``qualifying sale.'' The proposed regulations would instead
use the term ``qualified sale.'' Proposed Sec. 1.45Z-1(b)(29) would
define a ``qualified sale'' as a sale of a transportation fuel in a
manner described in section 45Z(a)(4). The definition would also: (i)
clarify the term ``sold for use in a trade or business'' for purposes
of section 45Z(a)(4)(B); (ii) incorporate the sale attribution rule in
section 45Z(f)(3) if fuel is sold by another member of the taxpayer's
consolidated group (as defined in Sec. 1.1502-1(b) and (h),
[[Page 5167]]
respectively); and (iii) prescribe an additional sale attribution rule,
as authorized by section 45Z(f)(3), for fuel sold by a related person
if the taxpayer is not a member of a consolidated group.
The draft regulatory text in the Appendix to Notice 2025-10 defined
the term ``sold for use in a trade or business'' to mean sold for use
as a fuel in a trade or business within the meaning of section 162 of
the Code. The term did not include a sale for blending or for further
processing, including use as a primary feedstock to produce another
fuel. Many stakeholders raised concerns about the interpretation of
``sold for use in a trade or business.'' They noted that in the fuel
industry, many producers sell to related or unrelated intermediaries,
such as wholesalers or dealers, rather than directly to unrelated final
purchasers. They asserted that the ``use as a fuel'' language could
prevent all sales for resale, such as those to intermediary dealers or
wholesalers, from qualifying for the section 45Z credit. These
stakeholders requested that the ``use as a fuel'' language be removed
and that the phrase ``use . . . in a trade or business'' be
incorporated as written in section 45Z(a)(4)(B). Stakeholders also said
that a ``use as a fuel'' limitation could undercut the language in
section 45Z(d)(5)(A), which requires only that a transportation fuel be
``suitable for use as a fuel in a highway vehicle or aircraft,'' but
not actually so used.
The proposed regulations would adopt the stakeholders' suggestion
to remove the ``use as a fuel'' language from the definition of ``sold
for use in a trade or business.'' Under the proposed regulations,
``trade or business'' would have the same meaning as in section 162 of
the Code. The meaning of ``sold for use'' would be determined under
these proposed regulations and would apply solely for purposes of
section 45Z. The proposed regulations would also explicitly clarify
that the term ``sold for use in a trade or business'' includes the sale
of fuel to an unrelated person that subsequently resells the fuel in
its trade or business.
The proposed regulations retain the draft regulatory text from the
Appendix to Notice 2025-10 that excludes a sale for blending from the
definition of ``sold for use in a trade or business.'' A sale for
blending (if made to an unrelated person) would qualify as a sale for
use in the production of a fuel mixture under section 45Z(a)(4)(A) and
proposed Sec. 1.45Z-1(b)(29)(i)(A). Therefore, including a sale for
blending in the ``sold for use in a trade or business'' definition,
which relates to section 45Z(a)(4)(B), would render a significant part
of section 45Z(a)(4)(A) superfluous.
The proposed regulations do not retain the draft regulatory text
from the Appendix to Notice 2025-10 that defined ``sold for use in a
trade or business'' to exclude a sale for further processing, including
use as a primary feedstock to produce another fuel. To prevent double
crediting, the OBBBA amended section 45Z(d)(5) to exclude from the
definition of a ``transportation fuel'' any fuel produced from a fuel
for which a section 45Z credit is allowable. See section 70521(e) of
the OBBBA. This statutory revision suggests that a sale for use as a
primary feedstock to produce another fuel may qualify as a sale for use
in a trade or business under section 45Z(a)(4)(B). The proposed
regulations would align the definition of ``sold for use in a trade or
business'' with the statutory language.
The proposed regulations would further define ``sold for use in a
trade or business'' to exclude a sale of fuel to a reseller that
subsequently sells the fuel at retail to another person and places the
fuel in the tank of such other person. Such a sale (if made to an
unrelated person) would be a qualified sale under section 45Z(a)(4)(C)
and proposed Sec. 1.45Z-1(b)(29)(i)(C). Therefore, inclusion of such
sales in the definition of ``sold for use in a trade or business,''
which relates to section 45Z(a)(4)(B), would render section
45Z(a)(4)(C) superfluous.
As noted earlier, the proposed definition of ``sold for use in a
trade or business'' gives meaning to section 45Z(a)(4)(A) and (C) and
is consistent with a plain reading of section 45Z(a)(4)(B). The
proposed definition is also consistent with the ``suitable for use as a
fuel in a highway vehicle or aircraft'' language in section
45Z(d)(5)(A).
The draft regulatory text in the Appendix to Notice 2025-10
incorporated the sale attribution rule in section 45Z(f)(3) for fuel
sold by another member of the taxpayer's consolidated group. Many
stakeholders requested the adoption of a broader ``look-through'' rule
for sales made through related intermediaries, so that a taxpayer would
be treated as selling fuel to an unrelated person if a related person
(for example, a related intermediary dealer or wholesaler) ultimately
sold the fuel to an unrelated person. The stakeholders pointed to
similar look-through rules that the Treasury Department and the IRS
adopted with regard to credits under sections 45 and 45J of the Code in
Notice 2008-60, 2008-30 I.R.B. 178, and Notice 2023-24, 2023-13 I.R.B.
571, respectively. The stakeholders expressed that many fuel producers
are not organized as corporations and cannot utilize the sale
attribution rule under section 45Z(f)(3).
After the release of Notice 2025-10, the OBBBA added rulemaking
authority to section 45Z(f)(3) that allows the Secretary to prescribe
additional related-person sale attribution rules similar to the
statutory rule. See section 70521(f) of the OBBBA. Based on this new
grant of authority, the proposed regulations would adopt the
stakeholders' suggestion regarding a broader look-through rule for
sales made through related persons. Proposed Sec. 1.45Z-1(b)(29)(iv)
would provide that, for purposes of section 45Z, a taxpayer that is not
a member of a consolidated group is treated as selling fuel to an
unrelated person if a related person sells the fuel to the unrelated
person. This rule would apply to all sales made by related persons
except those specifically addressed in section 45Z(f)(3) and proposed
Sec. 1.45Z-1(b)(29)(iii).
Proposed Sec. 1.45Z-1(b)(29)(v) would provide examples
illustrating the definition of ``qualified sale,'' including the ``sold
for use in a trade or business'' definition as it relates to section
45Z(a)(4)(B), the sale attribution rule for fuel sold by another member
of a taxpayer's consolidated group, the sale attribution rule for fuel
sold by a related person (other than another member of a taxpayer's
consolidated group), and a sale made by a taxpayer that produces and
subsequently blends a transportation fuel.
I. Transportation Fuel
1. In General
Proposed Sec. 1.45Z-1(b)(34) would define ``transportation fuel''
as provided in section 45Z(d)(5)(A), and would also define associated
terms. The proposed regulations would define the term ``suitable for
use as a fuel in a highway vehicle or aircraft'' (suitable for use) to
mean that the fuel has practical and commercial fitness for use as a
fuel in a highway vehicle or aircraft, or may be blended into a fuel
mixture that has practical and commercial fitness for use as a fuel in
a highway vehicle or aircraft. The proposed definition of ``suitable
for use'' is consistent with longstanding excise tax rules under Sec.
48.4081-1(c)(2) of the Manufacturers and Retailers Excise Tax
Regulations, with which the fuel industry is familiar.
The proposed regulations would also clarify that actual use as a
fuel in a highway vehicle or aircraft is not required. For example,
diesel fuel that has practical and commercial fitness for use as a fuel
in a highway vehicle or
[[Page 5168]]
aircraft, but is ultimately used as marine fuel, would satisfy the
``suitable for use'' standard. The proposed regulations would further
provide that CANG is suitable for use once it is produced so that it is
interchangeable with fossil natural gas and would require only minimal
processing (for example, further compression or liquefaction) to meet
the specifications of ASTM D8080. In addition, the proposed regulations
would also provide that a fuel that does not require further processing
and that may be blended with or used as a component of taxable fuel
(within the meaning of section 4083 of the Code) is suitable for use.
The proposed regulations would define the term ``produced from a
fuel for which a section 45Z credit is allowable,'' as used in section
45Z(d)(5)(A)(iv), to mean that a fuel has a primary feedstock that
meets the definition of a transportation fuel under section 45Z
(without regard to section 45Z(d)(5)(A)(iv)). This proposed rule would
prevent double crediting by ensuring that only the first transportation
fuel in a production chain qualifies for a section 45Z credit. See
section 70521(e) of the OBBBA. Thus, if one fuel is used as a primary
feedstock to produce a second fuel, and the first fuel qualifies as a
transportation fuel for purposes of section 45Z, the second fuel would
not qualify for a section 45Z credit. For instance, SAF produced from
ethanol as a primary feedstock, and hydrogen produced from RNG as a
primary feedstock, may not qualify as transportation fuel for purposes
of section 45Z. However, a fuel could still qualify for a section 45Z
credit if its production process uses a transportation fuel solely as a
process fuel or other non-primary-feedstock input.
The proposed regulations would provide examples illustrating the
definitions of ``suitable for use'' and ``produced from a fuel for
which a section 45Z credit is allowable.''
2. Electricity
The proposed regulations would not include electricity in the
definition of ``transportation fuel,'' for several reasons. Electricity
production would therefore be ineligible for the section 45Z credit.
First, at the time section 45Z was enacted, the Code contained an
assortment of income tax credit, excise tax credit, and excise tax
payment provisions for various biofuels and other alternative fuels
sold for use as a fuel or used as a fuel. These included incentives for
biodiesel, renewable diesel, and several different alternative fuels
(including compressed natural gas and second generation biofuel). Joint
Committee on Taxation, General Explanation of Tax Legislation Enacted
in the 117th Congress, JCS 1-23, at 278 (Dec. 31, 2023). Congress
designed the section 45Z credit to replace these incentives, which were
only available for liquid or gaseous fuels. See sections 40(b)(6);
40A(b)(1) and (2); 40B; 6426(c) through (e) and (k); 6427(e).
Therefore, for purposes of section 45Z, it would be reasonable to
understand the term ``fuel'' as referring to a liquid or gaseous
substance that can be consumed to supply heat or power. As a result,
the term ``transportation fuel'' under the proposed regulations would
not include electricity.
Second, the anti-stacking rules in section 45Z(d)(4)(B) disallow
receiving both a section 45Z credit and certain other credits with
respect to the same facility for a taxable year. See proposed Sec.
1.45Z-1(b)(28)(ii) (definition of anti-stacking credit); Part IV.B. of
this Explanation of Provisions (discussion of anti-stacking rules).
The inclusion of the anti-stacking rules indicates that Congress
understood the potential for activity at a particular facility to
generate multiple credits for a taxable year and wished to foreclose
that possibility. However, the section 45Y clean electricity production
credit is not included in the anti-stacking rules, which indicates that
the production of electricity is not eligible for the section 45Z
credit. Thus, Congress's omission of the section 45Y credit from the
anti-stacking rules suggests that Congress did not understand the term
``fuel'' to include electricity for purposes of section 45Z. Further,
Notice 2025-10, which stated that the forthcoming proposed regulations
intended to exclude electricity as a transportation fuel, was published
approximately 6 months before the enactment of the OBBBA. Though the
OBBBA amended certain aspects of section 45Z discussed in Notice 2025-
10, including the definition of ``transportation fuel,'' the OBBBA did
not amend or clarify the definition of ``transportation fuel'' to
include electricity.
Third, the Code already provides a separate credit for clean
electricity production under section 45Y. When Congress created the
section 45Z credit, it also created the section 45Y credit. Generally,
the section 45Y credit is not limited based on how the electricity is
ultimately used. If the definition of ``transportation fuel'' in
section 45Z were to include electricity, there would be significant
overlap between the electricity eligible for a credit under section 45Z
and the electricity eligible for a credit under section 45Y. Further, a
reading of section 45Z to include electricity in the definition of
``transportation fuel'' would not be consistent with Congressional
intent in separately enacting section 45Y to incentivize clean
electricity production and section 45Z to incentivize production of
clean transportation fuel.
J. Non-SAF Transportation Fuel
Proposed Sec. 1.45Z-1(b)(24)(i) would define ``non-SAF
transportation fuel'' for purposes of section 45Z as any transportation
fuel that is not a SAF transportation fuel. Proposed Sec. 1.45Z-
1(b)(24)(ii) would provide a non-exclusive list of non-SAF fuels that
may qualify as a transportation fuel, as well as descriptions of such
fuels. A non-SAF fuel described in proposed Sec. 1.45Z-1(b)(24)(ii)
would also need to meet all the other applicable requirements under
section 45Z to qualify as a transportation fuel. The list of non-SAF
fuels would generally track those fuels listed in section 3.03 of
Notice 2024-49. Proposed Sec. 1.45Z-1(b)(24)(ii) would also retain a
few modifications that Notice 2025-10 made to the definitions in Notice
2024-49 to address concerns raised by stakeholders. Consistent with
Notice 2025-10, the proposed regulations would clarify the description
of low-GHG CANG, including the ASTM D8080 reference, and would list
ASTM D1152 (neat methanol) as a specification for low-GHG methanol in
addition to ASTM D5797 (fuel blend methanol).
The Treasury Department and the IRS are cognizant of existing
business practices in which producers make fuel that may not meet all
the proposed ASTM specifications for that particular fuel. Therefore,
the proposed ASTM specifications would be both non-exhaustive and non-
exclusive with respect to determining whether a fuel is a
transportation fuel for purposes of section 45Z. Prescribing exclusive
fuel-by-fuel specifications in these proposed regulations would be
impractical and may unintentionally restrict future market
developments. The Treasury Department and the IRS request comments on
this general approach and whether in some cases additional specificity
is needed.
K. SAF Transportation Fuel
Proposed Sec. 1.45Z-1(b)(30) would define ``SAF transportation
fuel'' to mean SAF as defined in section 45Z(a)(3), and would also
define associated terms. Further, the proposed regulations would
clarify that a synthetic blending component sold to a
[[Page 5169]]
person that blends the fuel into a fuel mixture described in ASTM D7566
is ``sold for use in an aircraft'' within the meaning of section
45Z(a)(3).
L. Types and Categories of Transportation Fuel
Proposed Sec. 1.45Z-1(b)(35) would define the term ``type of
transportation fuel'' as a particular kind of fuel, and the term
``category of transportation fuel'' as the unique primary feedstock and
pathway used to produce a type of transportation fuel. The definitions
would clarify those terms as used in section 45Z(b)(1)(B)(i).
M. Unrelated Person
Consistent with section 45Z(f)(3), proposed Sec. 1.45Z-1(b)(36)
would define the term ``unrelated person'' as a person not related to
the taxpayer. The term ``unrelated party'' has the same meaning as
``unrelated person'' for purposes of the certification required by
section 45Z(f)(1)(A)(i)(II)(aa). The definition would also incorporate
the related person definition in section 45Z(f)(3).
III. General Rules
Proposed Sec. 1.45Z-2 would provide general rules regarding the
section 45Z credit. The proposed regulations would incorporate and
clarify the rules in section 45Z(a) through (c) regarding the amount of
the credit, the credit calculation, the timing of the credit, emissions
factors, and emissions rates (including the emissions rate table and
the PER process).
A. Amount of Credit
Proposed Sec. 1.45Z-2(a)(1) would incorporate and clarify the
credit calculation rules in section 45Z(a)(1). Proposed Sec. 1.45Z-
2(a)(2) would provide that the volume of a liquid fuel is measured on
the basis of gallons adjusted to ambient pressure and temperature of 1
atmosphere and 60 degrees Fahrenheit. The proposed rule would reference
proposed Sec. 1.45Z-1(b)(20)(ii) and (iii), respectively, for the
determination of whether a fuel is liquid or non-liquid and the
calculation of the gallon equivalent of a non-liquid fuel.
Proposed Sec. 1.45Z-2(a)(3) would provide rules and examples for
the calculation of the section 45Z credit. Proposed Sec. 1.45Z-
2(a)(3)(i) would implement the rounding rule provided in section
45Z(a)(5) for credit amounts and would clarify that the rule applies
only after multiplying the applicable amount, quantity of fuel, and
emissions factor. Proposed Sec. 1.45Z-2(a)(3)(ii) would require pro
rata allocation for sales of transportation fuel produced after
December 31, 2024, and held in common storage with other fuels.
Prior to the enactment of the OBBBA, the applicable amount meant
either the base amount provided in section 45Z(a)(2)(A) or the
alternative amount provided in section 45Z(a)(2)(B), with an increased
base amount and alternative amount for SAF transportation fuel under
section 45Z(a)(3)(A). Section 70521(g)(2) of the OBBBA eliminated the
increased base amount and alternative amount for SAF transportation
fuel produced after December 31, 2025. Proposed Sec. 1.45Z-2(a)(4)
would define the term ``applicable amount'' in accordance with section
45Z(a)(2), as amended by the OBBBA. Under the proposed definition, the
alternative amount would apply in the case of any transportation fuel
produced at a qualified facility that satisfies the PWA requirements.
The base amount would otherwise apply in the case of any transportation
fuel produced at a qualified facility that does not satisfy the PWA
requirements.
Proposed Sec. 1.45Z-2(a)(4)(iv) would implement the inflation
adjustment mechanics for the applicable amount provided under section
45Z(c), including the inflation adjustment factor as provided in
section 45Z(c)(2). In Notice 2025-37, the Treasury Department and the
IRS published the section 45Z inflation adjustment factor for calendar
year 2025. The section 45Z inflation adjustment factor for subsequent
calendar years will also be published in the Internal Revenue Bulletin.
B. Timing of Credit
Proposed Sec. 1.45Z-2(b)(1) would clarify that a taxpayer is
eligible to claim the section 45Z credit only for the taxable year in
which a qualified sale of a transportation fuel occurs, provided the
taxpayer meets all other requirements to claim the credit. See section
45Z(a)(1)(A)(ii). Proposed Sec. 1.45Z-2(b)(2) would incorporate the
effective date in section 13704(c) of the IRA, which provides that
section 45Z applies to transportation fuel produced after December 31,
2024.
Proposed Sec. 1.45Z-2(b)(3)(i) would clarify that a transportation
fuel may be produced in an earlier taxable year than the taxable year
in which the qualified sale of the fuel occurs, but that a qualified
sale may not occur before the date the fuel is produced. As a result,
if a taxpayer sells transportation fuel before production, the
qualified sale would occur on the date of production. Proposed Sec.
1.45Z-2(b)(3)(ii) would provide that a qualified sale occurs at the
time of the taxpayer's sale to the unrelated person, or if a related-
person sale attribution rule applies, at the time of the related
person's sale to the unrelated person.
C. Emissions Factor
Proposed Sec. 1.45Z-2(c)(1) would incorporate the definition of
``emissions factor'' provided under section 45Z(b)(1)(A). Proposed
Sec. 1.45Z-2(c)(2) would incorporate the emissions factor rounding
rule in section 45Z(b)(2) and provide an example.
D. Emissions Rate
Proposed Sec. 1.45Z-2(d)(1) would incorporate the rules for
determining the emissions rate of a transportation fuel in section
45Z(b)(1)(B) and (D). To determine an emissions rate for a fuel, a
taxpayer would either use the applicable emissions rate table published
by the Secretary or, if the applicable emissions rate table does not
establish an emissions rate for the taxpayer's fuel, a PER determined
by the Secretary.
Proposed Sec. 1.45Z-2(d)(2) would incorporate section 70521(b) and
(c)(1) of the OBBBA, which provide that for transportation fuel
produced after December 31, 2025, the emissions rate cannot be less
than zero, unless such fuel is derived from animal manure. Section
45Z(b)(1)(B)(v), which was added by section 70521(c)(1) of the OBBBA,
provides that, notwithstanding that general rule, the Secretary ``may
provide an emissions rate that is less than zero'' for a transportation
fuel derived from an animal manure feedstock such as dairy, swine, or
poultry manure. Proposed Sec. 1.45Z-2(d)(2) would clarify that the
limitation regarding negative emissions rates also applies to any
transportation fuel used as a production input. The proposed rule would
provide examples illustrating the negative-emissions-rate limitation
and the effect of a negative emissions rate on the emissions factor
calculation.
Proposed Sec. 1.45Z-2(d)(3) would incorporate the rule in section
45Z(b)(1)(B)(iv), which was added by section 70521(c)(1) of the OBBBA,
that excludes emissions attributed to indirect land use changes for
transportation fuel produced after December 31, 2025.
As discussed in Part III.E. and III.F. of this Explanation of
Provisions, under proposed Sec. 1.45Z-2(e)(2), the applicable
emissions rate table would direct a taxpayer to use the allowed
methodologies described in section 45Z(b)(1)(B)(ii) and (iii) and set
out in proposed Sec. 1.45Z-2(e)(3), and any PER
[[Page 5170]]
would be determined pursuant to section 45Z(b)(1)(D) and the procedures
in proposed Sec. 1.45Z-2(f).
E. Emissions Rate Table
1. In General
Proposed Sec. 1.45Z-2(e) would incorporate the rules in section
45Z(b)(1)(B) regarding the annual publication of a table of emissions
rates for similar types and categories of transportation fuels
(emissions rate table), including the requirement in section
45Z(b)(1)(B)(i) that the emissions rate table be published ``[s]ubject
to'' the requirements in section 45Z(b)(1)(B)(ii) through (v).
The Treasury Department and the IRS will annually publish an
emissions rate table for each calendar year in the Internal Revenue
Bulletin. The annual emissions rate table for calendar year 2025 was
published in Notice 2025-11.
Proposed Sec. 1.45Z-2(e)(2) would provide rules for identifying
the applicable emissions rate table that a taxpayer must use in a given
taxable year. Proposed Sec. 1.45Z-2(e)(2)(i) would clarify that the
applicable emissions rate table for a taxpayer is the emissions rate
table that is in effect on the first day of the taxpayer's taxable year
of production. The proposed rule would also clarify that, for
production after December 31, 2024, in taxable years beginning before
January 1, 2025, the applicable emissions rate table is the emissions
rate table effective for 2025.
In response to Notice 2025-10, stakeholders requested the ability
to use an emissions rate table tied to the year construction of a
facility began, regardless of when the taxpayer actually produces a
transportation fuel. If a taxpayer begins constructing a facility in
2025 but such facility does not begin producing fuel until a subsequent
calendar year, the stakeholders' requested rule would allow the
taxpayer to use the emissions rate table for 2025 to determine the
emissions rate of its fuel for all taxable years.
The proposed regulations would not adopt this suggestion. Section
45Z(b)(1)(B)(i) directs the Secretary to annually publish an emissions
rate table and requires taxpayers to use such tables. The statute does
not contemplate taxpayers locking in the use of old tables in later
years. Additionally, the amount of the section 45Z credit depends in
part on the emissions rate of the transportation fuel produced in a
given taxable year. Accordingly, the emissions rate of a fuel is
properly established using the emissions rate table in effect for the
taxable year in which such fuel was produced. The beginning of
construction date for the facility in which the fuel is produced has no
significance with respect to emissions rates and is unrelated to the
actual emissions associated with the production of transportation fuel
after the facility is placed in service.
Proposed Sec. 1.45Z-2(e)(2)(ii) would clarify that if a taxpayer
produces a fuel for which the applicable emissions rate table
establishes an emissions rate, the taxpayer must use the corresponding
allowed methodologies, as specified in proposed Sec. 1.45Z-2(e)(3), as
provided in such table to determine the emissions rate for all such
fuel produced during the taxpayer's taxable year.
Proposed Sec. 1.45Z-2(e)(2)(iii)(A) would clarify that the
applicable emissions rate table establishes the emissions rate for a
fuel if the emissions rate table includes both the type and category of
that fuel. Proposed Sec. 1.45Z-2(e)(2)(iii)(B) would clarify that if
an emissions rate table does not initially include a type or category
of fuel, but an allowed methodology is updated to add such type or
category of fuel during the calendar year, then that type or category
of fuel is considered included in such emissions rate table.
The proposed regulations would generally require a taxpayer to use
the latest annual emissions rate table (as opposed to prior annual
tables) and would prevent the use of outdated modeling.
2. Allowed Methodologies
Proposed Sec. 1.45Z-2(e)(3)(i) would provide that a taxpayer
producing a fuel for which an emissions rate is established by the
applicable emissions rate table must determine the fuel's emissions
rate using the allowed methodologies described in proposed Sec. 1.45Z-
2(e)(3)(iv) and (v), as directed by the applicable emissions rate
table.
Proposed Sec. 1.45Z-2(e)(3)(ii) would require a taxpayer to use
the first version of an allowed methodology that is publicly available
in the taxable year of production and that includes the type and
category of the taxpayer's fuel. However, if an updated version of an
allowed methodology becomes publicly available after the first day of
the taxable year of production (but still within such taxable year),
then the taxpayer could choose to treat such updated version as the
most recent version of such methodology. This choice would give a
taxpayer the flexibility to choose the version of an allowed
methodology to use with respect to taxable years for which an updated
version of a methodology may be published during a taxpayer's taxable
year of production. This would generally ensure that a taxpayer uses
the latest modeling and benefits from favorable updates to a
methodology, but would not penalize a taxpayer if a methodology is
updated unfavorably during the taxable year.
The proposed regulations would address the requirement in section
45Z(b)(1)(B)(i) that the emissions rate table be published ``[s]ubject
to'' the requirements in section 45Z(b)(1)(B)(ii) through (v). Proposed
Sec. 1.45Z-2(e)(3)(iv) and (v) would identify the allowed
methodologies for determining emissions rates for purposes of the
emissions rate table described in section 45Z(b)(1)(B)(i). If the
applicable emissions rate table establishes the emissions rate for a
non-SAF transportation fuel, a taxpayer producing such fuel would
determine the fuel's emissions rate using the 45ZCF-GREET model, as
directed by the applicable emissions rate table. If the applicable
emissions rate table establishes the emissions rate for a SAF
transportation fuel, a taxpayer producing such fuel would determine the
fuel's emissions rate using the most recent version of the CORSIA
Default Life Cycle Emissions Values for CORSIA Eligible Fuels lifecycle
approach (CORSIA Default) or the CORSIA Methodology for Calculating
Actual Life Cycle Emissions Values lifecycle approach (CORSIA Actual),
with the agreement of the United States, or the 45ZCF-GREET model, as
directed by the applicable emissions rate table. The proposed
regulations would also clarify that, for a given type and category of
SAF transportation fuel, a taxpayer must use the same methodology to
calculate lifecycle GHG emissions associated with all stages of fuel
feedstock production and distribution.
Section 45Z(b)(1)(B)(i) requires the emissions rate table to be
based on the amount of lifecycle GHG emissions (as described in section
211(o)(1)(H) of the CAA-2022) for such fuels. Section 211(o)(1)(H) of
the CAA-2022 defines lifecycle GHG emissions as the aggregate emissions
from all stages of the fuel's production and use, including feedstock
production and transportation, fuel production and distribution, and
use of the finished fuel. This type of lifecycle analysis is referred
to as ``well-to-wheel'' emissions analysis. As a result, for each type
and category of transportation fuel, the 45ZCF-GREET model also uses
``well-to-wheel'' emissions to calculate lifecycle GHG emissions for
all stages of fuel production, as well as emissions resulting from use
of the fuel in transportation.
Section 70521(c)(1) of the OBBBA provides that for fuel produced
after
[[Page 5171]]
December 31, 2025, notwithstanding the CAA reference in section
45Z(b)(1)(B)(i), the emissions rate of a transportation fuel shall
exclude any emissions attributed to indirect land use change. See
section 45Z(b)(1)(B)(iv).
3. 45ZCF-GREET Model
a. In General
Section 45Z(b)(1)(B)(ii) provides that in the case of non-SAF
transportation fuel, the lifecycle GHG emissions of such fuel must be
based on the most recent determinations under the Greenhouse gases,
Regulated Emissions, and Energy use in Transportation model developed
by the ANL, or a successor model (as determined by the Secretary). The
DOE changed the name of the ``Greenhouse gases, Regulated Emissions,
and Energy use in Transportation'' model to ``Greenhouse gases,
Regulated Emissions, and Energy use in Technologies'' in 2020 and it is
now generally referred to as the ``GREET'' model.
The GREET model refers to a suite of models, the first version of
which was released in 1995 and is now called the Research & Development
Greenhouse gases, Regulated Emissions, and Energy use in Technologies
(R&D GREET) model. Since 1995, the DOE maintained the GREET model to
enable research regarding lifecycle analyses of hundreds of different
methods of producing, delivering, and using energy. The R&D GREET model
was not designed to be used for determining emissions rates for tax
credits, including the section 45Z credit, but the current suite of
GREET models includes different versions, some of which are designed to
facilitate particular regulatory regimes.
As of February 4, 2026 the DOE's GREET website lists the following
different versions of the GREET model: R&D GREET, 40BSAF-GREET, 45VH2-
GREET, 45ZCF-GREET, CA-GREET4.0, and ICAO-GREET. See <a href="https://energy.gov/eere/greet">https://energy.gov/eere/greet</a>. For purposes of the section 45Z credit, the
phrase ``most recent determinations under the Greenhouse gases,
Regulated Emissions, and Energy use in Transportation model'' in
section 45Z(b)(1)(B)(ii) is best understood as referring to the most
recent determinations under the 45ZCF-GREET model. As discussed in Part
III.E.3.b. of this Explanation of provisions, the proposed regulations
would also designate the 45ZCF-GREET as a successor model to the GREET
model under section 45Z(b)(1)(B)(ii).
Some stakeholders have suggested that the R&D GREET model should be
used for the section 45Z credit. However, the 45ZCF-GREET model is the
only appropriate GREET model to use for purposes of the section 45Z
credit because the R&D GREET model is not limited to transportation
fuels and includes information that is based on preliminary analyses
(that is, analyses that are not yet complete, have significant
technical uncertainties, or are still being reviewed by laboratory
staff, the DOE staff, or independent experts). See generally GREET,
Office of Energy Efficiency & Renewable Energy, DOE, available at
<a href="https://www.energy.gov/eere/greet">https://www.energy.gov/eere/greet</a>.
While the R&D GREET model is a valuable tool for characterizing the
benefits and impacts of energy technologies in a directional manner and
testing new and updated data and parameters, it is designed to provide
flexibility in user-defined parameters and methodological choices for a
wide variety of research purposes and thus not appropriate for use in
policy applications without modifications. Because the R&D GREET model
offers users many choices regarding analysis methodology (for example,
co-product accounting method and global warming potential values),
different users can calculate different emissions rates with respect to
the same fuel. Many of these choices would not be appropriate for the
specific context of the section 45Z credit given the potentially
preliminary nature of much of the information represented in R&D GREET
and given that specific representations of activities, and their
emissions, are needed in a specific fashion (for example, to comply
with the requirements of section 45Z). Given the limitations of some of
the data underlying aspects of the R&D GREET model and the fact that
the model does not predetermine for the user the methodologies and
accounting parameters that are appropriate for compliance with the
requirements of section 45Z, R&D GREET does not provide the analytical
and methodological specificity necessary to meet the specific
objectives or statutory requirements of the section 45Z credit.
ANL developed, and the DOE published, the 45ZCF-GREET model as a
specific version of the GREET model to determine emissions rates that
also meets three key parameters: (i) user-friendliness and consistency,
(ii) technical robustness of the pathways represented, and (iii)
consistency with the requirements of section 45Z. The 45ZCF-GREET model
and the 45ZCF-GREET User Manual are available at <a href="https://www.energy.gov/eere/greet">https://www.energy.gov/eere/greet</a>. The first version of the 45ZCF-GREET model,
released on January 15, 2025, included the most commonly used types and
categories of fuel that are anticipated to meet the eligibility
requirements to claim the section 45Z credit. The 45ZCF-GREET model and
the 45ZCF-GREET User Manual were updated in May 2025; such updates
included adding pathways for alternative natural gas from coal mine
methane capture and ethanol from U.S. corn wet mills. Additional types
and categories of fuel may be added in future versions of the 45ZCF-
GREET model.
Implementation of the section 45Z credit requires that data used to
calculate emissions rates reflect a given taxpayer's specific
operations and that such data be independently verifiable to the extent
possible. Use of facility-specific verifiable data ensures that the
section 45Z credit is available only to those fuels that meet statutory
requirements. For certain parameters, bespoke inputs are unlikely to be
easily measured by taxpayers and/or independently verifiable with high
fidelity, given the current status of verification mechanisms. Thus,
certain parameters in the 45ZCF-GREET model are fixed assumptions,
referred to as ``background data,'' that are based on the best
available data and may not be changed by users. Alternatively, the
``foreground data'' in the 45ZCF-GREET model are parameters that must
be input by the user. The 45ZCF-GREET User Manual contains further
details on background and foreground data.
b. 45ZCF-GREET as a Successor Model
The Treasury Department and the IRS recognize that the continued
existence of the R&D GREET model and periodic updates to both the
45ZCF-GREET model and the R&D GREET model may create uncertainty about
which GREET model to use. To address any potential uncertainty, the
proposed regulations would invoke the Secretary's express delegation of
authority in section 45Z(b)(1)(B)(ii) to require use of the 45ZCF-GREET
model as a successor model.
In drafting the proposed regulations, the Treasury Department and
the IRS considered the statutory definition of the term ``lifecycle
greenhouse gas emissions'' in section 211(o)(1)(H) of the CAA-2022 and
the specific objectives of section 45Z. The Treasury Department and the
IRS also consulted with the DOE. Accordingly, the proposed regulations
would reflect that the 45ZCF-GREET model is a model specifically
developed by the ANL as a derivative of and successor to the R&D GREET
model to meet the requirements and objectives of section 45Z.
[[Page 5172]]
c. Most Recent Determinations Under GREET
Regardless of any determination by the Secretary of a successor
model, the phrase ``most recent determinations under the Greenhouse
gases, Regulated Emissions, and Energy use in Transportation model'' in
section 45Z(b)(1)(B)(ii) can be understood to refer to determinations
under the most recent version of the 45ZCF-GREET model.
As discussed in Part III.E.3.a. of this Explanation of Provisions,
the 45ZCF-GREET model is tailored to the administration of the section
45Z credit and includes features that make it easy for taxpayers to
use. Use of the most recent version of the 45ZCF-GREET model would also
ensure that the pathways and approaches provided for determining
``well-to-wheel'' emissions for various fuel production processes are
of sufficient methodological certainty to be appropriate for
determining eligibility for a tax credit.
d. SAF Portion of 45ZCF-GREET Model as a Similar Methodology
The proposed regulations would allow taxpayers to use the 45ZCF-
GREET model to determine emissions rates for SAF transportation fuel
(SAF portion of 45ZCF-GREET model). The SAF portion of the 45ZCF-GREET
model is a ``similar methodology'' to CORSIA under section
45Z(b)(1)(B)(iii)(II) because, like the CORSIA fuel lifecycle
methodologies, it evaluates the full fuel lifecycle, including all
stages of fuel and feedstock production through to the end use of the
finished fuel. The DOE worked with the Treasury Department and other
Federal agencies to develop the 45ZCF-GREET model, including
specifications for and limitations on background and foreground data,
to satisfy the statutory requirements of section 45Z. Additionally, in
the context of whether the R&D GREET model could be used to determine
lifecycle GHG emissions for purposes of section 40B(e)(2),\5\ the EPA
identified certain necessary components of a lifecycle GHG analysis
consistent with section 211(o)(1)(H) of the CAA-2022 that the R&D GREET
model lacked. The EPA subsequently determined that the new 40BSAF-GREET
2024 model, created in 2024 for the now-expired SAF credit under
section 40B, included the previously identified absent categories of
emissions.\6\ Similarly, the EPA found that the 45ZCF-GREET model
includes the categories of emissions it previously identified as
missing from the R&D GREET model, the lack of which made R&D GREET
insufficient for calculating lifecycle GHG emissions for purposes of
section 211(o)(1)(H) of the CAA-2022.\7\
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\5\ As in section 45Z(b)(1)(B)(iii)(II), section 40B(e)(2)
requires that a methodology similar to CORSIA must also satisfy the
criteria under section 211(o)(1)(H) of the CAA-2022. See also Notice
2024-37, 2024-21 I.R.B. 1191.
\6\ See Letter from Joseph Goffman, Principal Deputy Assistant
Administrator for the Office of Air and Radiation, U.S.
Environmental Protection Agency, to Lily Batchelder, Assistant
Secretary for Tax Policy, U.S. Department of Treasury (December 13,
2023) (EPA December 2023 Letter), available at <a href="https://home.treasury.gov/system/files/136/Final-EPA-letter-to-UST-on-SAF-signed.pdf">https://home.treasury.gov/system/files/136/Final-EPA-letter-to-UST-on-SAF-signed.pdf</a>.
\7\ See Letter from Joseph Goffman, Assistant Administrator for
the Office of Air and Radiation, U.S. Environmental Protection
Agency, to Aviva Aron-Dine, Deputy Assistant Secretary for Tax
Policy, U.S. Department of Treasury (January 8, 2025) (EPA January
2025 Letter), available at <a href="https://home.treasury.gov/system/files/136/January-2025-EPA-letter-to-UST-on-45zcf-GREET-signed.pdf">https://home.treasury.gov/system/files/136/January-2025-EPA-letter-to-UST-on-45zcf-GREET-signed.pdf</a>.
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The 45ZCF-GREET model contains certain necessary components of a
lifecycle GHG analysis consistent with section 211(o)(1)(H) of the CAA-
2022 as applied for purposes of the section 45Z regulations.\8\ The
45ZCF-GREET model is consistent with the requirements of section
45Z(b)(1)(B)(iii). Therefore, emissions rates for SAF transportation
fuels calculated using the 45ZCF-GREET model would also be consistent
with those requirements as applied for purposes of the section 45Z
regulations. See section 45Z(b)(1)(B)(i).
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\8\ The 45ZCF-GREET model includes significant indirect
emissions from land use, crop production, and livestock. Due to the
OBBBA, indirect emissions from land use, also known as induced or
indirect land use change, will be excluded for purposes of
transportation fuel produced after December 31, 2025. See section
45Z(b)(1)(B)(iv); section 70521(c) of the OBBBA.
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e. Other Aspects of 45ZCF-GREET Model
In the 45ZCF-GREET model, for purposes of accounting for emissions
associated with hydrogen (as a production input), natural gas
alternatives (as a production input or as the transportation fuel
produced), electricity, and carbon capture and sequestration, rules
similar to the rules under section 45V would apply unless otherwise
specified by the 45ZCF-GREET model with respect to technical modeling
issues or other technical differences. The proposed regulations would
also clarify the similar rule for incrementality with respect to the
use of energy attribute certificates in the 45ZCF-GREET model. See also
Sec. 1.45V-4(d).
In January 2025, the United States Department of Agriculture (USDA)
published a beta version of the USDA Feedstock Carbon Intensity
Calculator (USDA FD-CIC). The beta version of the USDA FD-CIC is
undergoing testing, peer review, and public comment in preparation for
the publication of a final version of USDA FD-CIC. Following
publication of the final version of USDA FD-CIC, the Treasury
Department and the IRS anticipate that a section 45Z-specific version
of the Feedstock Carbon Intensity Calculator (FD-CIC) module will be
included as an input to the DOE's 45ZCF-GREET model (45ZCF FD-CIC) used
for calculating carbon intensity adjustments under section 45Z for
feedstocks that are produced using certain agricultural practices. Such
practices may include no till, reduced till, cover crops, and nutrient
management. 45ZCF FD-CIC may undergo periodic updates, including
incorporation of new data and methodologies from other FD-CIC versions
(for example, USDA FD-CIC, R&D GREET FD-CIC (R&D FD-CIC)), to
incorporate more recent data or new data sources, types of practices,
feedstock types, or changes to geographic specificity. The results of
the 45ZCF FD-CIC are expected to inform the emissions rates calculated
under the 45ZCF-GREET model. The Treasury Department and the IRS
anticipate that 45ZCF FD-CIC may be used for fuel produced and sold in
2025 even though 45ZCF FD-CIC likely will be published in 2026.
The Treasury Department and the IRS anticipate that adoption of
45ZCF FD-CIC would entail additional requirements particular to its
use, such as agricultural practice implementation, recordkeeping, and
verification, which may include rules similar to those provided in the
USDA's technical guidelines for crops used as biofuel feedstocks in 7
CFR 2100, subparts D, E, and F. The Treasury Department and the IRS
anticipate publishing additional guidance on these requirements in
coordination with the publication of 45ZCF FD-CIC.
F. Provisional Emissions Rate (PER)
1. In General
Many stakeholders have expressed the urgent need for guidance to
clarify the scope and mechanics of the PER process referenced in
section 45Z(b)(1)(D), which provides that if the emissions rate table
does not establish an emissions rate for a transportation fuel, a
taxpayer producing such fuel may file a petition with the Secretary for
determination of the emissions rate with respect to such fuel, known as
a ``PER.''
Proposed Sec. 1.45Z-2(f)(1) would establish the procedures a
taxpayer must follow to request a PER
[[Page 5173]]
determination. The proposed regulations would require a taxpayer to
submit an emissions value request (EVR) to the DOE and obtain a
calculated emissions value letter (CEVL) from the DOE, prior to filing
a PER petition.
2. PER Terminology
Proposed Sec. 1.45Z-1(b) would define terms associated with the
PER procedures set out in proposed Sec. 1.45Z-2(f). Proposed Sec.
1.45Z-1(b)(12) would define ``eligible fuel,'' for purposes of the PER
procedures in proposed Sec. 1.45Z-2(f) and the associated definitions
in proposed Sec. 1.45Z-1(b), as either a type of fuel not included in
the applicable emissions rate table, or a type of fuel included in the
applicable emissions rate table but whose category is not included in
the applicable emissions rate table.
Proposed Sec. 1.45Z-1(b) would also define terms related to
requesting an emissions value (EV) from the DOE, which would be a
prerequisite to filing a PER petition. Proposed Sec. 1.45Z-1(b)(15)
would define the term ``emissions value'' or ``EV'' as the value
setting forth the DOE's analytical assessment of the lifecycle GHG
emissions associated with the fuel for which the EVR was made. Proposed
Sec. 1.45Z-1(b)(17) would define the term ``EV applicant'' as a
taxpayer submitting an EVR for an eligible fuel to the DOE. Proposed
Sec. 1.45Z-1(b)(6) would define the term ``calculated emissions value
letter'' or ``CEVL'' as the letter setting forth the emissions value
and DOE control number that the DOE issues to an applicant whose EVR is
completed.
3. Threshold Requirements
Proposed Sec. 1.45Z-2(f)(2) would provide that the DOE and the
IRS, respectively, will deny any EVR or PER petition for a type and
category of fuel included in the applicable emissions rate table. The
proposed rule would provide that a taxpayer may only request an
emissions value, and subsequently a PER determination, for an eligible
fuel. Because the section 45Z credit is computed for a type and
category of fuel, the proposed rule would also clarify that the DOE and
the IRS, respectively, will deny any EVR or PER petition based on a
facility rather than a type or category of fuel.
4. Emissions Value Requests
Proposed Sec. 1.45Z-2(f)(3) would describe the rules for
requesting an EV from the DOE for an eligible fuel. Proposed Sec.
1.45Z-2(f)(3)(i) would direct applicants to follow the guidance and
procedures that the DOE will separately publish for EVRs, including the
section 45Z EVR process instructions (Instructions). Proposed Sec.
1.45Z-2(f)(3)(i) would also describe common assumptions for EVRs,
including the well-to-wheel system boundary and certain accounting
rules.
Proposed Sec. 1.45Z-2(f)(3)(ii) would describe the information
required by the DOE for an EVR. Proposed Sec. 1.45Z-2(f)(3)(ii)(A)
would generally require that an EV applicant provide all information
required by the DOE's Instructions, including sections of a Class 3
Front-End Engineering and Design (FEED) study (or studies) or other
indicator of project maturity, as determined by the DOE, and a
completed Section 45Z EVR Form.
Proposed Sec. 1.45Z-2(f)(3)(ii)(B) would provide that for an EVR
for an eligible fuel that is a category of hydrogen, an EV applicant
must first submit a section 45V Emissions Value Request Application in
accordance with the process for a PER determination for the section 45V
credit, as described in Sec. 1.45V-4(c). The proposed rule would
provide that the EV applicant must submit the letter obtained under the
section 45V EVR process from the DOE stating the well-to-gate emissions
value that the DOE determined with respect to the facility's hydrogen
production pathway and the control number that the DOE assigned to the
section 45V EVR Application. Once such applicant completes the section
45V EVR process and submits its EVR for purposes of section 45Z, the
DOE may issue a CEVL, which would include an EV that fully accounts for
the well-to-wheel emissions of such category of hydrogen.
The proposed rule would also clarify that if the EV applicant
produces such category of hydrogen at multiple facilities, such
applicant will need to provide this information for each facility. See
Part IV.B. of this Explanation of Provisions for a discussion of the
anti-stacking rules between section 45Z and section 45V.
5. Submitting a PER Petition
Proposed Sec. 1.45Z-2(f)(4) would provide the exclusive procedures
for requesting a PER determination. Proposed Sec. 1.45Z-2(f)(4)(i)
would clarify that a taxpayer requests a PER determination by filing a
PER petition with the Form(s) 7218 included with the taxpayer's timely
filed (including extensions) Federal income tax return or Federal
information return for the first taxable year for which the taxpayer
claims the section 45Z credit for the eligible fuel to which the PER
petition relates. Proposed Sec. 1.45Z-2(f)(4)(ii) would describe the
required content of a PER petition, which would consist of the CEVL for
each eligible fuel for which the section 45Z credit is being claimed
for a given taxable year.
6. Determination of a PER
Proposed Sec. 1.45Z-2(f)(5)(i) would provide that a properly filed
PER petition is deemed accepted by the IRS, and that the deemed
acceptance constitutes the Secretary's determination of the PER. As
such, proposed Sec. 1.45Z-2(f)(5)(ii) would clarify that a taxpayer
may rely on the EV the DOE provides in a CEVL for purposes of
calculating and claiming the section 45Z credit, provided that all
information, representations, or other data the taxpayer provided to
the DOE in support of the taxpayer's EVR are accurate.
G. Relation Back of Emissions Rates (Including PER)
Proposed Sec. 1.45Z-2(g) would provide that when an emissions rate
is first determined for a type and category of fuel, whether
established in an applicable emissions rate table or by a PER
determination, that emissions rate will relate back to January 1, 2025.
The proposed rule would ensure that even if a taxpayer cannot determine
the emissions rate for a type and category of fuel at the time of
production, either because such type and category of fuel are not
established in the applicable emissions rate table or because the
Secretary has not determined a PER, such taxpayer may utilize a later-
determined emissions rate for such fuel as of the date of production.
IV. Special Rules
Proposed Sec. 1.45Z-4 would provide special rules with respect to
the determination of a section 45Z credit. Generally, these rules would
address the: (i) required registration at the time of production; (ii)
anti-stacking rules; (iii) anti-abuse rules; (iv) attribution of
production; (v) lack of ownership requirement; (v) foreign feedstocks
and prohibited foreign entities; and (vi) specific recordkeeping and
substantiation requirements.
A. Only Registered Production in the United States Taken Into Account
As provided in section 45Z(f)(1), proposed Sec. 1.45Z-4(a) would
provide that no section 45Z credit is determined with respect to any
transportation fuel unless the taxpayer is registered as a producer of
clean fuel (within the meaning of section 4101) at the time of
production and the fuel is produced in the United States, which
includes any territory of the United States. Proposed
[[Page 5174]]
Sec. 1.4101-1, which would provide the registration rules under
section 4101, is further discussed in Part VII. of this Explanation of
Provisions.
B. Anti-Stacking Rules
As previously discussed in Part II.G.2. of this Explanation of
Provisions, section 45Z(d)(4)(B) disallows a section 45Z credit for
fuel produced at a facility for which an anti-stacking credit (as
defined in proposed Sec. 1.45Z-1(b)(28)(ii)) is allowed. Proposed
Sec. 1.45Z-4(b) would provide anti-stacking rules that would govern
the interaction between different credits if a facility both produces
transportation fuel under section 45Z and engages in other credit-
eligible activity. The proposed rule also includes examples. To the
extent permitted by statute, the proposed rule would generally preserve
taxpayer choice of which credit to claim--a section 45Z credit or an
anti-stacking credit--for a taxpayer engaging in multiple credit-
eligible activities at the same facility in a taxable year. For
instance, a taxpayer producing hydrogen that qualifies for both a
section 45V credit and a section 45Z credit can generally choose which
credit to claim.
In addition to general comments on the proposed anti-stacking
rules, the Treasury Department and the IRS request specific comments
addressing situations in which a facility either has multiple owners or
in which a taxpayer does not own the facility, including administrative
and compliance issues arising under those scenarios.
Proposed Sec. 1.45Z-4(b)(2) would provide that the determination
of whether a facility is a qualified facility is made each taxable
year. Therefore, under the proposed rule, a facility may be a qualified
facility in one taxable year but not in another taxable year.
Additionally, in the case of a taxpayer producing transportation fuel
at multiple facilities, the taxpayer would separately determine for
each facility whether the fuel was produced at a qualified facility.
The proposed rules are consistent with the anti-stacking rules in
section 45Z(d)(4)(B), which are tied to the taxable year.
Proposed Sec. 1.45Z-4(b)(3) would provide examples illustrating
the application of the anti-stacking rules to section 45Z for each of
the anti-stacking credits. One example would address situations in
which the person claiming an anti-stacking credit for a facility has a
different taxable year than the taxpayer producing transportation fuel
at that facility. The examples would also clarify that the anti-
stacking rules apply regardless of whether the taxpayer or another
person claims an anti-stacking credit with respect to a facility.
C. Anti-Abuse Rules
As indicated in Notice 2025-10, the Treasury Department and the IRS
are cognizant of potential abuses of the section 45Z credit, including
situations in which a taxpayer produces and sells transportation fuel
in a manner that is inconsistent with Congressional intent in enacting
section 45Z. The Treasury Department and the IRS are also concerned
about other potential abuse, such as circular production, credit
churning or wasteful production with no intended use, and abuse of the
anti-stacking rules.
Proposed Sec. 1.45Z-4(c) would provide that the rules of section
45Z and the section 45Z regulations must be applied in a manner
consistent with the purposes of section 45Z and the section 45Z
regulations (and the regulations in under sections 6417 and 6418
related to the section 45Z credit), including incentivizing the
domestic production and use of clean transportation fuel and ensuring
that taxpayers do not circumvent the feedstock origin and anti-stacking
rules. Therefore, the proposed rule would provide that no section 45Z
credit is determined if the primary purpose of the production and sale
of clean transportation fuel is to obtain the benefit of the section
45Z credit in a manner that is wasteful, such as discarding, disposing
of, or destroying the transportation fuel without putting it to a
productive use. The proposed rule would further provide that whether
the production and sale of transportation fuel is consistent with the
purposes of section 45Z and the section 45Z regulations (and the
regulations in this chapter under sections 6417 and 6418 related to the
section 45Z credit) is based on all facts and circumstances.
Section 45Z(e) delegates authority to the Secretary to issue
guidance regarding implementation of section 45Z, including the
determination of section 45Z credits. Therefore, the proposed
regulations would provide general anti-abuse rules that are consistent
with the three prongs of the section 45Z(a)(4) definition of ``sale''
(referred to as a ``qualified sale'' in these proposed regulations)
that focus on post-production uses of transportation fuel.
The Treasury Department and the IRS request comments on the need
for these or additional section 45Z anti-abuse rules. The Treasury
Department and the IRS also request comments on the potentially abusive
scenarios that should be covered by any anti-abuse rules.
D. Production Attributable to the Taxpayer and Section 761(a) Elections
Consistent with section 45Z(f)(2), proposed Sec. 1.45Z-4(d) would
provide rules for production attributable to the taxpayer. For a
facility in which more than one person has an ownership interest (and
the arrangement is not classified as a partnership for Federal tax
purposes), proposed Sec. 1.45Z-4(d)(1) would provide that production
from the facility is allocated among those persons in proportion to
their respective ownership interests in the gross sales from the
facility. The proposed rule would further provide that each owner's
respective allocable share of the section 45Z credit is based on each
owner's allocable share of production, determined pursuant to section
45Z and these proposed regulations. Proposed Sec. 1.45Z-4(d)(2) would
provide an example of production attributable to the taxpayer. Proposed
Sec. 1.45Z-4(d)(3) would address instances in which a facility is
owned pursuant to a valid section 761(a) election.
E. Facility Ownership Not Required
Credit eligibility under section 45Z is tied to production of a
transportation fuel at a qualified facility and a subsequent qualified
sale of the fuel. There is no statutory requirement that the producer
of the transportation fuel own the qualified facility. Proposed Sec.
1.45Z-4(e) would address situations in which the producer does not own
the qualified facility at which it produces the transportation fuel, to
ensure that production is attributed fairly and accurately in those
situations.
Proposed Sec. 1.45Z-4(e)(1) would clarify that a taxpayer is not
required to own the qualified facility at which it produces
transportation fuel for a section 45Z credit to be determined with
respect to such fuel. If a taxpayer produces transportation fuel at a
qualified facility owned by another person, proposed Sec. 1.45Z-
4(e)(2) would attribute that production to the taxpayer unless
otherwise specified in the Code or the section 45Z regulations. In the
case of a production arrangement under which multiple taxpayers produce
transportation fuel at a facility that is not owned by all the
taxpayers, production would be allocated among the taxpayers in
proportion to their respective interests in the gross sales from that
fuel, as determined under the applicable contract or other legal
arrangement with respect to the fuel.
[[Page 5175]]
F. Foreign Feedstock and Prohibited Foreign Entity Restrictions
Consistent with section 45Z(f)(1)(A)(iii), as added by section
70521(a) of the OBBBA, proposed Sec. 1.45Z-4(f)(1) would provide that
transportation fuel that is produced after December 31, 2025, must be
exclusively derived from a feedstock that was produced or grown in the
United States, Mexico, or Canada.
Consistent with section 45Z(f)(8), as added by section 70521(k) of
the OBBBA, proposed Sec. 1.45Z-4(f)(2) would prohibit the
determination of a section 45Z credit: (i) for taxable years beginning
after July 4, 2025, if the taxpayer is a specified foreign entity; and
(ii) for taxable years beginning after July 4, 2027, if the taxpayer is
a foreign-influenced entity (other than a foreign-influenced entity
that made certain payments to a specified foreign entity). See section
7701(a)(51)(B) and (D) for definitions of the terms specified foreign
entity and foreign-influenced entity.
G. Specific Recordkeeping and Substantiation Requirements
In addition to the general recordkeeping requirements under section
6001 and Sec. 1.6001-1, proposed Sec. 1.45Z-4(g) would require a
taxpayer claiming the section 45Z credit to maintain records sufficient
to establish the taxpayer's eligibility for the section 45Z credit and
the amount of the credit claimed. It would also provide two safe
harbors: (i) for substantiating emissions rates with respect to non-SAF
transportation fuel; and (ii) for substantiating qualified sales of
transportation fuel.
The proposed recordkeeping and substantiation requirements are
necessary to ensure the accuracy of reported emissions rates and
because the amount of the section 45Z credit may depend on certain
operational choices, such as use of certain types of feedstocks or
fuels, or engaging in certain emissions-reduction practices like carbon
capture and sequestration (which may vary from year to year).
1. In General
Proposed Sec. 1.45Z-4(g)(1) would provide that at a minimum,
sufficient records include records: (i) establishing that each fuel
produced is a transportation fuel; (ii) establishing any relevant
information relating to the primary feedstock(s) used to produce each
fuel; (iii) establishing that each fuel meets any additional
specifications for the type of fuel as described in Sec. 1.45Z-
1(b)(24) or (30); (iv) substantiating how the emissions rate for each
fuel was determined (including, if applicable, the specific type(s) and
category(ies) under the applicable emissions rate table); (v) relating
to any fuel testing obtained by the taxpayer; (vi) establishing that
each facility used to produce fuel is a qualified facility; (vii)
establishing the date each facility was placed in service; (viii)
establishing that each fuel was sold in a qualified sale; and (ix)
establishing any certification from an unrelated person and
substantiating the information contained therein. A taxpayer must also
keep all information, including raw data, used for or related to any
petition for a PER. If a taxpayer is claiming an increased credit
amount by satisfying the PWA requirements, the taxpayer must also
maintain the records described in Sec. 1.45Z-3 (referencing Sec.
1.45-12).
Proposed Sec. 1.45Z-4(g)(2) would provide a safe harbor for
substantiating the emissions rate for a non-SAF transportation fuel
that was determined using the 45ZCF-GREET model. A taxpayer relying on
this safe harbor would need to obtain certification in substantially
the same form and manner described in proposed Sec. 1.45Z-5 (related
to certification for a SAF transportation fuel) with respect to that
non-SAF transportation fuel. The proposed Sec. 1.45Z-5 certification
requirements are discussed in Part V. of this Explanation of
Provisions.
Proposed Sec. 1.45Z-4(g)(3)(i) would provide a safe harbor for
substantiating whether the sale of a transportation fuel is a qualified
sale for purposes of section 45Z. A taxpayer relying on this safe
harbor would need to obtain from the purchaser a certificate prepared
by the purchaser under penalty of perjury in substantially the same
form and manner as that described in proposed Sec. 1.45Z-4(g)(3)(ii).
Proposed Sec. 1.45Z-4(g)(3)(ii) would include a model certificate that
a taxpayer may use for purposes of meeting this safe harbor. If the
certificate relates to a single purchase, the taxpayer must obtain the
certificate from the purchaser prior to or at the time of sale. If the
certificate relates to purchases made over a period of time, the
taxpayer must obtain the certificate from the purchaser prior to or at
the same time as the initial sale to which the certificate relates. The
safe harbor would require that a taxpayer have no reason to believe
that any information in the certificate regarding the use of the
transportation fuel is false. The safe harbor would also require a
taxpayer to maintain the certificate with respect to the sale of
transportation fuel in its books and records.
Additionally, the Treasury Department and the IRS request comments
on what types of documentation or other substantiation a taxpayer
should maintain to establish: proper determination of a fuel's
emissions rate, including the inputs into CORSIA Default, CORSIA
Actual, or the 45ZCF-GREET model; certification from an unrelated
person for non-SAF transportation fuel; existing systems, industry
standards, or customary practices that may be used to substantiate
emissions rate and inputs into CORSIA Default, CORSIA Actual, or the
45ZCF-GREET model (or if there are none, how such tracking and
verification systems should be developed, with potential timelines
regarding development).
2. Foreign Feedstocks Including Used Cooking Oil
As explained in Notice 2025-10, the Treasury Department and the IRS
remain concerned about the ability to reliably distinguish between
imported used cooking oil (UCO) and palm oil, and the resulting risk of
crediting ineligible fuels. Furthermore, section 45Z(f)(1)(A)(ii)
provides that transportation fuel that is produced after December 31,
2025, must be exclusively derived from a feedstock that was produced or
grown in the United States, Mexico, or Canada. As previously discussed
in Part IV.F. of this Explanation of Provisions, proposed Sec. 1.45Z-
4(f)(1) would implement this statutory change.
Consistent with this approach, pathways that use foreign feedstocks
(including UCO) for fuel produced after December 31, 2025, will not be
available in the 45ZCF-GREET model until the Treasury Department and
the IRS publish further guidance. A feedstock is considered a foreign
feedstock if it originates from a source (for example, a farm,
restaurant, or food processor) and/or is purchased from an aggregator
located outside the United States, Canada, or Mexico.
The Treasury Department and the IRS are considering appropriate
substantiation and recordkeeping requirements for feedstocks imported
from Canada and Mexico (including UCO), and request comments on
possible approaches with respect to substantiating that any imported
feedstocks meet the statutory sourcing requirement. The Treasury
Department and the IRS are also interested in any industry practices to
track feedstock source(s) that would mitigate potential taxpayer burden
while being administrable for the IRS. For example, whether using
specific existing business records, a taxpayer could demonstrate that
feedstocks exclusively produced in
[[Page 5176]]
Canada or Mexico did not contain other feedstocks or additives that
originated outside of Canada or Mexico.
The Treasury Department and the IRS also request comments on
purchases from aggregators of UCO and approaches to determine the
underlying source(s) of the UCO that are administrable for taxpayers
and the IRS. The Treasury Department and the IRS request comments on,
for instance, whether there are reliable methods that would indicate
the geographic location where seeds originated or crops were grown as a
precursor for use as cooking oil, which could be used to determine
whether the foreign feedstock limitation in section 45Z(f)(1)(A)(iii)
applies.
V. Procedures for Certification of Lifecycle Greenhouse Gas Emissions
Rates
Proposed Sec. 1.45Z-5 would provide rules for certification from
an unrelated person of emissions rates for SAF transportation fuel
(certification). The rules would describe the content, form, and manner
of the required certification under section 45Z(f)(1)(A)(i)(II).
Proposed Sec. 1.45Z-5(b) through (f) would provide rules relating to
the content of the certification. Proposed Sec. 1.45Z-5(g) would
describe the requirements for timely certification. Proposed Sec.
1.45Z-5(h) would provide a model certification.
A. Requirements for Certifications
1. In General
In general, proposed Sec. 1.45Z-5(b)(1) would provide that for
each taxable year for which a taxpayer claims a section 45Z credit for
SAF transportation fuel, the taxpayer must obtain a certification from
an unrelated person and include such certification with the taxpayer's
Form 7218, which is filed with the taxpayer's Federal income tax return
or Federal information return, for each qualified facility at which the
taxpayer produces SAF transportation fuel.
Proposed Sec. 1.45Z-5(b)(2) would provide that the certification
described in proposed Sec. 1.45Z-5(b)(1) must be prepared by a
qualified certifier (as defined in proposed Sec. 1.45Z-5(b)(3)) and
signed by the qualified certifier under penalty of perjury. Proposed
Sec. 1.45Z-5(b)(2) would further provide that the certification must
include information that is in substantially the same form as the model
certification provided in proposed Sec. 1.45Z-5(h). Proposed Sec.
1.45Z-5(b)(2)(i) through (vi) would describe the following information
that a certification must contain: (i) a statement from the qualified
certifier regarding the production of SAF transportation fuel
(production statement); (ii) a statement from the qualified certifier
regarding conflicts of interest (conflict statement); (iii) information
regarding the qualified certifier, including documentation of the
qualified certifier's qualifications (qualified certifier statement);
(iv) certain general information about the qualified facility at which
the SAF transportation fuel production undergoing certification
occurred (qualified facility statement); (v) any documentation
necessary to substantiate the certification process given the standards
and best practices prescribed by the qualified certifier's accrediting
body as they apply to the circumstances of the taxpayer and the
qualified facility; and (vi) any other information or documentation
required by applicable IRS tax forms or form instructions.
2. Production Statement
Proposed Sec. 1.45Z-5(c)(1) would provide that the production
statement must state that the qualified certifier performed a
certification sufficient for the IRS to determine that any lifecycle
GHG emissions data inputs and the operation, during the applicable
taxable year, of the qualified facility that produced the SAF
transportation fuel for which the section 45Z credit is claimed are
accurately reflected in: (i) the number of gallons of SAF
transportation fuel produced by the taxpayer that is entered on the
Form 7218 with which the certification is included; and (ii) either the
data the taxpayer input into the allowed methodology under proposed
Sec. 1.45Z-2(e)(3), or the data the taxpayer submitted in its PER
petition and that was provided to the DOE in support of the taxpayer's
request for the emissions value provided in the PER petition.
Proposed Sec. 1.45Z-5(c)(2) would provide that, if a taxpayer
submitted a PER petition, then the production statement must also
specify the emissions value received from the DOE that was calculated
using the data provided in support of the taxpayer's emissions value
request.
Proposed Sec. 1.45Z-5(c)(3) would provide that the production
statement must specify the lifecycle GHG emissions rate and the amount
of SAF transportation fuel produced by the taxpayer that are entered on
the Form 7218 with which the certification is included.
3. Conflict Statement
Proposed Sec. 1.45Z-5(d)(1) would provide that the conflict
statement must state that: (i) the qualified certifier has not received
a fee based to any extent on the value of any section 45Z credit that
has been or is expected to be claimed by the taxpayer, and no
arrangement has been made for such fee to be paid at any time in the
future; (ii) the qualified certifier has not been a party to any
transaction involving the sale of SAF transportation fuel the taxpayer
produced or in which the taxpayer purchased primary feedstocks for the
production of such SAF transportation fuel; (iii) the qualified
certifier is unrelated to the taxpayer and is not an employee of the
taxpayer; and (iv) the qualified certifier is not married to anyone who
is related to, or an employee of, the taxpayer.
Proposed Sec. 1.45Z-5(d)(2) would provide that if the qualified
certifier is acting in his or her capacity as a partner in a
partnership, an employee of any person, whether an individual,
corporation, or partnership, or an independent contractor engaged by a
person other than the taxpayer, the statements described in proposed
Sec. 1.45Z-5(d)(1) must also be made with respect to the partnership
or the person that employs or engages the qualified certifier.
4. Qualified Certifier Statement
Proposed Sec. 1.45Z-5(e) would provide that the qualified
certifier statement must include: (i) the qualified certifier's name,
address, and certifier identification number; (ii) the qualified
certifier's qualifications to conduct the certification, including a
description of the certification the qualified certifier received from
the accrediting body; (iii) if the qualified certifier is acting in his
or her capacity as a partner in a partnership, an employee of any
person, whether an individual, corporation, or partnership, or an
independent contractor engaged by a person other than the taxpayer, the
name, address, and certifier identification number of the partnership
or the person that employs or engages the qualified certifier; (iv) the
signature of the qualified certifier and the date of signature; and (v)
a statement that the certification was conducted for Federal tax
purposes.
5. Information on Taxpayer's Qualified Facility
Proposed Sec. 1.45Z-5(f) would provide that the certification must
include: (i) the location of the qualified facility; (ii) a description
of the qualified facility, including its method of producing SAF
transportation fuel; (iii) the type(s) of primary feedstock(s) used by
the qualified facility to produce the SAF transportation fuel during
the taxable
[[Page 5177]]
year of production; (iv) the amount(s) of primary feedstock(s) used by
the qualified facility to produce the SAF transportation fuel during
the taxable year of production; (v) the location(s) from which the
qualified facility sourced the primary feedstock(s) used to produce the
SAF transportation fuel during the taxable year of production; (vi) a
list of the metering devices used to record any data used by the
qualified certifier to support the production statement under proposed
Sec. 1.45Z-5(c), along with a statement that the qualified certifier
has reason to believe that the device(s) underwent industry-appropriate
quality assurance and quality control, and the accuracy and calibration
of the device has been tested in the year prior to the time of
observation; and (vii) confirmation that the emissions rate of the SAF
transportation fuel produced during the taxable year of production is
accurate to the higher of +/-5% or 2 kilograms of CO<INF>2</INF>e per
mmBTU.
B. Qualified Certifier
Proposed Sec. 1.45Z-5(b)(3) would provide rules regarding
qualified certifiers for the allowed methodologies. A qualified
certifier would be required to have the relevant active accreditation
as of the date it provides a certification to a taxpayer.
1. CORSIA Methodologies
Proposed Sec. 1.45Z-5(b)(3)(i) would provide that, for taxpayers
using CORSIA Default or CORSIA Actual to determine the emissions rate
for SAF transportation fuel, the term qualified certifier means any
individual or organization that is unrelated to the taxpayer and is not
an employee of the taxpayer, and that has an active accreditation from
International Sustainability and Carbon Certification, Roundtable on
Sustainable Biomaterials, ClassNK, or other sustainability
certification scheme approved by ICAO. Such individuals or
organizations are experienced and familiar with evaluating information
regarding CORSIA Default and CORSIA Actual.
2. 45ZCF-GREET Model
Proposed Sec. 1.45Z-5(b)(3)(ii) would provide that, for taxpayers
using the 45ZCF-GREET model to determine the emissions for SAF
transportation fuel, the term qualified certifier means any individual
or organization that is unrelated to the taxpayer and is not an
employee of the taxpayer, and that has an active accreditation from:
(i) the American National Standards Institute National Accreditation
Board (ANAB) to conduct validation and verification in accordance with
the requirements of International Organization for Standardization
(ISO) 14065; or (ii) as a verifier, lead verifier, or verification body
under the California Air Resources Board Low Carbon Fuel Standard (CARB
LCFS) program. Such ANAB and CARB LCFS verifiers are experienced with
evaluating information similar to the information included in the
45ZCF-GREET model.
C. Timely Certification Required
Proposed Sec. 1.45Z-5(g) would provide that a certification that
includes all required information is valid with respect to a particular
claim only if it is signed and dated by the qualified certifier no
later than: (i) the due date, including extensions, of the Federal
income tax return or Federal information return for the taxable year
during which the SAF transportation fuel undergoing certification is
sold in a qualified sale; or (ii) in the case of a section 45Z credit
first claimed for the taxable year on an amended return or
administrative adjustment request (AAR), the date on which the amended
return or AAR is filed.
VI. Procedures for Filing a Claim for the Clean Fuel Production Credit
Proposed Sec. 1.45Z-6 would describe the time and manner of filing
a claim for the section 45Z credit and provide special rules for cases
in which the taxpayer claiming the credit is not the registered
producer of a transportation fuel. Under the proposed rule, a taxpayer
claiming a section 45Z credit would either be the person registered as
a producer of a transportation fuel at the time of production, or a
person that would be treated as the registrant.
A. Time and Manner of Filing a Claim
In general, proposed Sec. 1.45Z-6(a) would provide that a taxpayer
claims the section 45Z credit on a completed Form 7218 included with
the taxpayer's timely filed (including extensions) Federal income tax
return or Federal information return for the taxable year for which the
taxpayer claims the section 45Z credit. Under proposed Sec. 1.45Z-
6(a), a taxpayer would need to complete a separate Form 7218 for each
qualified facility at which it produces a transportation fuel for which
it is claiming a credit.
B. Proper Claimant
Proposed Sec. 1.45Z-6(b)(1) would provide the general rule that
only a taxpayer that is registered by the IRS as a producer of
transportation fuel at the time of production may claim the section 45Z
credit.
Proposed Sec. 1.45Z-6(b)(2)(i) through (iii) would provide special
rules for situations in which a person other than a registered producer
of transportation fuel may claim the section 45Z credit. These special
rules would generally apply to: (i) a taxpayer that owns an entity that
is disregarded as an entity separate from its owner, as defined in
Sec. 301.7701-2(c)(2)(i) (disregarded entity); (ii) an S corporation
(as defined in section 1361(a)(1)) that owns a qualified subchapter S
subsidiary (QSub), as defined in section 1361(b)(3)(B); and (iii) an
agent for a consolidated group, as defined in Sec. 1.1502-77. The
proposed rules are consistent with the section 45Z Fact Sheet FAQs but
provide additional specificity and clarity.
Proposed Sec. 1.45Z-6(b)(2)(i) would provide that in the case of a
disregarded entity that produces transportation fuel and is registered
as a producer of transportation fuel at the time of production, the
taxpayer that owns the disregarded entity is treated as the registered
producer for purposes of claiming the section 45Z credit.
Proposed Sec. 1.45Z-6(b)(2)(ii) would provide that in the case of
a QSub that produces transportation fuel and is registered as a
producer of transportation fuel at the time of production, the S
corporation that owns the QSub is treated as the registered producer
for purposes of claiming the section 45Z credit.
Proposed Sec. 1.45Z-6(b)(2)(iii) would clarify that if a member of
a consolidated group is registered as a producer of transportation fuel
at the time of production, the agent for such consolidated group is
treated as the registered producer for purposes of claiming the section
45Z credit.
VII. Section 4101 Registration
A. Section 4101 Registration Generally
Proposed Sec. 1.4101-1 would provide rules for section 4101
registration for purposes of section 45Z, including rules addressing
disregarded entities, QSubs, and members of a consolidated group, and
the registration tests for purposes of section 45Z(f)(1)(A)(i)(I). The
proposed rules are modeled after the longstanding registration rules in
Sec. 48.4101-1 of the Manufacturers and Retailers Excise Tax
Regulations that apply for purposes of fuel excise taxes and credits.
This registration requirement is distinct from the required pre-filing
registration for a taxpayer that intends to make a section 6417 or
section 6418 election, as provided by the Credit Transfer Election
Regulations and the Elective Payment Election Regulations.
[[Page 5178]]
Proposed Sec. Sec. 1.4101-1(a)(4) and 48.4101-1(a)(8) would
provide rules for reregistration. Proposed Sec. Sec. 1.4101-1(h) and
48.4101(a)(7) would provide rules regarding the effect of a Letter of
Registration for purposes of section 45Z and excise tax registrations,
respectively.
Proposed Sec. 1.4101-1 would provide rules regarding the approval,
denial, revocation, or suspension of registration that are similar to
the rules of section 4222(c) and Sec. 48.4222(c)-1. Additionally, many
of the requirements of proposed Sec. 1.4101-1 would be similar or
identical to the existing provisions of Sec. 48.4101-1 and to proposed
Sec. 48.4101-1(a)(7) and (8), which would facilitate consistent tax
administration. The Treasury Department and the IRS are aware that many
applicants for registration for purposes of the section 45Z credit and
other income tax credits must also be registered under section 4101 for
excise tax purposes. As a result, many applicants are already familiar
with the section 4101 registration process and must maintain other
section 4101 registrations (in addition to the registration required
under section 45Z(f)(1)(A)(i)(I) and other income tax registrations).
B. Letter of Registration Required
Proposed Sec. 1.4101-1(a)(2) would provide that a person is
registered under section 4101 only if the IRS has issued that person a
Letter of Registration under the appropriate activity letter and the
registration has not been revoked or suspended. This proposed rule is
similar to Sec. 48.4101-1(a)(2).
C. Separate Entity Treatment
Proposed Sec. 1.4101-1(a)(3)(i) would provide that each business
unit that has, or is required to have, a separate EIN is treated as a
separate person for purposes of registration. Proposed Sec. 1.4101-
1(a)(3)(ii) would provide that Sec. 301.7701-2(c)(2)(i) (disregarded
entity treatment for certain wholly owned entities) does not apply for
purposes of registration under proposed Sec. 1.4101-1. Under the
proposed rule, a disregarded entity that has, or is required to have,
an EIN would be treated as a corporation for purposes of registration.
Therefore, under the proposed rule, if such an entity produces
transportation fuel, it must be registered as a producer of
transportation fuel at the time of production for the owner of the
disregarded entity to be eligible to claim the section 45Z credit for
such fuel.
Proposed Sec. 1.4101-1(a)(3)(iii) would provide that a QSub is
treated as a separate corporation for purposes of registration under
proposed Sec. 1.4101-1. As a consequence, each QSub that has an EIN
and that produces transportation fuel must be registered as a producer
of transportation fuel at the time of production for its S corporation
owner to be eligible to claim the section 45Z credit for such fuel. For
consistency and clarity, the proposed regulations would also amend the
introductory clause of Sec. 1.1361-4(a)(1) (which generally ignores a
QSub's separate existence for Federal tax purposes) by adding proposed
Sec. 1.4101-1(a)(3)(iii) to the list of exceptions.
The Treasury Department and the IRS understand that many facilities
that produce transportation fuel are owned by a disregarded entity. The
proposed regulations would provide registration rules that would
reflect this practice while also satisfying the statutory requirements.
The proposed rules would be similar to and consistent with: (i) Sec.
48.4101-1(a)(4), which provides that every business that has, or is
required to have, a separate EIN is treated as a separate person for
purposes of excise tax registration under section 4101; (ii) Sec.
301.7701-2(c)(2)(v)(A)(3), which provides that Sec. 301.7701-
2(c)(2)(i) (concerning certain wholly-owned entities) does not apply
for purposes of registration under sections 4101, 4222, and 4412; and
(iii) Sec. 1.1361-4(a)(8)(i)(C), which provides that a QSub is treated
as a separate corporation for purposes of registration under sections
4101, 4222, and 4412.
The separate entity rules would also align with other related tax
provisions, including sections 45V and 45Q (for which anti-stacking
provisions apply), and the elective payment and credit transfer
election provisions of sections 6417 and 6418, which elections are
generally made on a per-facility basis. Although the proposed rules are
consistent with the making of a section 6417 or section 6418 election
on a facility-by-facility basis, it is important to highlight the
difference between these proposed registration rules and the rules for
making an election under section 6417 or section 6418.
With respect to sections 6417 and 6418, if a taxpayer is the sole
owner (directly or indirectly) of a disregarded entity for Federal
income tax purposes and the disregarded entity directly holds the
underlying applicable credit property, then the taxpayer (and not the
disregarded entity) makes the section 6417 or section 6418 election,
including completing the required pre-filing registration as part of
making a section 6417 or section 6418 election. See Sec. Sec. 1.6417-
2(a)(1)(ii), 1.6417-5, 1.6418-2(a)(3)(i), and 1.6418-4. For example, if
a taxpayer has two qualified facilities for purposes of section 45Z
that are owned by separate disregarded entities, each disregarded
entity (and not the taxpayer) must be registered as a producer of
transportation fuel for purposes of the section 45Z credit. However,
the taxpayer (and not either disregarded entity) would ultimately make
any section 6417 or section 6418 election (including completing the
section 6417 or section 6418 pre-filing registration process) with
respect to any section 45Z credit determined with respect to each
qualified facility.
Additionally, section 45Z(f)(1)(A)(i)(I) requires registration
``under section 4101.'' This language indicates that Congress meant for
the existing Sec. 48.4101-1 regulations to apply for purposes of the
section 45Z credit, including the separate entity rules of Sec.
48.4101-1(a)(4). The special procedures that apply with respect to a
taxpayer that owns a disregarded entity or a QSub that is registered
under proposed Sec. 1.4101-1 and claims the section 45Z credit are
discussed in Part VI.B. of this Explanation of Provisions.
D. Reregistration
As provided in section 4101(a)(5), proposed Sec. Sec. 1.4101-
1(a)(4)(i) and 48.4101-1(a)(8)(i) would each require a person to
reregister if after a transaction (or series of related transactions)
more than 50 percent of ownership interests in, or assets of, such
person are held by persons other than persons (or persons related
thereto) who held more than 50 percent of such interests or assets
before the transaction (or series of related transactions).
Reregistration would not apply to companies whose stock is regularly
traded on an established securities market. These proposed requirements
would be consistent with section 4101(a)(5) and (d).
Proposed Sec. Sec. 1.4101-1(a)(4)(ii) and 48.4101-1(a)(8)(ii)
would each require a person to reregister if the person changes its
EIN.
Proposed Sec. 1.4101-1(a)(4)(iii) would provide a safe harbor for
a person that has been registered by the IRS and must reregister due to
a change in ownership or EIN. A person that is approved for
reregistration would be eligible to claim a section 45Z credit as of
the date the IRS received the application for reregistration, even if,
at the time of such person's fuel production, the IRS had not yet
approved the reregistration. The Treasury Department and the IRS
recognize the urgency for a taxpayer to be issued a Letter of
Registration for purposes of the section 45Z credit because, unlike
other tax credits requiring section 4101 registration, section
45Z(f)(1)(A)(i)(I) requires that a
[[Page 5179]]
taxpayer be registered at the time of production.
E. Definitions
Proposed Sec. 1.4101-1(b)(1) would define an ``applicant'' as a
person that has applied for registration under proposed Sec. 1.4101-
1(d). The proposed definition is consistent with the definition of
``applicant'' in Sec. 48.4101-1(b)(1).
Proposed Sec. 1.4101-1(b)(2) would define ``Letter of
Registration'' as a letter issued by the IRS to approve a registration
required under section 4101. Under the proposed definition, a Letter of
Registration would include the registrant's registration number and the
effective date of the registration.
Proposed Sec. 1.4101-1(b)(3) would define the phrase ``penalized
for a wrongful act'' as cases in which a person has: (i) been assessed
any penalty under chapter 68 of the Code (or similar provision of the
law of any State) for fraudulently failing to file any return or pay
any tax, and the penalty has not been wholly abated, refunded, or
credited; (ii) been assessed any penalty under chapter 68 of the Code,
such penalty has not been wholly abated, refunded, or credited, and the
IRS determines that the conduct resulting in the penalty is part of a
consistent pattern of failing to deposit, pay, or pay over a
substantial amount of tax; (iii) been convicted of a crime under
chapter 75 of the Code (or similar provision of the law of any State),
or of conspiracy to commit such a crime, and the conviction has not
been wholly reversed by a court of competent jurisdiction; (iv) been
convicted, under the laws of the United States or any State, of a
felony for which an element of the offense is theft, fraud, or the
making of false statements, and the conviction has not been wholly
reversed by a court of competent jurisdiction; (v) been assessed any
tax under section 4103 of the Code and the tax has not been wholly
abated, refunded, or credited; or (vi) had its registration under
section 4101, section 4222, section 4662, or section 4682 of the Code
revoked. This proposed definition is similar to the definition of the
phrase ``penalized for a wrongful act'' in Sec. 48.4101-1(b)(4).
Proposed Sec. 1.4101-1(b)(4) would define a ``related person'' for
purposes of registration under section 4101 as a person that: (i)
directly or indirectly exercises control over an activity of the
applicant; (ii) owns, directly or indirectly, five percent or more of
the applicant; (iii) is under a duty to assure the payment of a tax for
which the applicant is responsible; (iv) is a member, with the
applicant, of a group of organizations (as defined in Sec. 1.52-1(b)
of this chapter) that would be treated as a group of trades or
businesses under common control for purposes of Sec. 1.52-1; or (v)
distributed or transferred assets to the applicant in a transaction in
which the applicant's basis in the assets is determined by reference to
the basis of the assets in the hands of the distributor or transferor.
This proposed definition is consistent with the definition of ``related
person'' in Sec. 48.4101-1(b)(5).
Proposed Sec. 1.4101-1(b)(5) would define a ``registrant'' as a
person who has registered under section 4101 in accordance with
proposed Sec. 1.4101-1(f)(3) and whose registration has not been
revoked or suspended. This proposed definition is consistent with the
definition of ``registrant'' in Sec. 48.4101-1(b)(6).
F. Requirement To Register
Proposed Sec. 1.4101-1(c)(1) would require every person producing
a transportation fuel, as defined in proposed Sec. 1.45Z-1(b)(34), to
register with the IRS in accordance with proposed Sec. 1.4101-1. The
proposed rule incorporates the registration requirement described in
section 4101(a)(1), as amended by section 70521(i) of the OBBBA, and is
similar to Sec. 48.4101-1(c)(1). The proposed rule is also consistent
with section 45Z(f)(1)(A)(i)(I).
Proposed Sec. 1.4101-1(c)(2) would articulate the consequences of
failing to register under section 4101 by citing to penalties under
sections 6719, 7232, and 7272 of the Code. The proposed rule is similar
to Sec. 48.4101-1(c)(3), which was published before the enactment of
section 6719 and cites to penalties under sections 7232 and 7272.
Section 7232 imposes a criminal penalty for failure to register or
reregister as required by section 4101 or for a willful false statement
in an application for registration or reregistration. Sections 6719 and
7272 impose civil penalties for failure to register or reregister under
section 4101.
G. Application Instructions
Proposed Sec. 1.4101-1(d) would require applicants to apply for
section 4101 registration using Form 637, Application for Registration
(For Certain Excise Tax Activities), or such other form as the IRS may
designate, in accordance with the instructions to such form. An
applicant would be required to apply for registration under activity
letter CN if seeking registration as a producer of non-SAF
transportation fuel, and under activity letter CA if seeking
registration as a producer of SAF transportation fuel, or under such
other activity letter(s) as the IRS may designate. The proposed rule is
consistent with Sec. Sec. 48.4101-1(e) and 48.4222(a)-1(b).
H. Registration Tests
Proposed Sec. 1.4101-1(e)(1) would provide that the IRS will
register an applicant only if the applicant meets the activity test of
proposed Sec. 1.4101-1(e)(2), the acceptable risk test of proposed
Sec. 1.4101-1(e)(3), and the satisfactory tax history test of proposed
Sec. 1.4101-1(e)(4), which are collectively called the ``registration
tests.'' The registration tests under proposed Sec. 1.4101-1(e) are
similar to the registration tests under Sec. 48.4101-1(f).
The proposed registration tests are consistent with sections
4101(c) and 4222(c), because their purposes are to confirm whether an
applicant is actually engaging in the activity for which it is
requesting to be registered, to prevent an applicant from becoming
registered and being able to claim a tax credit if it is not engaged in
such an activity, and to ensure that an applicant has satisfied all of
its tax obligations under the Code, similar to section 4222(c) and
Sec. Sec. 48.4222(a)-1 and 48.4222(c)-1. These tests are necessary to
protect the revenue and to prevent applicants from using their
registration to avoid payment of tax (by erroneously claiming an income
tax credit).
1. Activity Test
Under proposed Sec. 1.4101-1(e)(2), an applicant would meet the
activity test only if the IRS determines that the applicant: (i) is, in
the course of its trade or business, regularly engaged in the activity
for which it is requesting registration; or (ii) is likely to be
(because of such factors as the applicant's business experience,
financial standing, or trade connections), in the course of its trade
or business, regularly engaged in the activity for which it is
requesting registration within 6 months after becoming registered under
section 4101. Proposed Sec. 1.4101-1(e)(2) is similar to Sec.
48.4101-1(f)(2).
The purpose of the activity test is to prevent applicants that are
not engaged in the activity required for the section 45Z credit from
becoming registered under section 4101, which is a prerequisite to
claiming the section 45Z credit. For example, if an applicant seeking
registration for purposes of the section 45Z credit represents on its
application for registration that it is not yet (or likely to be within
6 months) engaged in the activity of producing a
[[Page 5180]]
transportation fuel, such applicant would not be approved for
registration because it fails the activity test.
2. Acceptable Risk Test
Under proposed Sec. 1.4101-1(e)(3)(i), an applicant would meet the
acceptable risk test only if neither the applicant nor a related person
(as defined in proposed Sec. 1.4101-1(b)(4)) has been penalized for a
wrongful act. Additionally, if an applicant or a related person has
been penalized for a wrongful act, the IRS would be able to determine
that an applicant meets the acceptable risk test based on consideration
of the factors enumerated in proposed Sec. 1.4101-1(e)(3)(ii). The
acceptable risk test under proposed Sec. 1.4101-1(e)(3) is similar to
the acceptable risk test under Sec. 48.4101-1(f)(3).
The purpose of the acceptable risk test under proposed Sec.
1.4101-1(e)(3) is to ensure that the applicant and persons related to
the applicant have met their obligations to pay taxes and file returns
under the Code and also have not been convicted of a crime that
indicates that the applicant would be dishonest in its representations
to the IRS for purposes of protecting the revenue, similar to section
4222(c).
3. Satisfactory Tax History Test
Proposed Sec. 1.4101-1(e)(4)(i) would provide that an applicant
meets the satisfactory tax history only if the IRS determines that the
applicant has a satisfactory tax history. Proposed Sec. 1.4101-
1(e)(4)(ii) would provide that an applicant has a satisfactory tax
history only if the IRS determines that the filing, deposit, and
payment history for all Federal taxes of the applicant and any related
person (as defined in proposed Sec. 1.4101-1(b)(4)) supports the
conclusion that the applicant will comply with its obligations under
proposed Sec. 1.4101-1. Proposed Sec. 1.4101-1(e)(4) is similar to
the adequate security test of Sec. 48.4101-1(f)(4), and the definition
of ``satisfactory tax history'' in proposed Sec. 1.4101-1(e)(4)(ii) is
similar to the definition in Sec. 48.4101-1(f)(4)(iii).
The purpose of the satisfactory tax history test under proposed
Sec. 1.4101-1(e)(4) is to ensure that the applicant and persons
related to the applicant have met their obligations to pay taxes and
file returns under the Code and also have not been convicted of a crime
that indicates that the applicant would be dishonest in its
representations to the IRS for purposes of protecting the revenue,
similar to section 4222(c).
I. Action on Application by the IRS
Proposed Sec. 1.4101-1(f)(1) would provide that the IRS may
investigate the accuracy and completeness of any representations made
by an applicant and request any additional relevant information from
the applicant. Proposed Sec. 1.4101-1(f)(2) would provide that if the
IRS determines that an applicant does not meet all the registration
tests described in proposed Sec. 1.4101-1(e), the IRS will notify the
applicant, in writing, that its application for registration is denied
and state the basis for the denial. Proposed Sec. 1.4101-1(f)(3) would
provide that if the IRS determines that an applicant meets all the
registration tests described in proposed Sec. 1.4101-1(e), the IRS
will register the applicant under section 4101 and issue the applicant
a Letter of Registration that includes the effective date of the
registration and the appropriate activity letter(s). The proposed rule
would also provide that a copy of an application for registration (Form
637) is not a Letter of Registration. Proposed Sec. 1.4101-1(f) is
similar to Sec. 48.4101-1(g).
J. Terms and Conditions of Registration
Proposed Sec. 1.4101-1(g)(1) would require each applicant or
registrant to: (i) make deposits, file returns, and pay taxes required
by the Code and the regulations; (ii) keep records sufficient to show
production of a transportation fuel; and (iii) notify the IRS of any
change (such as a change in ownership) in the information the
registrant submitted in connection with its application for
registration or previously submitted under proposed Sec. 1.4101-
1(g)(1)(iii), within 10 days after the change occurs. Proposed Sec.
1.4101-1(g)(1) is similar to Sec. 48.4101-1(h)(1).
Proposed Sec. 1.4101-1(g)(2) would provide that an applicant or
registrant may not sell, lease, or otherwise allow another person to
use its registration (except as otherwise provided in proposed Sec.
1.45Z-6(b)(2)) or make any false statement to the IRS in connection
with a submission under section 4101. Proposed Sec. 1.4101-1(g)(2) is
similar to Sec. 48.4101-1(h)(2).
Requiring registrants to comply with their tax deposits, payments,
and filing burdens under the Code protects the revenue, similar to
section 4222(c) and Sec. 48.4222(c)-1. Requiring registrants to notify
the IRS of any change in information that the registrant submitted in
connection with its application ensures the IRS is aware of relevant
changes and can ensure the registrant continues to be eligible to
retain its registration.
For example, if a registrant that produces a transportation fuel
changes the type of fuel it produces, the registrant should inform the
IRS of this change so that the IRS can review the fuel being produced
to ensure that the registrant still meets a condition of registration
by producing a transportation fuel. Prohibiting a registrant from
allowing another person to use its registration and make false
statements to the IRS ensures that the IRS can rely upon the
information and representations provided by a registrant, and protects
the revenue by preventing fraud and abuse of section 4101 registration.
K. Effect of Letter of Registration
Proposed Sec. 1.4101-1(h) and proposed Sec. 48.4101-1(a)(7) would
provide that a Letter of Registration is not a determination of
liability for tax, eligibility for a tax credit or deduction, or any
other tax treatment under the Code. The proposed rules would also
provide that a Letter of Registration is not a determination letter, as
defined in Sec. 601.201(a)(3) of this chapter.
The proposed rules are consistent with section 4101 and the overall
statutory scheme. Section 4101 addresses only registration and not
eligibility for underlying tax credits for which registration is
required. Additionally, for each tax credit that requires registration
under section 4101, registration is one of multiple requirements for
credit eligibility. A taxpayer must meet all of the statutory
requirements for each credit and cannot rely solely on a Letter of
Registration to prove entitlement to such credit because doing so would
make the other requirements in the tax credit statutes superfluous.
See, e.g., sections 40(b)(6)(E), 40A, 40B, 45Z, and 6426(k).
Additionally, in the case of excise tax credits, courts have held that
a Letter of Registration indicates only that the registrant is
registered under section 4101 and is not a determination that the
registrant is entitled to claim such credit. See Affordable Bio
Feedstock, Inc. v. United States, 529 F. Supp. 3d 1298, 1304-07 (M.D.
Fla. 2021), aff'd, 42 F.4th 1288 (11th Cir. 2022).
L. Adverse Actions by the IRS Against a Registrant
Proposed Sec. 1.4101-1(i)(1) would provide that the IRS will
revoke or suspend a registration if the IRS determines at any time that
the registrant: (i) does not meet one or more of the registration tests
under proposed Sec. 1.4101-1(e) and has not corrected the deficiency
within a reasonable period of time after notification by the IRS; (ii)
[[Page 5181]]
has used its registration to evade, or attempt to evade, the payment of
any tax, or to postpone or in any manner to interfere with the
collection of any such tax, or to make a fraudulent claim for a credit
or payment; (iii) has aided or abetted another person in evading, or
attempting to evade, payment of any tax, or in making a fraudulent
claim for a credit or payment; or (iv) has sold, leased, or otherwise
allowed another person to use its registration, except as otherwise
provided in proposed Sec. 1.45Z-6(b)(2).
Proposed Sec. 1.4101-1(i)(2) would provide that if the IRS
determines that a registrant has, at any time, failed to comply with
the terms and conditions of registration under proposed Sec. 1.4101-
1(g), made a false statement to the IRS in connection with its
application for registration (or reregistration) or for retention of
registration, or otherwise used its registration in a manner that
creates a significant risk of nonpayment or late payment of tax, then
the IRS may revoke or suspend the registrant's registration.
Proposed Sec. 1.4101-1(i)(3) would provide that if the IRS revokes
or suspends a registration, the IRS will notify the registrant in
writing and state the basis for the revocation or suspension and the
activity letter(s) to which the revocation or suspension relates. The
effective date of the revocation or suspension may not be earlier than
the date on which the IRS notifies the registrant.
These proposed rules, which are similar to the rules of Sec.
48.4101-1(i), are necessary because they enable the IRS to revoke or
suspend registrations as needed to prevent registrants that violate the
rules of section 4101 from using their registration to avoid payment of
tax (by erroneously claiming an income tax credit).
VIII. Ownership Clarification for Section 6417 Elective Payment
Election and Section 6418 Credit Transfer Election
Both sections 6417(a) and 6418(a) require a credit (applicable
credit or eligible credit) to be determined with respect to the
taxpayer before an election may be made. The underlying credit
provisions confirm whether a taxpayer, to determine a credit, must own
the relevant underlying eligible credit property or only conduct the
activities giving rise to a credit. Current Sec. Sec. 1.6417-2(c)(4)
and 1.6418-2(d)(1) provide rules on determining the credit with respect
to a taxpayer and include that a credit is determined with respect to a
taxpayer if the taxpayer owns the underlying eligible credit property
and conducts the activities giving rise to the credit, or in the case
of section 45X (under which ownership of eligible credit property is
not required), is considered (under the regulations under section 45X)
the taxpayer with respect to which the section 45X credit is
determined.
The preambles to the Elective Payment Election Regulations and the
Credit Transfer Election Regulations both explain with respect to
Sec. Sec. 1.6417-2(c)(4) and 1.6418-2(d)(1), respectively, that the
only credit for which ownership is not required is the section 45X
credit. However, a taxpayer also is not required to own the underlying
eligible credit property to determine the section 45Z credit. Section
45Z requires only that a taxpayer produce transportation fuel at a
qualified facility and sell the fuel in a qualified sale, without
requiring ownership of the qualified facility. See section 45Z(a)(1),
regarding general credit eligibility, and section 45Z(d)(4), defining
``qualified facility.''
The proposed regulations would amend both Sec. Sec. 1.6417-2(c)(4)
and 1.6418-2(d)(1) to indicate that facility ownership is not required
for the section 45Z credit. The proposed amendments would only require
a taxpayer to conduct the activities giving rise to the section 45Z
credit. It would be consistent with proposed Sec. 1.45Z-4(e)(1), which
would state that facility ownership is not required for a section 45Z
credit to be determined. The proposed amendments would also clarify
that ownership is not required for the section 45(d)(3)(C) credit and
include clarifying language to acknowledge contract manufacturing
arrangements for the section 45X credit. In addition, the proposed
regulations would amend both Sec. Sec. 1.6417-2(f) and 1.6418-2(g) to
provide different applicability dates for the proposed changes. The
Treasury Department and the IRS request comments on the ownership
language with respect to sections 45Z and 45(d)(3)(C), and whether to
add language on contract manufacturing or toll processing arrangements
for the section 45Z credit.
IX. Proposed Applicability Dates and Reliance
Proposed Sec. Sec. 1.45Z-1, 1.45Z-2 (except for paragraph (e)),
and 1.45Z-4 through 1.45Z-6, would apply to qualified sales occurring
in taxable years ending on or after the date the final regulations are
published in the Federal Register. Proposed Sec. 1.45Z-2(e) would
apply to qualified sales occurring in taxable years ending on or after
January 10, 2025. Proposed Sec. 1.4101-1 and proposed Sec. 48.4101-
1(a)(7) and (8) would apply to persons producing transportation fuel in
taxable years ending on or after the date the final regulations are
published in the Federal Register. Proposed Sec. 1.6417-2(c)(4) and
(f), proposed Sec. 1.6418-2(d)(1) and (g), and the proposed amendment
to Sec. 1.1361-4(a)(1) would apply to taxable years ending on or after
the date the final regulations are published in the Federal Register.
Taxpayers may rely on these proposed regulations until final
regulations are published in the Federal Register, provided taxpayers
follow them in their entirety and in a consistent manner.
Special Analyses
I. Regulatory Planning and Review
Executive Orders 12866 and 13563 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
These proposed regulations have been designated by the Office of
Management and Budget's (OMB) Office of Information and Regulatory
Affairs (OIRA) as subject to review under Executive Order 12866
pursuant to the Memorandum of Agreement (July 4, 2025) between the
Treasury Department and OMB regarding review of tax regulations. OIRA
has determined that this proposed rulemaking is economically
significant and subject to review under section 3(f) of Executive Order
12866 and section 1(c) of the Memorandum of Agreement. Accordingly,
these proposed regulations have been reviewed by OMB.
A. Need for Regulations
Section 45Z of the Internal Revenue Code provides an income tax
credit for the production of clean transportation fuel, which is
divided into two broad categories: sustainable aviation fuel (SAF) and
non-SAF transportation fuel. The statute directs the Secretary of the
Treasury or the Secretary's delegate (Secretary) to issue guidance
regarding implementation of section 45Z, including the calculation of
emissions rates and the annual publication of an emissions rate table.
A taxpayer determines a transportation fuel's emissions rate by either
using the annual emissions rate table or obtaining
[[Page 5182]]
a provisional emissions rate (PER) determination from the Secretary.
The proposed regulations provide procedures for taxpayers to obtain a
PER if the emissions rate table does not establish an emissions rate
for the type and category of transportation fuel produced. The statute
also authorizes the Secretary to issue guidance on taxpayer
registration and certification for purposes of the section 45Z credit.
The proposed regulations also clarify the meaning of several statutory
terms, such as ``gallon equivalent,'' ``suitable for use,'' and ``sold
for use in a trade or business.''
Pursuant to section 6(a)(3)(B) of Executive Order 12866, the
following qualitative analysis provides further details regarding the
anticipated impacts of the proposed regulations. The statute, prior
guidance, and proposed regulations are briefly summarized in Part I.B.
of this Special Analyses. The economic analysis of these proposed
regulations is described in Part I.C. of this Special Analyses.
Specifically, Part I.C.1. explains the baseline used for the economic
analysis; Part I.C.2. discusses the types of entities affected by the
proposed regulations; and Part I.C.3. provides the qualitative
assessment of the potential economic effects, including the benefits
and costs, of the proposed regulations compared to the baseline.
B. Statute, Prior Guidance, and Proposed Regulations
Section 45Z provides an income tax credit for clean transportation
fuel produced domestically after December 31, 2024, and sold by
December 31, 2029. Originally enacted in 2022 and extended and modified
by Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as
the One, Big, Beautiful Bill Act (OBBBA), the section 45Z credit
replaces an assortment of prior fuel incentives. Those incentives
consisted of income tax credit, excise tax credit, and excise tax
payment provisions for various biofuels and other alternative fuels
sold for use as a fuel or used as a fuel, including biodiesel,
renewable diesel, compressed natural gas, second generation biofuel,
and SAF. Transportation fuel is divided into two broad categories: SAF
and non-SAF. Transportation fuel produced after December 31, 2025, must
be exclusively derived from a feedstock that was produced or grown in
the United States, Mexico, or Canada.
Following the statute, a taxpayer calculates the amount of the
section 45Z credit by multiplying the applicable amount per gallon or
gallon equivalent with respect to a transportation fuel by the
emissions factor for that fuel. If a taxpayer produces the
transportation fuel at a qualified facility that satisfies the
prevailing wage and apprenticeship (PWA) requirements, the applicable
amount is increased. A transportation fuel's emissions factor measures
the reduction in a fuel's emissions rate relative to the statutory
baseline emission rate, expressed as a fraction of the statutory
baseline emission rate. The amount of the section 45Z credit is
generally larger as the emissions rate of the transportation fuel
approaches zero. Transportation fuel produced after December 31, 2025,
cannot have an emissions rate of less than zero unless it is derived
from animal manure.
The primary method for determining the emissions rate for non-SAF
is the United States Department of Energy's (DOE) 45ZCF-GREET model.
Producers of SAF have the option of using the 45ZCF-GREET model, the
CORSIA Default methodology, or the CORSIA Actual methodology. Taxpayers
can request a PER determination if the annually published emissions
rate table does not establish an emissions rate for the type and
category of transportation fuel produced. In January 2025, the United
States Department of Agriculture (USDA) published a beta version of
USDA Feedstock Carbon Intensity Calculator (FD-CIC) for testing, peer
review, and public comment in preparation of a final version of USDA
FD-CIC. Following publication of the final version of USDA FD-CIC, the
Treasury Department anticipates that 45ZCF FD-CIC, a section 45Z-
specific version of the FD-CIC module, will be included as an input to
the DOE's 45ZCF-GREET model to be used for calculating carbon intensity
adjustments under section 45Z for feedstocks that are produced using
certain agricultural practices.
The Treasury Department and the IRS have issued several notices
providing initial guidance on the section 45Z credit. Notice 2024-49
provided guidance on the section 45Z registration requirements,
including the time, form, and manner of registration. Notice 2025-10
announced forthcoming proposed regulations addressing the section 45Z
credit. These proposed regulations are the forthcoming proposed
regulations announced in Notice 2025-10. Additionally, Notice 2025-11
provided guidance regarding methodologies for determining emissions
rates under section 45Z and provided the initial emissions rate table.
The proposed regulations provide definitions and general rules on
the section 45Z credit, such as on credit eligibility, credit amount,
credit timing, and emissions rates. The statute directs taxpayers to
use a gallon equivalent for non-liquid fuels but does not provide a
baseline standard. The proposed rules define ``gallon equivalent'' to
mean, with respect to any non-liquid fuel, the amount of such fuel that
has the energy equivalent of a gallon of gasoline determined at the
lower heating value. The higher heating value and lower heating value
of a fuel refer to the amount of energy released during combustion, but
they differ in how they account for the water produced. The higher
heating value assumes that all water produced is condensed back into
liquid, while the lower heating value assumes it remains as vapor, thus
excluding the heat of vaporization from the total energy.
To qualify for the credit, the fuel must be suitable for use as a
fuel in a highway vehicle or aircraft (suitable for use). The proposed
regulations define suitable for use to mean that the fuel either has
practical and commercial fitness for use as a fuel in a highway vehicle
or aircraft or may be blended into a fuel mixture that has practical
and commercial fitness for use as a fuel in a highway vehicle or
aircraft. The rules clarify that actual use as a fuel in a highway
vehicle or aircraft is not required.
In addition to being suitable for use, section 45Z(a)(4) requires a
taxpayer to sell transportation fuel to an unrelated person: (i) for
use by such person in the production of a fuel mixture; (ii) for use by
such person in a trade or business; or (iii) who sells such fuel at
retail to another person and places such fuel in the fuel tank of such
other person. The proposed regulations would explicitly clarify that
the term ``sold for use in a trade or business'' includes fuel sold to
an unrelated person that subsequently resells the fuel in its trade or
business.
The proposed PER process would require a taxpayer to submit an
emissions value request (EVR) to the DOE to obtain an emissions value,
which the taxpayer would use to file a petition requesting the
determination of a PER. The proposed regulations also provide various
special rules, including with respect to required registration, anti-
stacking, production attribution, facility ownership, foreign feedstock
limitation, and recordkeeping. Finally, the proposed regulations
provide procedures for certification of emissions rates for SAF
transportation fuel, filing procedures for claiming the section 45Z
credit, and rules for registration.
[[Page 5183]]
C. Economic Analysis
1. Baseline
The Treasury Department and the IRS have assessed the benefits and
the costs of these proposed regulations relative to a no-action
baseline reflecting anticipated Federal-income-tax-related behavior in
the absence of these regulations.
2. Affected Taxpayers
These proposed regulations could affect both domestic corporations
and pass-through entities. The IRS Research, Applied Analytics, and
Statistics Division estimates that there will be 260 facilities
registering to produce transportation fuel. The Treasury Department and
the IRS understand that, for many producers, each facility is owned by
a disregarded entity. Each disregarded entity and qualified subchapter
S subsidiary (QSub) that has an EIN and is a producer of transportation
fuel for purposes of section 45Z would need to register as a producer
of clean fuel for its owner to be eligible to claim the section 45Z
credit. Therefore, the number of approved registrants is expected to
exceed the number of facilities and credit claimants, though there is
uncertainty in the magnitude.
The DOE estimated that there would be 200 PER applicants per year
for section 45Z credits in the June 2024 Supporting Statement for
Lifecycle Greenhouse Gas Emissions Value Analysis: Clean Fuel
Production Credit. However, due to more recent analysis utilizing the
actual number of PER requests for the section 45V credit, the estimate
has been reduced to 30 PER requests in the first year and declining
over time as more pathways are added to the 45ZCF-GREET model.
3. Summary of Economic Effects
The proposed regulations define terms, incorporate and clarify
rules, and provide certainty for taxpayers intending to claim the
section 45Z credit. In the absence of regulations on the section 45Z
credit, taxpayers could take differing positions on eligibility or file
claims for credits that do not meet the statutory criteria. Clearly
defined terms, rules, and requirements also provide for more efficient
tax administration, the preservation of tax revenues, accurate filings,
and the harmonization of rules across multiple tax credits.
The Treasury Department and the IRS have not undertaken
quantitative estimates of the economic effects of these proposed
regulations. The Treasury Department and the IRS do not have readily
available data or models to estimate with reasonable precision the
effect on the timing and scale of investment behavior that could result
from these proposed regulations. In the absence of such quantitative
estimates, the Treasury Department and the IRS have undertaken a
qualitative analysis of the economic effects of specific provisions of
these proposed regulations relative to a no-action baseline.
The proposed regulations incorporate and implement the statutory
requirement to publish an emissions rate table by directing the
identified allowed methodologies for the established type and
categories of fuel to the 45ZCF-GREET and CORSIA Default and Actual
models. The emission rate table thus allows taxpayer flexibility by
reflecting a given taxpayer's specific operations as inputs to the
appropriate model. The initial emissions rate table provided in the
Appendix of IRS Notice 2025-11 includes the fuels listed in the table
below.
BILLING CODE 4831-GV-P
[[Page 5184]]
[GRAPHIC] [TIFF OMITTED] TP04FE26.005
BILLING CODE 4831-GV-C
The statute directs taxpayers to use a gallon equivalent for non-
liquid fuels but does not provide a baseline standard. These proposed
regulations define ``gallon equivalent'' to mean, with respect to any
non-liquid fuel, the amount of such fuel that has the energy equivalent
of a gallon of gasoline, which
[[Page 5185]]
refers to the amount of such fuel that has a Btu content of 116,090
(lower heating value). The proposed regulations use gasoline as the
baseline fuel for testing gallon equivalency because gasoline is the
most common transportation fuel in the United States, and section 45Z
is designed to incentivize domestic production of transportation fuels
that may serve as alternatives to existing fossil fuels. According to
the U.S. Energy Information Administration (EIA), ``in 2023, petroleum
products accounted for about 89% of total U.S. transportation sector
energy use. Biofuels contributed about 6%, most of which was blended
with petroleum fuels (gasoline, diesel fuel, and jet fuel).'' \9\ The
chart below using data from EIA's Annual Energy Outlook 2025 shows that
in 2024, motor gasoline made up almost 59% of the total of petroleum
and other fuels used in transportation. Additionally, in the interest
of harmonizing rules, the use of a gasoline gallon equivalency is
consistent with the gasoline gallon equivalent requirement in section
6426(d)(3), which applies to many of the same types of fuel as section
45Z in the context of a credit that section 45Z replaces.
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\9\ See <a href="https://www.eia.gov/energyexplained/use-of-energy/transportation.php">https://www.eia.gov/energyexplained/use-of-energy/transportation.php</a>.
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BILLING CODE 4831-GV-P
[GRAPHIC] [TIFF OMITTED] TP04FE26.006
BILLING CODE 4831-GV-C
Other definitions of gallon equivalency were considered, including
diesel gallon equivalency and ethanol gallon equivalency. These
definitions would have the effect of decreasing (diesel) or increasing
(ethanol) the amount of the calculated section 45Z credit without
changing the characteristics of the fuels eligible for the credits. For
example, the diesel gallon equivalent of gasoline is 0.88 gallons,
therefore using a diesel gallon equivalent would generally reduce any
available credit by 12 percent for non-liquid fuels. Neither of these
equivalency definitions would have provided the equivalency of the most
common transportation fuel currently in use nor provided the same
consistency with the gasoline gallon equivalent requirement in section
6426(d)(3).
Non-liquid fuels comprise a small portion of the transportation
fuel market. Renewable natural gas (RNG) accounted for approximately 84
percent of the nearly 64 billion cubic feet of all the natural gas used
as transportation fuel in the United States.\10\ Natural gas, however,
accounted for less than 1% of total transportation fuel use.\11\ In
addition, much of the supply for RNG is due to clean fuel programs such
as the national Renewable Fuel Standard (RFS) so a small change in the
credit rate for non-liquid fuels resulting from a different choice for
the gallon equivalent for non-liquid fuels is unlikely to have a
significant effect on overall transportation fuel supply.
---------------------------------------------------------------------------
\10\ See New Renewable Fuel Standard volume targets facilitate
renewable natural gas production--U.S. Energy Information
Administration (EIA).
\11\ See Alternative Fuels Data Center: Natural Gas Fuel Basics.
---------------------------------------------------------------------------
To facilitate implementation of a gallon equivalency standard for
non-liquid fuels, these proposed regulations must specify whether the
equivalency is based on a lower heating value or a higher heating value
of the baseline fuel, as the two types of heating values have different
energy contents. The proposed regulations use a lower heating value
rather than a higher heating value because it is a better
representation of the useful energy provided by transportation fuel. To
provide clarity and to ensure consistency across section 45Z claims,
the proposed regulations provide the lower heating values of some
common non-liquid fuels and an example for determining the number of
gallon equivalents using the listed values.
Section 45Z requires a transportation fuel, in part, to be suitable
for use as a fuel in a highway vehicle or aircraft but does not define
the term ``suitable for use.'' The proposed regulations define
``suitable for use'' to mean: (i) that the fuel has practical and
commercial fitness for use as a fuel in a highway vehicle or aircraft,
or (ii) may be blended into a fuel mixture that has practical and
commercial fitness for use as a fuel in a highway vehicle or aircraft.
The proposed regulations further clarify that actual use as a fuel in a
highway vehicle or aircraft is not required.
The definition of ``suitable for use'' in these proposed
regulations is consistent with a plain reading of the statutory
[[Page 5186]]
language. Other options considered include defining ``suitable for
use'' to require actual use as a fuel in a highway vehicle or aircraft.
Such an interpretation would reduce the amount of fuel eligible for the
credit and thus constrain the cost of the section 45Z credit. However,
such an interpretation would not be consistent with a plain reading of
the statutory language.
In addition to the suitable for use requirement, section 45Z(a)(4)
requires a taxpayer to sell transportation fuel to an unrelated person:
(i) for use by such person in the production of a fuel mixture; (ii)
for use by such person in a trade or business; or (iii) who sells such
fuel at retail to another person and places such fuel in the fuel tank
of such other person. The proposed regulations explicitly clarify that
the term ``sold for use in a trade or business'' includes fuel sold to
an unrelated person that subsequently resells the fuel in its trade or
business. The proposed definition responds to stakeholder concern that
more restrictive definitions could prevent all fuel sales for resale,
such as those to intermediary dealers or wholesalers, from qualifying
for the section 45Z credit.
Stakeholders explained that, in the fuel industry, many producers
sell to related or unrelated intermediaries, such as wholesalers or
dealers, rather than directly to unrelated final purchasers. This
common practice allows efficient distribution and the availability of
biofuels across regions of the United States because resellers have the
infrastructure, capacity, and expertise to deliver fuel where it is
needed that producers do not.\12\ The proposed regulatory definition
promotes flexibility while maintaining adherence to the statutory
language. The proposed regulatory definition reduces the costs to those
producers who would need to alter their current distribution practices
to take advantage of the tax credit and therefore creates an incentive
for more clean fuel production.
---------------------------------------------------------------------------
\12\ See <a href="https://www.eia.gov/energyexplained/gasoline/where-our-gasoline-comes-from.php">https://www.eia.gov/energyexplained/gasoline/where-our-gasoline-comes-from.php</a>.
---------------------------------------------------------------------------
In considering the definition of ``sold for use in a trade or
business,'' the Treasury Department and the IRS evaluated the potential
for double crediting. To address that concern, the draft regulatory
text in the Appendix to Notice 2025-10 defined the term ``sold for use
in a trade or business'' to mean sold for use as a fuel in a trade or
business within the meaning of section 162 of the Code. The draft term
did not include a sale for blending or for further processing,
including use as a primary feedstock to produce another fuel.
After the publication of Notice 2025-10, OBBBA amended section
45Z(d)(5)(A) to exclude from the definition of ``transportation fuel''
any fuel produced from a fuel for which a section 45Z credit is
allowable. This revision indicates that a sale for use as a primary
feedstock to produce another fuel may qualify as a sale for use in a
trade or business under section 45Z(a)(4)(B). The OBBBA amendment thus
eliminated the double-crediting potential of transportation fuel used
for further processing, including use as a primary feedstock to produce
another fuel. As a result, the proposed definition of ``sold for use in
a trade or business'' in these proposed regulations responds to
stakeholder feedback by removing the phrase ``sold for use as a fuel''
from the definition without the risk of double crediting for
transportation fuels.
Many stakeholders have expressed the urgent need for guidance to
clarify the scope and mechanics of the PER process. Proposed Sec.
1.45Z-2(f) implements the statutory language regarding the PER process
and provide this urgent guidance to taxpayers. The proposed regulations
provide clarity to taxpayer requests for a PER determination by
delineating the proper forms and how to file them, as well as
describing the content required and explaining the manner and effect of
a PER determination. In addition, the proposed regulations direct
applicants to follow the DOE's published instructions as well as
describe common assumptions and the information required by the DOE for
an EVR. The proposed regulations also harmonize rules for eligible
fuels that are a category of hydrogen by outlining the interaction
between the PER processes for the section 45V credit and the section
45Z credit.
The certainty provided by these proposed regulations would foster
consistent treatment across credit claimants, allow taxpayers producing
eligible transportation fuel to make informed investment decisions, and
facilitate commercial market transactions with respect to contracts
between suppliers and buyers.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of OMB
before collecting information from the public, whether such collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a valid control number assigned by the OMB.
The collections of information in these proposed regulations
contain reporting, third-party disclosure, and recordkeeping
requirements that are necessary to ensure that the taxpayer qualifies
for the clean fuel production credit. The collections will be used by
the IRS for tax compliance purposes and by taxpayers to ensure the fuel
qualifies for the credit.
The proposed regulations describe reporting and recordkeeping that
are part of the registration requirements, as detailed in proposed
Sec. 1.4101-1(a), (d), (f), and (g). These collections are used to
determine whether an applicant meets the requirements to be registered
under section 4101, a requirement to qualify for the section 45Z
credit. The registration requirements, including the Form 637, are
already approved by the OMB under control number 1545-1835 with the PRA
procedures under 5 CFR 1320.10. The proposed regulations are not
creating or changing these already approved collections.
The collections of information in the proposed regulations describe
reporting related to claiming the clean fuel production credit, as
detailed in proposed Sec. 1.45Z-6. The burden for these requirements
is included with Form 7218 and its instructions. The Form 7218 and its
instructions are already approved by OMB under the following control
numbers: 1545-0123 for businesses, 1545-0074 for individuals, 1545-0047
for non-profit organizations, and 1545-0092 for trusts and estates with
the PRA procedures under 5 CFR 1320.10. The proposed regulations are
not creating or changing these already approved collections.
The collections of information in the proposed regulations would
include reporting requirements that taxpayers claiming the section 45Z
credit for SAF transportation fuel provide a certification from an
unrelated person with their Federal income tax return or information
return for each taxable year for which they claim the section 45Z
credit as required by section 45Z(f)(1)(A)(i)(II) and as detailed in
proposed Sec. 1.45Z-5. The proposed regulations would also include a
third-party reporting and disclosure requirement that such a
certification be prepared and certified by an unrelated person. The
certification must contain an attestation regarding the taxpayer's
production of SAF transportation fuel, conflicts of interest, the
certifier's qualifications, the taxpayer's facility, and documentation
necessary to substantiate the certification process. The taxpayer must
submit the
[[Page 5187]]
certification to the IRS by including it with the Form 7218. The burden
for these requirements is already included within the Form 7218 and its
instructions. Form 7218 and its instructions are already approved by
OMB under the following control numbers: 1545-0123 for businesses,
1545-0074 for individuals, 1545-0047 for tax-exempt organizations, and
1545-0092 for trusts and estates. The proposed regulations are not
creating or changing these already approved collections.
The proposed regulations reference the DOE's process for an
emissions value applicant (EV applicant) to request an emissions value
from the DOE that could then be used to file a petition with the
Secretary for a PER determination as detailed in proposed Sec. 1.45Z-
2. The petition made to IRS will be performed by including the
calculated emissions value letter obtained from the DOE with Form 7218.
The burden for the petition to the IRS is already included within the
Form 7218 and its instructions. Form 7218 and its instructions are
already approved by OMB under the following control numbers: 1545-0123
for businesses, 1545-0074 for individuals, 1545-0047 for tax-exempt
organizations, and 1545-0092 for trusts and estates. The proposed
regulations would not create or change these already approved
collections.
The proposed regulations would describe the collection of
information associated with the process for taxpayers to request an EV
from the DOE and is reflected in the DOE's PRA submission relating to
such process. These proposed regulations would not create or change any
of the collection requirements submitted by the DOE to OMB for
approval. Approval of the DOE's PRA submission is pending OMB approval.
The proposed regulations would not create or change any of the
collection requirements being approved by OMB under the DOE OMB Control
Number 1910-NEW.
The collections of information in the proposed regulations describe
third-party disclosure and recordkeeping requirements that provide safe
harbor methods for the substantiation of emissions rates and qualified
sales, as detailed in proposed Sec. 1.45Z-4. The certificates
described in the proposed regulations may be used to establish, in
part, the taxpayer's eligibility for the section 45Z credit and the
amount of the credit claimed on the taxpayer's return. The burden
associated with these information collections will be included within
the following OMB control numbers: 1545-0123 for businesses, 1545-0074
for individuals, 1545-0047 for tax-exempt organizations, and 1545-0092
for trusts and estates with the PRA procedures under 5 CFR 1320.10.
The collections of information in the proposed regulations include
recordkeeping requirements related to claiming the section 45Z credit.
A taxpayer would use these records to establish its eligibility for the
section 45Z credit and the amount of the credit claimed. The
recordkeeping requirements would include that taxpayers keep records
about emissions rates, production, and sale. These recordkeeping
requirements are considered general tax records under Sec. 1.6001-
1(e). For PRA purposes, general tax records are already approved by OMB
under the following control numbers: 1545-0123 for businesses, 1545-
0074 for individuals, 1545-0047 for non-profit organizations, and 1545-
0092 for trusts and estates.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. Unless an agency determines that a proposal is not likely to
have a significant economic impact on a substantial number of small
entities, section 603 of the RFA requires the agency to present an
initial regulatory flexibility analysis (IRFA) of the proposed rule.
The Treasury Department and the IRS have not determined whether the
proposed rule, when finalized, will likely have a significant economic
impact on a substantial number of small entities. This determination
requires further study. However, because there is a possibility of
significant economic impact on a substantial number of small entities,
an IRFA is provided in these proposed regulations. The Treasury
Department and the IRS invite comments on both the number of entities
affected and the economic impact on small entities.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel of the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business.
A. Need for and Objectives of the Rule
The proposed regulations would provide needed guidance for
taxpayers on eligibility for the section 45Z credit, the amount and
timing of the section 45Z credit, the use of the 45ZCF-GREET model and
CORSIA methodologies to determine the lifecycle GHG emissions rates of
transportation fuel, procedures for petitioning the Secretary for a PER
determination, requirements for the certification of emissions rates
for SAF transportation fuel, filing procedures for claiming a section
45Z credit, and rules for registration under section 4101 for purposes
of section 45Z.
B. Affected Small Entities
The RFA directs agencies to provide a description of, and if
feasible, an estimate of, the number of small entities that may be
affected by the proposed regulations, if adopted. The Small Business
Administration's Office of Advocacy estimates in its 2023 FAQs that
99.9 percent of American businesses meet the definition of a small
business. The applicability of these proposed regulations does not
depend on the size of the business, as defined by the Small Business
Administration. As described more fully in the preamble to this
proposed regulation and in this IRFA, sections 45Z, 4101, 6417, and
6418, and these proposed regulations may affect a variety of different
businesses across several different industries. Because the potential
credit claimants can vary widely and the credit first went into effect
in 2025, it is difficult to estimate at this time the compliance costs
and quantifiable burdens of these proposed regulations, if any, on
small businesses. Although there is uncertainty as to the exact number
of small businesses within this group, the current estimated number of
taxpayers subject to these proposed regulations is 260 taxpayers of
which 35 percent are small.
The Treasury Department and the IRS expect to receive more
information on the impact on small businesses through comments on these
proposed regulations and again after taxpayers start using the guidance
and procedures provided in these proposed regulations to claim the
section 45Z credit.
C. Impact of the Rules
The proposed regulations would provide rules for how taxpayers can
claim the section 45Z credit. Taxpayers that claim the section 45Z
credit would have administrative costs related to reading and
understanding the rules as well as recordkeeping and reporting
requirements because of the certification and Federal income tax return
or information return requirements. The costs would vary across
different-sized entities and across the type(s) of
[[Page 5188]]
project(s) in which such entities are engaged.
To claim a section 45Z credit, a taxpayer producing a
transportation fuel must determine the lifecycle GHG emissions rate(s)
for all transportation fuel sold during a taxable year. In general, a
taxpayer must use the emissio
[…truncated; see source link]Indexed from Federal Register on February 4, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.