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07.02.21

New CCUS guidance from IRS - The parts are greater than the whole

BY Ellen S. Friedman

IRS Revenue Ruling 2021-13, issued July 1, 2021, elegantly resolves several troubling technical issues presented by IRC Section 45Q and the final regulations promulgated thereunder (see TD 9944 (86 FR 4728, January 15, 2021)) that had the potential to stymie the development of carbon capture, utilization and sequestration (CCUS) projects by third-party investors at existing industrial facilities with equipment that separates and subsequently vents carbon dioxide. Yesterday’s ruling involved the installation of carbon capture equipment by a third-party investor in 2021 at an operating methanol facility (Facility X) containing an acid gas removal unit (AGR) placed in service in 2017 that separated and vented carbon dioxide. The ruling answered the following questions:

  • For purposes of Section 45Q(a) of the Internal Revenue Code (Code), is the acid gas removal unit at Facility X carbon capture equipment within the meaning of § 1.45Q-2(c) of the Income Tax Regulations?
  • Is an investor required to own every component of carbon capture equipment within a single process train at Facility X to be the person to whom the credit under § 45Q(a) (Section 45Q credit) is attributable under § 1.45Q-1(h)?
  • For purposes of § 45Q(a), what is the original placed-in-service date of the single process train of carbon capture equipment at Facility X that includes the existing acid gas removal unit and new components of carbon capture equipment?
  • How, if at all, does the original placed-in-service date of the single process train affect the placed-in-service date of the existing acid gas removal unit for depreciation purposes under §§ 167 and 168 of the Code?

The holdings, which can be applied to analogous fact patterns, are:

  1. An acid gas removal unit at an industrial facility is a component of carbon capture equipment within the meaning of § 1.45Q-2(c);
  2. An investor in certain components of carbon capture equipment at an industrial facility is not required to own every component of carbon capture equipment in a single process train at an industrial facility to be the person to whom the Section 45Q credit is attributable under § 1.45Q-1(h), but must own at least one component of carbon capture equipment in the single process train of carbon capture equipment at the industrial facility;
  3. Solely for purposes of Section 45Q(a), the original placed-in-service date of a single process train of carbon capture equipment at an industrial facility that includes the existing acid gas removal unit and new components of carbon capture equipment is the date that the single process train is placed in a condition or state of readiness and availability for the capture, processing, and preparation of carbon oxide for transport for disposal, injection, or use.
  4. The original placed-in-service date of the single process train for purposes of Section 45Q has no effect on the placed-in-service date of the existing acid gas removal unit for depreciation purposes under Sections 167 and 168.

This helpful guidance should clear the way for the buildout of CCS by third-party investors seeking to benefit from 45Q tax credits at existing emitters currently venting isolated carbon oxide streams. The parties to such arrangements, however, should take care to identify the investor as the sole party to whom such 45Q credit will be attributable — the party that shall be solely responsible for the physical or contractual disposal, sequestration, or commercial utilization of the captured carbon oxide and all other 45Q compliance requirements.

Nixon Peabody is a regular thought leader for CCS. For more information, visit our Carbon Capture, Sequestration, and Mitigation page.

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Ellen S. Friedman

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