How to Get a 45Q Tax Credit for a Carbon Capture Project
Business activities accounted for 22% of greenhouse gas emissions in 2018, but a special tax credit is available that might give companies more incentive to reduce emissions, limit their carbon footprint, and save money in the process.
The Internal Revenue Service (IRS) Section 45Q tax credit is given to businesses for buying and using equipment that captures and disposes of carbon dioxide from industrial emissions through a process called carbon sequestration (removal from the atmosphere). The 45Q tax credit has been in effect since 2008, but was updated in 2018 to provide greater opportunities for large and small businesses to reduce their taxes and improve the environment.
What Is Carbon Sequestration?
Geologic carbon sequestration is the process of storing carbon dioxide (CO2), the most commonly produced greenhouse gas, in deep underground geological formations.
In this type of carbon capture and sequester process, which is applied mostly in industrial situations (like steel and cement production), the CO2 is pressurized to a liquid and then injected into porous rocks for long-term storage. The storage must be safe, environmentally sustainable, and cost-effective.
How Does the Tax Credit Work?
With the Energy Improvement and Extension Act of 2008, the IRS introduced a new incentive tax credit of $20 per metric ton for CO2 geologic storage and $10 per metric ton for CO2 used for enhanced oil recovery (EOR) or enhanced natural gas recovery (EGR). This Section 45Q tax credit was capped at a total of 75 million tons.
However, in 2018, with the passage of the Bipartisan Budget Act, the tax credit amounts were increased, and in January 2021, the Treasury Department and the IRS issued final regulations describing the updated tax credit.
The term “carbon oxide” is used in the 2021 regulations to represent both of the two combinations of carbon and oxygen: carbon monoxide and carbon dioxide. Although carbon dioxide is the most common and has a greater effect on the environment, carbon monoxide is also a concern because it can be lethal.
The tax credit is for equipment used in several types of projects:
- Capture and disposal of qualified carbon oxide using specific equipment
- The secure storage of carbon oxide is the geologic storage in secure underground locations discussed above
- Use of carbon oxide injected in a qualified enhanced oil or natural gas recovery project
- Use of qualified carbon oxide “in a manner that qualifies for the credit”
Although the tax credit is based on metric tons of qualified carbon oxide captured, the amount of credit also depends on whether business used carbon capture equipment that meets certain specifications, including being placed in service at a qualified facility before or on or after February 9, 2018.
Businesses can claim two tax credits:
- Up to $50 per metric ton of qualified carbon oxide for permanent sequestration
- Up to $35 per metric ton of qualified carbon oxide for enhanced oil or natural gas recovery purposes
Under the new regulations, there is also no limitation on the number of qualified carbon oxide captured.
Other Requirements and Qualifications
The 2021 regulations include these specific, detailed requirements:
- Adequate security measures for geological storage
- Definitions of what types of carbon capture equipment are qualified
- Standards for measuring use of qualified carbon oxide
The 45Q credit also comes with these stipulations:
- Credits must be repaid if carbon oxide leaks into the atmosphere during a three-year period after the initial storage or injection.
- The credit is available for 12 years from the time the equipment is placed in service.
- Construction must begin by January 1, 2024.
- The facility must emit fewer than 500,000 metric tons of CO2 per year, and not fewer than 25,000 tons of qualified CO2 per year.
How Do I Claim the Tax Credit?
To get started on claiming your tax credit, gather your records for the equipment you bought, including training, transportation, and setup costs. You will also need records to show the amounts of qualified carbon oxide captured under each type of project and when it was captured.
You’ll need to complete a tax credit application Form 8933 (Carbon Oxide Sequestration Credit), showing the amount for each type of carbon capture activity.
Finally, you must add Form 8933 tax credit, along with other tax credits, to your General Business Credit Form 3800. This form has calculations and different sections for different types of credits. The totals from this form are included in your business tax return.
These forms are complicated, and if you don’t meet all the qualifications or file a complete report, your tax credits may be denied. Get help from a tax professional to make sure everything is correct and complete.
Can Small Businesses Claim the 45Q Tax Credit?
Small businesses aren’t qualified for the tax credit if their emissions are under 25,000 tons of qualified CO2 per year, but they may be able to get the tax credit in other ways.
For example, the final regulations allow businesses to join together to run a common project to claim the credit—though common ownership and location may be necessary.
The tax credit usually goes to the business that owns the equipment, but it can be directed to the person that disposes of or uses the carbon dioxide instead. This might be an opportunity for small businesses to get the tax credit by marketing creative ways to dispose of or use the captured carbon.