The IRS issued proposed regulations on the clean fuel production credit under Section 45Z (the “45Z credit”) on February 3 (REG-121244-23), and the rules include several taxpayer-favorable guidance changes.
The 45Z credit is generally available for producers of qualified transportation fuels such as biodiesel, ethanol, renewable natural gas, renewable diesel, and sustainable aviation fuel (“non-SAF”), that also meet certain greenhouse gas (GHG) lifecycle emissions standards and are sold in a qualifying manner. The 45Z credit is based on the product of (i) gallons (or equivalent) produced and sold, (ii) the emissions factor of the fuel, and (iii) the applicable amount adjusted for inflation.
The proposed regulations formalize much of the earlier guidance released in Notice 2024-49, Notice 2025-10, and Notice 2025-11, with some taxpayer-favorable modifications and additions. This guidance should help reduce uncertainty for producers as they work to monetize their 45Z credits under Section 6418. (For prior coverage, see Regulations on Energy Tax Credit Transfers Finalized).
Key highlights of the proposed regulations include:
- Clarification of the “sale or use in a trade or business” requirement by rejecting the former draft regulations’ definition, which required the fuel to be used “as a fuel” in a trade or business. The proposed regulations modify the definition to include sales to an unrelated party that subsequently resells the fuel. The modification provides certainty to producers who sell transportation fuel through a wholesaler or intermediary relationship.
- Confirmation that fuel with manure as feedstock can have a negative emissions rate, creating a credit exceeding the previous statutory maximum rate.
- Confirmation of the concept of what constitutes a qualified facility. Producers will need to be mindful of production boundaries, multipurpose components, planned capital expenditure investments, and the structure of contracts for purposes of tracking prevailing wages.
- Provision of additional details on the process for obtaining a provisional emissions rate for fuels that do not include both the type and category of fuel listed in the emissions rate table.
- Clarification of incrementality rules and placed-in-service considerations for facilities leveraging energy attribute certificates (EACs) or renewable energy certificates.
- Inclusion of safe harbors for substantiating non-SAF carbon intensity and qualified sales documentation.
The regulations are generally proposed to be effective for tax years ending after the regulations are finalized, but taxpayers can rely on them immediately if they follow the rules in their entirety and in a consistent manner.
BDO Insight
The proposed regulations provide helpful clarity and make several changes that could benefit taxpayers. There are still some open questions and further guidance is expected, but most taxpayers should have enough information to make key determinations on eligibility. Documenting, substantiating, and certifying compliance with the rules will be critical to claim a credit.
Background
Section 45Z was created by the Inflation Reduction Act (IRA) to replace the various preexisting alternative fuel, biodiesel, and renewable fuel credits with a new technology-neutral credit for clean transportation fuel. The OBBBA modified and extended the credit, which is available for qualified fuel sold after 2024 and before 2030.
The credit is offered on a per-gallon equivalent basis for fuel sold by a producer to an unrelated party. To qualify for the credit, the fuel must be produced in the U.S. and meet GHG emissions standards. Fuel sold after 2025 must be derived from feedstock produced or grown in Canada, Mexico, or the U.S.
Qualified fuel must be “suitable for use as a fuel in a highway vehicle or aircraft.” Section 45Z provides separate credit rates and emissions standards for sustainable aviation fuel (SAF) and other transportation fuels.
The credit rate is calculated on a sliding scale based on an emissions factor determined by the GHG emissions rate. Like most other IRA credits, the 45Z credit is limited to a base amount of one-fifth of the maximum credit if the taxpayer fails to meet prevailing wage and apprenticeship (PWA) requirements. For Section 45Z purposes, the prevailing wage requirements apply to the construction, alteration, and repair of any facility placed in service on or after January 1, 2025. For facilities placed in service before 2025, the prevailing wage rules apply to any alteration or repair of a facility occurring in tax years beginning after 2024. The apprenticeship requirements generally apply regardless of when the facility is placed in service, but a transition rule for facilities placed in service before 2025 limits the application of the requirements to construction occurring 90 days after June 20, 2024.
Anti-stacking rules preclude any Section 45Z credit at a facility for which a Section 45V (or a Section 48 credit in lieu of a Section 45V credit) or a Section 45Q credit are claimed.
Producer
The Section 45Z credit is available to the “producer” of the fuel. The producer is the taxpayer that engages in all the steps and processes necessary to make the fuel, beginning with the processing of primary feedstock and ending with the fuel ready to be sold. The proposed regulations provide that minimal processing that simply creates a fuel mixture or does not result in a chemical transformation would not qualify. Imported fuel with minimal processing in the U.S. would also not qualify. Several examples clarify the rules, providing specifically that blenders are not eligible.
For renewable natural gas, the producer is the taxpayer that processes the untreated sources of alternative natural gas to remove water, carbon dioxide, and other impurities so it is interchangeable with fossil natural gas. This definition specifically excludes taxpayers that simply remove natural gas from a pipeline and compress it.
The producer is not necessarily required to own the entire production facility in which the fuel is produced, and the proposed regulations provide rules for allocating the credit among owners based on each owner’s allocable share of production. If fuel is produced by multiple taxpayers at a facility that is not owned by all taxpayers, production will be allocated based on gross sales.
Section 45Z operates differently than prior fuel tax credits. The previous fuel credit regimes applied the credits to various taxpayers in the supply chain, depending on the credit and the activity, such as blending, selling fuel directly into the tank of a vehicle, or purchasing fuel in bulk. For the Section 45Z credit, the taxpayer must be considered the “producer.” For taxpayers involved at various stages of a production process that involves multiple owners, it will be critical to determine and allocate the credits.
Qualified Sales
The producer generally must sell the fuel to an unrelated person, but the proposed regulations provide special rules for treating a sale to a related party as qualified if the related party will later sell the fuel to an unrelated party.
The proposed regulations provide favorable new rules for determining what constitutes a qualified sale. Earlier guidance restricted qualified sales to sales of the fuel “for use as fuel” in a trade or business. The proposed regulations clarify that the fuel only needs to be sold “for use” in a trade or business, without any further restrictions on its use as fuel. This means the fuel can be sold to a wholesaler, dealer, or blender, for resale or further processing, or it can be sold for any other business use besides transportation.
The proposed regulations specifically acknowledge that while the fuel must be “suitable for use as a fuel in a highway vehicle or aircraft,” there is no requirement that it actually be used this way. To be considered suitable, the fuel must have practical and commercial fitness for use as fuel in a highway vehicle or aircraft (or may be blended into a fuel mixture that has practical and commercial fitness for such use). Fuel can have this practical and commercial fitness even if use in a highway vehicle or aircraft is not its predominant use.
The proposed regulations prevent double-crediting of fuel by precluding a credit for any fuel produced from a fuel for which a Section 45Z credit is allowable.
The favorable application of the rules will expand the types of sales that qualify for the Section 45Z credit. Renewable natural gas and other fuels have many other common uses besides transportation, and sales to unrelated parties for those uses will qualify under the proposed regulations. The rules are much less restrictive than previous fuel credits, which often required a sale for specific use in a vehicle.
Emissions Rates
The proposed regulations include detailed rules and procedures for determining the emissions rate. The IRS will publish an annual emissions rate table for taxpayers to calculate their rates. The table for calendar year 2025 was published in Notice 2025-11.
The emissions rate table generally prescribes a methodology for determining the emissions of specific fuel types. Taxpayers producing a non-SAF fuel determine the emissions rate using the 45ZCF-GREET model developed and maintained by the Department of Energy (DOE) as directed by the rate table. A taxpayer producing a SAF 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), or the 45ZCF-GREET model, as directed by the rate table.
Taxpayers must use an allowed methodology in accordance with the applicable emissions rate table, accurately enter all information requested by that methodology, and follow all publicly available instructions. The models use both fixed assumptions and facility-specific data inputs that must be measured and independently verified. Under a change made by the OBBBA, fuel produced after 2025 excludes any emissions attributed to indirect land use changes. The proposed regulations clarify several rules for applying the models, specifically allowing the use of EACs in the 45ZCF-GREET model to establish that electricity used in the production process comes from renewables.
Taxpayers producing fuels not covered by the category and type of fuel in the table must obtain a provisional emissions rate (PER) from Treasury. To request a PER, taxpayers must first submit an emissions value request (EVR) from the DOE.
The ability to exclude land use changes from the calculation and to obtain a negative emissions factor for manure feedstock will benefit farmers and production processes that use farm-related feedstock. The proposed regulations rely on rules for the clean hydrogen production credit under Section 45V to calculate a lower emissions rate through EACs. The Section 45V rules impose several restrictions for EACs to be eligible, but they are phased in, allowing near-term opportunities. Taxpayers with fuel not covered by the IRS table should begin the process of obtaining a PER immediately, if they have not done so already.
PWA Rules and Credit Transfers
The proposed regulations do not offer additional substantive guidance on PWA compliance or credit transfers, as guidance was previously issued separately on those issues. Compliance with the PWA rules is crucial for obtaining the full credit. While failures to maintain compliance with PWA rules can be cured, those remedies can become costly through both the wage deficiency and penalty payments.
Final regulations on the PWA requirements were issued in 2024 (T.D. 9998), and taxpayers should review the PWA documentation rules carefully. Section 45Z provides relief from the PWA rules if the facility was placed in service before 2025, so the placed-in-service date could be an important determination. The final PWA regulations do not provide extensive guidance when retrofitting, expanding, updating, or repairing a facility would be considered placing a new facility in service for purposes of the PWA rules. The distinction may be less important because the PWA requirements will apply to any repairs or alterations of an existing facility even if it is considered placed in service before 2025.
Producers should be cognizant that any planned capex may fall under the alteration definition to verify that contracts are appropriately scoped. Taxpayers should also be aware of the contract type and the owners’ scope to confirm the correct timing of the applicable wage determinations. In addition, taxpayers should identify applicable rates or submit requests through the DOL as early as possible. The wage determinations that many producers in the Midwest operate under are narrow in terms of the labor classifications covered.
Registration, Certification, and Documentation
Taxpayers must be registered at the time the production occurs to claim a credit for the fuel sale. Unlike prior fuel credits, the Section 45Z credit rules do not allow taxpayers to register retroactively before filing the claim for credit. Form 637, Application for Registration (For Certain Excise Tax Activities) is used to apply for registration, and the credit is claimed on Form 7218, Clean Fuel Production Credit.
The proposed regulations require taxpayers to maintain records sufficient to establish eligibility. The IRS created a safe harbor for substantiating the emissions rate, and it requires extensive certification and documentation. Taxpayers must generally obtain a certification of the rate from a qualified certifier, and a model certificate is offered in the guidance. The proposed regulations also offer a safe harbor and model certificate for substantiating a qualified sale to an unrelated party.
The certification of a sale must be made prior to or at the time of the sale. The certification of the rate must be performed by an unrelated and qualified certifier and it will require extensive work to verify qualification. Taxpayers should verify that they are properly registered and are collecting and retaining the necessary documentation to claim the credit.
Next Steps
Despite lingering uncertainty on some issues, taxpayers now have extensive guidance to help them plan projects, structure activities, arrange tax credit sales, and proceed with documentation workflows necessary for underwriting tax credit sales.
Taxpayers producing clean transportation fuels should consult with their tax advisors and industry associations. Comments on the proposed regulations must be received by April 6, 2026.
Please visit BDO’s Business Incentives & Tax Credits page for more information on how BDO can help.