New guidance discusses carbon capture equipment and credit eligibility

TAX ALERT | July 06, 2021

Authored by RSM US LLP

The Department of Treasury recently released guidance, Rev. Rul. 2021-13, addressing whether certain types of equipment components qualify as carbon capture equipment under section 45Q, and whether an investor is required to own each component of carbon capture equipment in order to qualify for the credit.

Section 45Q allows for a credit for the capture and disposal of qualified carbon oxide. Under the section 45Q regulations, carbon capture equipment consists of all components of property that are used to capture or process carbon oxide until it is transported for disposal or use. The carbon capture equipment does not include components used for transporting the carbon oxide. All components that make up an independently functioning process train which is capable of capturing, processing and preparing the carbon oxide for transport is treated as a single unit of carbon capture equipment (single process train).

To be eligible for the credit, section 45Q and the regulations thereunder, provide that the credit is attributable to the person that owns the carbon capture equipment and either physically or contractually ensures the capture and disposal, injection or utilization of the carbon oxide. The regulations provide that for each single process train of carbon capture equipment, only one taxpayer is considered the person to whom the credit is attributed. 

The revenue ruling addresses facts where a methanol plant, that produces methanol from petroleum coke in a multistep industrial process, uses an acid gas removal (AGR) unit to remove unwanted components from gasified petroleum coke, such as carbon dioxide. The AGR unit was placed into service on Jan. 1, 2017 and since that time, the carbon dioxide separated by the AGR unit has been released into the air resulting in no section 45Q credit eligibility. However, in 2021, an investor purchased and installed new components of carbon capture equipment necessary to create a single process train capable of capturing, processing and preparing the carbon dioxide for transport. The investor did not acquire an ownership interest in the AGR unit or the methanol plant.

In addressing the issues delineated in the revenue ruling, the IRS determined that the AGR unit is characteristic of the physical acid gas removal process. Further, it determined that because one of the functions of the AGR unit is to separate carbon dioxide from a gas stream, it is carbon capture equipment for purposes of section 45Q. The IRS also determined that due to the wording of the regulations requiring that only one person be responsible for compliance with, and therefore qualified to claim the section 45Q credit, that person is not required to own every component of carbon capture equipment within a single process train to be the person to whom the section 45Q credit is attributable. Based on this determination, the IRS held that the investor in the carbon capture equipment could be the person eligible for the section 45Q credit. The IRS also held that the placed in service dates for purposes of section 45Q would be different than those of section 167 and section 168 as the placed in service date for the credit would be based on when the AGR unit is in a state of readiness and available for the capture, processing and preparation of carbon oxide for transport. The placed in service date for the section 45Q credit has no effect on the placed in service date for the original date the existing AGR was placed in service for sections 167 and 168.

WNT takeaways

The revenue ruling is helpful to provide guidance to taxpayers who are adding component parts to existing equipment in order to capture and dispose of carbon oxide. Further, this revenue ruling answers the question of whether an investor in component parts of the equipment can be the taxpayer eligible for the credit. It also clarifies rules related to the placed in service date of the carbon capture equipment for purposes of section 45Q and the depreciation rules under section 167 and 168. Taxpayers who are interested in claiming the section 45Q credit should consult their tax advisors to ensure they meet the remainder of the requirements under section 45Q and the regulations thereunder.