July 22, 2021
IRS rules that investor that owns at least one component of carbon capture equipment can claim IRC Section 45Q credit
In Revenue Ruling 2021-13, the IRS ruled that (1) an acid gas removal (AGR) unit at a methanol plant constitutes carbon capture equipment; and (2) the person to whom the IRC Section 45Q credit is attributable must own at least one component of the carbon capture equipment. The IRS also ruled that, for purposes of IRC Section 45Q(a), the original placed-in-service date of a single process train of carbon capture equipment that includes new and existing equipment is the date the single process train is ready and available to capture, process and prepare carbon oxide for transport.
An acid gas removal (AGR) unit was placed in service at a methanol plant on January 1, 2017. The AGR unit removes the unwanted components, including CO2, from the production process and releases or captures the CO2. No taxpayer has claimed an IRC Section 45Q credit for carbon dioxide sequestration since the AGR unit was placed into service.
In 2021, an investor purchased and installed new components of carbon capture equipment that created a "single process train" to capture, process and prepare for transport the CO2 that was being released into the atmosphere at the methanol plant. The investor did not acquire an ownership interest in the AGR unit or the plant.
Laws and analysis
AGR unit is carbon capture equipment
Under Treas. Reg. Section 1.45Q-2(c)(3), a "single process train," which consists of all components that make up an independently functioning process train capable of capturing, processing and preparing carbon oxide for transport, will be treated as a single unit of carbon capture equipment.
The IRS held that because one of the functions of the AGR unit is to separate CO2 from a gas stream, it is carbon capture equipment for purposes of IRC Section 45Q.
Investor must own one component to claim credit
The IRC Section 45Q credit can be claimed by a person that owns at least one component of carbon capture equipment in the single process train. Only one person can claim the credit.
The IRS held that to claim the IRC Section 45Q credit, a taxpayer does not necessarily need to own every component of the carbon capture process, but the taxpayer must own at least one component of the AGR unit at the methanol plant.
Placed-in-service date is 2021 for IRC Section 45Q purposes
IRC Section 45Q credits can be claimed for any industrial or direct air-capture facility for which construction begins before January 1, 2026, and that captures certain amounts of qualified carbon oxide, depending on its size. The Bipartisan Budget Agreement (BBA) created two new credits for carbon oxide captured using equipment originally placed in service on or after February 9, 2018, allowing up to:
The placed-in-service date applies when the single process train is placed in "a condition or state of readiness and availability for the specifically designed function of capturing, processing, and preparing carbon oxide for transport for disposal, injection, or utilization." The IRS found that for the methanol plant, this would occur when the new components of carbon capture equipment are added to allow the plant to capture, process and prepare carbon oxide for transport for disposal, injection or utilization, rather than release it into the atmosphere.
The IRS held that under the facts, the placed-in-service date of the single process train is 2021.
The IRS noted that for purposes of depreciation under IRC Sections 167 and 168, the placed-in-service date remains January 1, 2017.
Taxpayers with facts and circumstances similar to those presented in this ruling will likely find that it resolves ambiguity that remained after the IRC Section 45Q regulations were issued. The ruling does not, however, clarify how to approach the so-called 80/20 test for carbon capture systems that contain some used equipment (which allows equipment with some used components to qualify as originally placed in service if the used components do not exceed 20% of the total value of the equipment). In the facts presented, the pre-existing AGR unit was not owned by the taxpayer that installed the balance of the carbon capture equipment, making the used equipment classification irrelevant to the determination of whether the carbon capture equipment owned by the taxpayer was "new" and, therefore, eligible to generate IRC Section 45Q credits.