11 February 2026 Comprehensive proposed regulations on IRC Section 45Z clean fuel production credit would clarify requirements for energy producers
In proposed regulations under IRC Section 45Z (REG-121244-23) the Treasury Department and IRS establish the operative framework for claiming the clean fuel production credit enacted by the Inflation Reduction Act (IRA) and modified by the One, Big, Beautiful Bill Act (OBBBA). The proposed regulations would define the rules for determining eligibility, computing credit amounts, verifying lifecycle greenhouse gas emissions and documenting qualified sales, marking the first comprehensive regulatory roadmap for taxpayers. The proposed regulations would also modify existing regulations on electing or transferring credits and on excise tax registration to coordinate with the proposed regulations. The proposed regulations would generally be effective for qualified sales occurring in tax years ending on or after the date the final regulations are published in the Federal Register, with some exceptions. Taxpayers may rely on these proposed regulations immediately, however, if they follow them in their entirety and in a consistent manner. The IRC Section 45Z clean fuel production credit applies to low-emission transportation fuel produced at qualified facilities (not including facilities for which an IRC Section 45V, 45Q or 48 (for hydrogen) credit is available) (see Tax Alert 2025-1434). The IRC Section 45Z credit is generally available for low-emission transportation fuel produced domestically after December 31, 2024, and sold through December 31, 2029. Fuel produced after December 31, 2025, must be exclusively derived from feedstock grown or produced in the United States, Canada or Mexico. The IRC Section 45Z credit equals (1) the applicable amount per gallon (or gallon equivalent) for transportation fuel produced by the taxpayer at a qualified facility and sold in the manner described in IRC Section 45Z(a)(4) during the tax year multiplied by (2) the emissions factor for such fuel as determined under IRC Section 45Z(b). For sustainable aviation fuel (SAF), the credits for fuel produced after December 31, 2025, reflect the $0.20 (base) and $1.00 (bonus) per-gallon amount applicable to all other transportation fuels. This reflects the statutory repeal of the enhanced SAF credit rates (the $0.35 / $1.75 structure), which applied only to fuel produced on or before December 31, 2025. Taxpayers that are a specified foreign entity may not claim credits for tax years beginning after July 4, 2025; taxpayers that are a foreign-influenced entity may not claim a credit for tax years beginning after July 4, 2027 (see Tax Alert 2025-1608). To claim the IRC Section 45Z credit, a taxpayer must have a signed letter of registration from the IRS dated on or before the date the fuel is produced. Taxpayers can apply for the letter of registration on Form 637, Application for Registration (for Certain Excise Tax Activities) (see Tax Alert 2024-1404). The IRA created the elective payment and credit transfer regimes under IRC Sections 6417 and 6418. Under IRC Section 6417, an "applicable entity" can make a direct-pay election (effectively treating tax credits generated by a renewable energy project as equivalent to taxes paid on a filed return) for certain tax credits (see Tax Alert 2024-0624). Under IRC Section 6418, an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit to an unrelated transferee taxpayer if certain requirements are met (see Tax Alert 2024-0933). The proposed regulations would define a facility as a single production line that includes all components that function interdependently to produce transportation fuel, regardless of whether those components are in a single building or dispersed, so long as they form an integrated system. The definition expressly allows inclusion of carbon capture equipment where the captured carbon affects the lifecycle emissions profile of the fuel but excludes certain post-production and indirect equipment (for example, compression equipment used solely to move already-produced fuel to market). A facility qualifies for IRC Section 45Z only if no "anti-stacking credit" under IRC Sections 45V, 48 (by reason of an IRC Section 48(a)(15) election) or 45Q is allowed for that facility for the same tax year. The proposed regulations would apply this test on a facility-by-facility, year-by-year basis, meaning that a facility could qualify for IRC Section 45Z in one year and be disqualified in another year if an anti-stacking credit were claimed. Prop. Treas. Reg. Section 1.45Z-4(e)(1) would clarify that taxpayers do not need to own a qualified facility to claim the IRC Section 45Z credit for transportation fuel production. If production were to occur at a facility owned by someone else, production would be attributed to the taxpayer unless otherwise provided. For production arrangements involving multiple taxpayers at a non-owned facility, production would be allocated based on each taxpayer's respective interests in the gross sales from that fuel, as outlined in their contract or agreement. Under Prop. Treas. Reg. 1.45Z-1(b)(26), only a transportation fuel producer that is registered as a clean fuel producer under IRC Section 4101 at the time of production could claim the IRC Section 45Z credit. The proposed regulations would define a producer as the person that performs the substantive processing steps that transform feedstocks into transportation fuel; minimal activities, such as blending, would not constitute production. For alternative natural gas (including renewable natural gas (RNG)), the proposed regulations would clarify that only the processor is treated as the transportation fuel producer for IRC Section 45Z purposes. A processor is the entity that performs the substantive processing steps, removing water, carbon dioxide and impurities, to create a fungible, pipeline-quality gas. A compressor, by contrast, merely removes gas from a pipeline, further compresses it, and sells it; these activities would not constitute production under the proposed definition and therefore would not qualify the compressor as a producer eligible for the IRC Section 45Z credit. The proposed regulations would interpret "qualified sale" in a manner that reflects industry practice while preserving the statutory distinctions among sales for blending, sales for use in a trade or business, and retail sales. "Sold for use in a trade or business" would be defined by reference to IRC Section 162 and explicitly include sales to intermediaries that resell the fuel as part of their business. For sales routed through corporate groups, the proposed regulations would adopt and extend the statutory sale attribution rules. Members of an affiliated group filing a consolidated return could treat sales by one member as sales by another for IRC Section 45Z purposes, and taxpayers outside consolidated groups could look through to sales by related persons. The proposed regulations would define the term "suitable for use as a fuel in a highway vehicle or aircraft" as fuel that has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft or that may be blended into a fuel mixture used for that purpose. The definition would not include electricity production. The IRC Section 45Z credit equals (1) the applicable amount per gallon (or gallon equivalent) multiplied by (2) the emissions factor for the fuel and (3) the volume of fuel sold in a qualified sale. The proposed regulations would specify how to measure the amounts that go into the calculation. The proposed regulations would implement the statutory requirement to determine lifecycle rates of greenhouse-gas emissions using either an annual emissions rate table published by the Secretary or a provisional emissions rate (PER) if the fuel is not listed on the table. The emissions rate table for 2025 was published in Notice 2025-11. Under the proposed regulations, a taxpayer's applicable emissions rate table is the one in effect for the tax year in which the fuel is produced, not the tax year of the facility's construction. For non-SAF transportation fuel, the proposed regulations would designate the 45ZCF-GREET model as the required methodology. For SAF, the proposed regulations would require using either (1) the most recent version of the lifecycle approach of the CORSIA Default Life Cycle Emissions Values for CORSIA Eligible Fuels (CORSIA Default), (2) the lifecycle approach of the CORSIA Methodology for Calculating Actual Life Cycle Emissions Values (CORSIA Actual) or (3) the 45ZCF-GREET model.
The proposed regulations would set out a multistep PER process for taxpayers that produce an "eligible fuel" not yet represented by a type and category in the applicable emissions rate table. The taxpayer would be required to (1) submit an emissions value request (EVR) to the Department of Energy (DOE) (following DOE's forthcoming instructions) and provide detailed technical and project maturity information (including engineering studies)(hydrogen fuel requests have additional requirements) and (2) file a PER petition with its tax return for the first year it claims the IRC Section 45Z credit for that fuel. If the PER petition were complete and timely, the IRS would deem it accepted, and the emissions value would be treated as the PER. The proposed regulations would also provide "relation back" rules so that an emissions rate established through either a table or PER can be applied to fuel produced as of January 1, 2025, for that type and category. Special coordination rules would apply when the eligible fuel is a category of hydrogen, requiring taxpayers first to obtain an emissions value under the IRC Section 45V PER process and then extend that analysis to a full "well-to-wheel" emissions value for IRC Section 45Z purposes. To qualify for the IRC Section 45Z credit, the taxpayer would be required to register as a producer of clean fuel at the time of production. The registration rules are listed in Prop. Treas. Reg. Section 1.4101-1. The proposed regulations include anti-stacking rules governing the interaction between different credits if a facility produces transportation fuel under IRC Section 45Z and engages in other credit-eligible activity. The proposed regulations also include a general anti-abuse rule that denies the credit where the primary purpose of production and sale is to obtain IRC Section 45Z benefits in a wasteful or circular manner. The IRS reserves broad authority to recharacterize transactions and disregard steps in those cases. The OBBBA amendments, as implemented in the proposed regulations, would constrain the use of foreign feedstocks and foreign-influenced entities. For fuel produced after December 31, 2025, transportation fuel would have to be derived exclusively from feedstock produced or grown in the United States, Mexico or Canada. In addition, the proposed regulations reflect statutory rules barring IRC Section 45Z credits for taxpayers that are specified foreign entities (for tax years beginning after July 4, 2025) or for foreign-influenced entities (with limited exceptions), as defined in IRC Section 7701(a)(51) (for tax years beginning after July 4, 2027). The proposed regulations would require documentation as a condition of claiming the IRC Section 45Z credit. Taxpayers would be required to maintain records that show they complied with all the requirements.
The proposed regulations would require taxpayers to obtain certification from an unrelated person of emissions rates for SAF transportation fuel for each tax year that the credit is being claimed. The certification would have to be included with the taxpayer's Form 7218 for each qualified facility. The proposed regulations outline certifiers eligible to give this certification and what it must include. The proposed regulations would also require a production statement showing how the certifier calculated the amounts included in the certification. Taxpayers must claim the IRC Section 45Z credit on a completed Form 7218, Clean Fuel Production Credit, included with their timely-filed (including extensions) federal income tax return or federal information return for the tax year for which they claim the credit. A taxpayer would need to complete a separate Form 7218 for each qualified facility at which it produces transportation fuel for which it is claiming a credit. Certain producers of eligible clean fuel may have further registration requirements under IRC Section 4101 (the federal excise tax on taxable fuel imposed by IRC Sections 4041(a)(1) and 4081). Registration is only required for persons that have been issued a Letter of Registration under activity letter CN (for non-SAF transportation fuel producers) and CA (for SAF producers). The proposed regulations are modeled after the longstanding registration rules in Treas. Reg. Section 48.4101-1 of the Manufacturers and Retailers Excise Tax Regulations, which apply for purposes of fuel excise taxes and credits. Disregarded entities and QSubs would be treated as separate corporations for registration purposes if they have (or were required to have) their own EIN, reflecting the facility-by-facility nature of IRC Section 45Z and the need for the IRS to track production at the entity level. At the same time, the regulations would clarify that the owner, rather than the disregarded entity or QSub, is the proper claimant of the IRC Section 45Z credit. The proposed regulations would amend the IRC Section 6417 and 6418 regulations to clarify that facility ownership is not required for claiming the IRC Section 45Z credit as long as the taxpayer conducts the activities giving rise to the credit. If a taxpayer's disregarded entity held the credit property, only the taxpayer could make the IRC Section 6417 or 6418 election and complete the required pre-filing registration. The 2025—2026 transition period is the most significant for producers. The repeal of the SAF premium, introduction of the domestic-feedstock requirement and GHG methodology shift all occurred simultaneously on January 1, 2026. For producers (especially for SAF and/or used cooking oil (UCO)-based producers), the timing requires early 2026 decision-making around feedstock contracts, capital expenditures and life cycle assessment methodologies. The proposed regulations' expansive interpretation of "qualified sale" would align more closely with commercial fuel distribution practices, particularly by expressly accommodating sales through intermediaries and intragroup attribution. As a result, producers should consider revisiting contractual arrangements and sales flows to confirm that the party claiming the IRC Section 45Z credit is properly deemed the seller under the attribution rules. Careful structuring and documentation of sales will be critical, as "qualified sale" status ultimately determines the amount available to be claimed or transferred. The distinction between "fuel produced" vs. "tax years beginning" also matters. Several restrictions (e.g., foreign-entity limitations) depend on the tax year, while others (credit rate changes, emissions rules, feedstock eligibility) apply based on date of production. The proposed regulations highlight this distinction repeatedly; as such, it will be important when modeling credit eligibility for facilities with irregular tax years or multijurisdictional operations.
Document ID: 2026-0411 | ||||||
