With $369 billion allocated for climate and energy policies, the Inflation Reduction Act of 2022 marks a historic commitment to the U.S. biofuels sector. It includes new tax credits, funding for biofuel infrastructure and expanded tax credits for carbon capture and storage.
“The Inflation Reduction Act is a huge legislative milestone for the ethanol industry,” says Donna Funk, Pinion biofuels advisor. “Every producer and their supplier need to understand how they can take advantage of these opportunities.”
Key tax provisions impacting the biofuels industry:
- 45Q Carbon Capture and Sequestration
- 45Z Clean Fuel Production Tax Credit
- 45U Zero-Emission Nuclear Power Production
- 45Y Clean Electricity Production Tax Credit
- 48E Clean Electricity Investment Tax Credit
- 48C Advanced Energy Project Credit
- 45X Advanced Manufacturing Production Credit
- Sustainable Aviation Fuel
- Investment Tax Credit
- Prevailing Wage and Apprenticeship Requirements
So, what does this mean for you? Pinion’s biofuel advisors break down three ways producers can take advantage of these potential benefits.
3 tips to maximize IRA tax benefits
Take advantage of 45Z or 45Q tax credits but not both.
Many ethanol plants are doing projects that would fit the 45Z clean fuel production credit and the 45Q carbon capture credit. But as things stands right now, producers are not allowed to claim them both in the same tax year.
The current regulations assign both the 45Q and 45Z to the carbon molecule – not the taxpayer. So, if you’re collaborating with another entity on a project that involves both clean fuel production (45Z) and carbon capture (45Q), be sure to communicate effectively about who is claiming which credit.
Capitalize on the Clean Fuel Credit but focus on ROI.
The Clean Fuel Production Credit (Section 45Z) provides a tax credit for clean transportation fuels, including ethanol and corn-based fuels. Producers can earn a tax credit up to $1.00 per gallon of fuel, which is an outstanding opportunity worth pursuing.
However, the credit amount is tied directly to your CI Score, meaning not everyone will get the full $1.00. To get the full amount, plants will need to earn a 0 CI score and meet the wage and apprenticeship rule.
“Since it’s unclear how much you’ll be eligible to claim when the dust settles, be sure to only make capital investments you know will pay off without the credit,” advises Funk. “Capitalize on the tax credit where you can but focus on ROI first.”
Be aware of tax credit transfer limits.
Tax credit transfers allow entities the benefit of transferring their credit to a third-party for cash. This can be beneficial if you qualify for the tax credit, but are not eligible for elective pay.
A couple things to keep in mind: Partnership (LLC) or Subchapter S Corporation structures can transfer credits to other eligible entities or individuals – but only once. Once they are transferred to another entity, they cannot be further passed on. On the other hand, individual members or shareholders cannot transfer credits allocated to them from the business to another entity or individual.
Contact a Pinion tax advisor to learn how the Inflation Reduction Act could impact your business and tax planning strategy.