The IRS released much-anticipated guidance for the carbon
sequestration tax credit under section 45Q of the Internal Revenue
Code on February 19, 2020. The guidance sets the foundation for
“tax equity” transactions involving the credit, which
until this point had too many open questions to be financeable.
Although questions remain, this guidance is a significant step
toward unlocking a tax equity market for carbon capture. The
guidance is in Revenue Procedure 2020-12, and is effective for
transactions entered into after March 8, 2020.
Background on Carbon Sequestration Credits and Tax Equity
Transactions
The carbon sequestration credit provides a dollar-for-dollar
reduction in federal income tax liability for each metric ton of
“qualified carbon oxide” captured at a qualifying plant
and then permanently buried, used as a tertiary injectant in an
enhanced oil or natural gas recovery project, or used in another
commercial process that would result in the permanent
