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July 02, 2021

IRS Issues Revenue Ruling Providing Guidance on Carbon Capture Equipment

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IRS ISSUES REVENUE RULING PROVIDING GUIDANCE ON CARBON CAPTURE EQUIPMENT

On July 1, 2021, the Internal Revenue Service (IRS) issued Revenue Ruling 2021-13 (the “Revenue Ruling”) to clarify that a taxpayer may qualify for the carbon capture credit under section 45Q of the Internal Revenue Code of 1986, as amended (the “Code”), without owning every component of carbon capture equipment within a single process train. However, the taxpayer must (i) remain responsible for physically or contractually ensuring the capture and disposal, injection or utilization of the carbon oxide (“CO2”) captured by the qualified facility and (ii) own at least one component of carbon capture equipment in the single process train of carbon capture equipment.[1]  The Revenue Ruling also discusses the determination of the “placed-in-service” date for the components of such equipment, and explains the interplay between the “placed-in-service” date for the single process train that applies for purposes of claiming the section 45Q credit versus the various “placed-in-service” dates that will apply to separate components of the process train for depreciation purposes. The Revenue Ruling further clarifies recent guidance published under final regulations (T.D. 9944) on January 15, 2021 (the “Final Regulations”), as discussed in our client publication titled “IRS Issues Final Regulations on Section 45Q Carbon Capture Credits.

Factual Background of the Revenue Ruling

The Revenue Ruling involves a plant (“Facility X”) that produces methanol from petroleum coke in a multistep industrial process involving an acid gas removal (AGR) unit. The AGR unit purifies raw synthesis gas (“syngas”) by removing unwanted components (including CO2) from the syngas stream before the purified syngas is converted to methanol. The CO2 separated from the syngas stream would be released into the atmosphere unless captured.

The AGR unit was placed in service on January 1, 2017, and, until 2021, it released all CO2 separated by the unit into the atmosphere. No taxpayer previously claimed a section 45Q credit with respect to the AGR unit. In 2021, a taxpayer (“Investor”) purchased and installed new components of carbon capture equipment alongside the AGR unit (the “new CCE components”). The AGR unit and the new CCE components, together, are considered a single process train that captures, processes and prepares the CO2 for transport. Investor did not own an interest in either the AGR unit or Facility X and sought guidance regarding eligibility for the section 45Q credit based on installation of the new CCE components alongside the AGR unit.

Guidance Under the Revenue Ruling

The Revenue Ruling provides guidance in four key areas:

  • Carbon Capture Equipment. Carbon capture equipment generally includes all components of property that are used to capture or process CO2 until it is transported for disposal, injection or utilization.[2]  Further, under the Final Regulations, 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 (i.e., a single process train). Because one of the functions of the AGR unit is to separate CO2 from a syngas stream, the Revenue Ruling concludes that Facility X’s AGR unit qualifies as “carbon capture equipment” within the meaning of section 1.45Q-2(c) of the Treasury regulations.
  • Equipment Ownership Requirements. The Final Regulations provide that, for each single process train of carbon capture equipment, only one taxpayer will be allowed to claim the credit: the taxpayer who either physically ensures the capture and disposal, injection or utilization of the qualified carbon oxide (or contracts with others to do the same). The Revenue Ruling clarifies that a taxpayer must own at least one component of carbon capture equipment of a single process train to claim the section 45Q credit – not all components. Thus, the Revenue Ruling concludes that Investor will qualify for the credit because Investor owns at least one component of the carbon capture equipment and is responsible for ensuring the capture and disposal of the CO2.
  • Original Placed-In-Service Date for Existing AGR Unit with New CCE Components. The original placed-in-service date of a single process train of carbon capture equipment that includes both an existing AGR unit and new CCE components is the date that the single process train has the ability to capture, process and prepare CO2 for transport for disposal, injection or utilization. Accordingly, the Revenue Ruling concludes that the placed-in-service date of the single process train of the new CCE components at Facility X is in 2021.
  • Placed-In-Service Date and Depreciation. The Revenue Ruling clarifies that the original placed-in-service date of a single process train for purposes of section 45Q has no effect on the placed-in-service date of an existing AGR unit or the new CCE components for purposes of claiming depreciation deductions under sections 167 and 168. Consequently, Facility X’s single process train results in at least two separate placed-in-service dates for depreciation purposes: (i) the existing AGR unit with a placed-in-service date in 2017, and (ii) the new CCE components with a placed-in-service date in 2021.

Footnotes

[1]  Unless otherwise indicated, all “section” references contained herein are to sections of the Code).

[2]  Section 1.45Q-2(c).

Authors and Contributors

Ryan Bray

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Larry Crouch

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Todd Lowther

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