REG–121244–23: Section 45Z Clean Fuel Production Credit

IRS Proposals Shift Fuel Incentives from Blending to Production

The IRS has issued proposed regulations for the Section 45Z Clean Fuel Production Credit, marking a definitive shift from incentivizing fuel blending to incentivizing domestic production of clean fuels. Section 45Z, established by the Inflation Reduction Act of 2022 and later amended by the One, Big, Beautiful Bill Act (OBBBA), provides a production tax credit (PTC) for low-emission transportation fuels. These fuels must be produced at a qualified facility within the U.S. and sold between January 1, 2025, and December 31, 2029 (as extended by the OBBBA).

The proposed regulations clarify critical aspects of the credit, including eligibility requirements, emissions rate calculations, and stringent certification and registration protocols under Section 4101, which governs excise tax registration. Producers must apply using Form 637 and receive a signed Letter of Registration from the IRS before production begins. The stakes are high:

• Credit Applicability: The credit applies to fuel produced after December 31, 2024.
• Registration: Strict registration requirements are now in place, impacting the timing of credit eligibility.
• Fuel Types: The regulations create a bifurcated system, with separate rules for Sustainable Aviation Fuel (SAF) and non-SAF.
• Energy Source: Electricity is explicitly excluded as a qualifying fuel under Section 45Z.

These rules implement changes resulting from both the Inflation Reduction Act and the OBBBA, signaling a refined approach to clean fuel incentives.

Defining 'Producer' and 'Facility': Blenders Need Not Apply

As discussed in the previous section, these rules implement changes resulting from both the Inflation Reduction Act and the OBBBA, signaling a refined approach to clean fuel incentives.

Now, let's turn to the core definitions that determine who is eligible for the Section 45Z credit. The IRS is explicitly defining "producer" and "production" in ways that shift incentives away from simple blending and towards more substantial fuel production processes.

• Producer Defined: For the purposes of Section 45Z, the proposed regulations at 1.45Z-1(b)(26)(i) define a "producer" as the person that engages in the production of a transportation fuel. The IRS clarifies that where multiple parties are involved, the "producer" is the most active participant in the production process.

• Alternative Natural Gas (ANG) Exception: Specifically, 1.45Z-1(b)(26)(ii) clarifies that the "producer" of alternative natural gas (including renewable natural gas or RNG) is the processor who removes water, carbon dioxide, and other impurities to make it interchangeable with fossil natural gas. This definition excludes anyone who merely compresses natural gas that's already interchangeable with fossil natural gas.

• Production Defined: Proposed regulations at 1.45Z-1(b)(27)(i) define "production" as all steps and processes used to make a transportation fuel. Production starts with processing the primary feedstock and ends with a transportation fuel ready for a qualified sale. This explicitly excludes minimal processing.

The Delta: From Blending to Production

This is a critical departure from prior regimes. The proposed rules explicitly state that "minimal processing" does not qualify as production under Section 45Z. This is articulated in regulation 1.45Z-1(b)(27)(ii). Minimal processing includes creating a fuel mixture or engaging in activities that do not result in a chemical transformation.

For example, the blending of ethanol and gasoline, or importing largely finished fuel for minimal processing in the U.S., does not constitute production. The IRS emphasizes that Section 45Z replaced incentives specifically designed to incentivize blending, such as the credits under Sections 40B and 6426(k), and the payment under Section 6427(e). Therefore, equating production with blending would be contrary to Congressional intent.

Facility Defined

The definition of "facility," as used in Section 45Z(d)(4), is crucial because transportation fuel must be produced at a "qualified facility." The proposed regulations, specifically 1.45Z–1(b)(18), would define a "facility" as a single production line. This includes equipment like carbon capture equipment directly integrated into the production process. However, it excludes post-production compression equipment or other equipment not directly involved in transforming the feedstock into a finished fuel. This definition impacts who is eligible for the credit, especially in the RNG sector.

Electricity Excluded; Gallon Equivalents Defined

As explained in the previous section, to qualify for the Section 45Z credit, fuel must be produced at a "qualified facility." The proposed regulations, specifically 1.45Z–1(b)(18), would define a "facility" as a single production line. This includes equipment like carbon capture equipment directly integrated into the production process. However, it excludes post-production compression equipment or other equipment not directly involved in transforming the feedstock into a finished fuel. This definition impacts who is eligible for the credit, especially in the RNG sector.

Continuing on definitional matters, the IRS has addressed fuels themselves. The proposed regulations explicitly define "fuel" under Section 45Z to exclude electricity. Specifically, proposed regulation 1.45Z–1(b)(19) defines "fuel" as any liquid or gaseous substance that can be consumed to supply heat or power. This exclusion prevents overlap with Section 45Y, the Clean Electricity Production Credit, which incentivizes electricity production from renewable sources. The IRS aims to prevent taxpayers from claiming multiple credits for the same energy source.

Because Section 45Z(a)(1)(A) bases the credit on a "gallon (or gallon equivalent)" of transportation fuel, the IRS has clarified how to measure non-liquid fuels. For liquid fuels, the measurement is straightforward: gallons. But for non-liquid fuels like renewable natural gas (RNG) or hydrogen, the proposed regulations, specifically 1.45Z–1(b)(20)(i), define a "gallon equivalent" as the amount of such fuel that has the energy equivalent of a gallon of gasoline. This means the amount of non-liquid fuel containing 116,090 British thermal units (BTUs), based on the gasoline lower heating value (LHV).

The choice of gasoline as the baseline matters significantly. The IRS selected gasoline because it is the most common transportation fuel in the United States, and Section 45Z is designed to incentivize domestic production of transportation fuels that may serve as alternatives to existing fossil fuels. This approach aligns with Section 6426(d)(3), which provided an excise tax credit for many of the same types of fuels eligible for the Section 45Z credit, before Section 45Z replaced Section 6426(d).

Furthermore, the IRS specifies using the lower heating value (LHV) of gasoline rather than the higher heating value (HHV). The LHV represents the useful energy provided by a transportation fuel more accurately. The proposed regulations, 1.45Z–1(b)(20)(iii), explain that the gallon equivalent for a non-liquid fuel is calculated by dividing the lower heating value of that fuel (measured in BTU) by the lower heating value of a gallon of gasoline (116,090 BTU), rounded to five decimal places. This technical choice directly affects the credit calculation, potentially impacting the amount of credit received for fuels like hydrogen or compressed natural gas, depending on their lower heating values.

The 'Qualified Sale' Fix: Accommodating Intermediaries

As previously discussed, calculating emissions accurately is crucial for maximizing the Section 45Z credit. The proposed regulations, 1.45Z–1(b)(20)(iii), explain that the gallon equivalent for a non-liquid fuel is calculated by dividing the lower heating value of that fuel (measured in BTU) by the lower heating value of a gallon of gasoline (116,090 BTU), rounded to five decimal places. This technical choice directly affects the credit calculation, potentially impacting the amount of credit received for fuels like hydrogen or compressed natural gas, depending on their lower heating values.

The proposed regulations also address the definition of a "qualified sale" under Section 45Z(a)(4). Section 45Z, established by the Inflation Reduction Act of 2022 and later modified by the One, Big, Beautiful Bill Act (OBBBA), provides a credit for clean fuel production. A “qualified sale” is defined in proposed § 1.45Z–1(b)(29) as a sale of transportation fuel as described in Section 45Z(a)(4). The proposed regulations aim to clarify the term ‘‘sold for use in a trade or business’’ as it appears in Section 45Z(a)(4)(B).

Stakeholders voiced concerns regarding the initial interpretation of "sold for use in a trade or business," particularly its potential impact on sales to intermediaries like wholesalers and dealers. The original draft regulatory text in Notice 2025–10 defined "sold for use in a trade or business" as "sold for use as a fuel in a trade or business within the meaning of Section 162 of the Code," which allows deductions for ordinary business expenses. This definition excluded sales for blending or further processing.

The concern was that strictly interpreting "use in a trade or business" could inadvertently disqualify sales to these intermediaries, as they don't directly use the fuel as fuel in their own business, but rather resell it. This would have narrowed the scope of eligible sales for the Section 45Z credit, contrary to the intent of the legislation.

To address these concerns, the proposed regulations remove the "use as a fuel" language. Instead, they explicitly clarify that the term "sold for use in a trade or business" includes the sale of fuel to an unrelated person who subsequently resells the fuel in their trade or business. This means a producer selling to a wholesaler who then sells to a gas station does qualify as a qualified sale, assuming all other requirements are met. However, the exclusion for sales for blending remains. The IRS reasoned that blending sales already qualify under Section 45Z(a)(4)(A) as a sale for use in the production of a fuel mixture, making its inclusion under Section 45Z(a)(4)(B) superfluous. The regulations also exclude sales where a reseller sells fuel at retail and places it directly into a customer's vehicle tank, as these are considered qualified sales under Section 45Z(a)(4)(C).

Furthermore, the proposed regulations incorporate a broader "look-through" rule for sales made through related persons. This was another key request from stakeholders, who noted that many fuel producers aren't structured as corporations and thus couldn't utilize the sale attribution rule under Section 45Z(f)(3) which applies to consolidated groups. Proposed § 1.45Z–1(b)(29)(iv) stipulates that a taxpayer not in a consolidated group is treated as selling fuel to an unrelated person if a related person sells the fuel to that unrelated person. This look-through rule applies to all sales by related persons, except those specifically addressed in Section 45Z(f)(3) and proposed § 1.45Z–1(b)(29)(iii). This addresses the concern that producers selling through related intermediaries (wholesalers, dealers) would be penalized. This change was enabled by the OBBBA, which granted the Secretary additional rulemaking authority under section 45Z(f)(3) to prescribe related-person sale attribution rules.

Calculating Emissions: GREET vs. CORSIA and the PER Process

As clarified in the previous section, the determination of who is a "qualified producer" hinges on proper registration under Section 4101 and the sale of fuel to an unrelated person. However, the amount of the Section 45Z credit is tied directly to the fuel's emissions rate. Section 45Z(b)(1)(A) defines the "emissions factor" and Section 45Z(b)(2) provides rounding rules. The proposed regulations under § 1.45Z–2(c)(2) incorporate these rules.

To calculate the credit, the emissions factor must first be determined, which is calculated using the fuel's "emissions rate." According to proposed § 1.45Z–2(d)(1), this rate is determined in one of two ways: (1) by reference to the applicable emissions rate table published annually by the Secretary, or (2) via a Provisional Emissions Rate (PER) determined by the Secretary if a rate for the specific fuel is not listed in the table.

The Treasury Department and the IRS will publish an emissions rate table annually in the Internal Revenue Bulletin. Notice 2025–11 already provides the emissions rate table for calendar year 2025. Proposed § 1.45Z–2(e)(2)(i) clarifies that the applicable emissions rate table is the one in effect on the first day of the taxpayer’s taxable year of production. Crucially, the proposed regulations decline to allow taxpayers to "lock in" an emissions rate table based on the year construction began, as had been requested by some stakeholders. The IRS reasons that Section 45Z(b)(1)(B)(i) requires using the current table, and that the facility construction date is irrelevant to actual emissions.

If the emissions rate table establishes a rate for the taxpayer’s fuel type and category, proposed § 1.45Z–2(e)(2)(ii) dictates that the taxpayer must use the methodologies specified in the table to determine the emissions rate for all fuel produced during that taxable year. Proposed § 1.45Z–2(e)(2)(iii)(A) clarifies that a rate is “established” only if the table includes both the fuel type and category. The applicable emissions rate table will direct taxpayers to use specific methodologies, as detailed in proposed § 1.45Z–2(e)(3).

For non-Sustainable Aviation Fuel (SAF), the designated methodology is the 45ZCF–GREET model. For SAF, the taxpayer can choose between the CORSIA methodology or the GREET model, reflecting the language in Section 45Z(b)(1)(B)(ii) and (iii).

Proposed § 1.45Z–2(e)(3)(ii) addresses updates to these models. Taxpayers must use the first publicly available version of the methodology that includes the fuel type and category in the taxable year of production. However, if an updated version is released later in the year, the taxpayer may choose to use the updated version. This provides flexibility, allowing taxpayers to benefit from favorable updates without being penalized by unfavorable ones.

The proposed regulations also incorporate changes enacted by the One, Big, Beautiful Bill Act (OBBBA). Section 70521(b) and (c)(1) of the OBBBA, now reflected in proposed § 1.45Z–2(d)(2), specifies that emissions rates cannot be less than zero unless the fuel is derived from animal manure. However, Section 45Z(b)(1)(B)(v), also added by the OBBBA, allows the Secretary to provide an emissions rate less than zero for fuel derived from animal manure. The proposed rule clarifies that this limitation on negative emissions rates also applies to transportation fuel used as a production input. Furthermore, Section 45Z(b)(1)(B)(iv), added by the OBBBA, excludes emissions attributed to indirect land use changes (ILUC) for fuel produced after December 31, 2025, simplifying calculations for many domestic producers. Note, these rates relate back to Jan 1, 2025.

The Registration Trap: Timing is Everything

While the proposed rules aim to clarify and streamline the process for claiming the Section 45Z credit, one aspect demands particular attention: the registration requirements under Section 4101. Unlike some other tax credit regimes, strict adherence to registration timing is paramount. The regulations propose that a taxpayer must be registered under Section 4101, which covers excise tax on fuels, at the time of production to be eligible for the Section 45Z credit. This is a stricter standard than that applied to other credits, like the Section 45V credit for clean hydrogen production or the Section 45Q credit for carbon sequestration.

Proposed § 1.4101–1(a)(2) reinforces this by stating that a person is only considered registered under Section 4101 if the IRS has issued a Letter of Registration with the appropriate activity letter, and the registration hasn't been revoked or suspended. This echoes similar requirements found in § 48.4101–1(a)(2), which governs fuel excise tax.

Separate Entity Treatment: The proposed regulations also address the treatment of disregarded entities and Qualified Subchapter S Subsidiaries (QSubs). Proposed § 1.4101–1(a)(3)(ii) clarifies that the disregarded entity rules under § 301.7701–2(c)(2)(i) do not apply for Section 4101 registration. This means that a disregarded entity that has, or is required to have, a separate Employer Identification Number (EIN) is treated as a corporation for registration purposes. Consequently, if a disregarded entity or QSub produces transportation fuel, it must be registered as a producer of transportation fuel at the time of production for its owner to claim the Section 45Z credit.

This separate entity treatment aligns with other tax provisions, including Sections 45V and 45Q, where anti-stacking provisions apply, and the elective payment and credit transfer election provisions of Sections 6417 and 6418, which are generally made on a per-facility basis. It is important to note that while Section 6417, which allows certain tax-exempt entities to treat certain credits as direct payments, and Section 6418, which allows the transfer of certain tax credits to unrelated parties, also involve registration, this pre-filing registration is separate and distinct from the Section 4101 registration required for claiming the Section 45Z credit itself.

Safe Harbor for Reregistration: Recognizing that ownership changes can trigger reregistration requirements under Section 4101(a)(5), the proposed regulations offer a safe harbor in Proposed § 1.4101–1(a)(4)(iii). If a person has been registered by the IRS but must reregister due to a change in ownership or EIN, approval for reregistration allows them to claim the Section 45Z credit as of the date the IRS received the application for reregistration. This applies even if the IRS hadn't yet formally approved the reregistration at the time of fuel production.

Anti-Stacking Rules and Foreign Feedstock Limits

The proposed regulations address situations where multiple tax credits could potentially apply to the same facility, preventing the "stacking" of certain credits. Specifically, if a facility receives credit under Section 45V, which provides a credit for clean hydrogen production, Section 45Q, which incentivizes carbon capture and sequestration, or Section 48(a)(15), which pertains to energy credits, it cannot also claim the Section 45Z credit for clean fuel production. This anti-stacking provision, outlined in Proposed § 1.45Z–4(b), aims to prevent the double-dipping of tax benefits for the same activity. The determination of whether a facility qualifies under these anti-stacking rules is made annually, meaning a facility might be eligible for the Section 45Z credit in one taxable year but not in another. An exception exists for irrevocable elections under Section 48, where the initial election determines the credit eligibility for the facility's lifetime.

In addition to anti-stacking rules, the proposed regulations address the origin of feedstocks used in clean fuel production. Consistent with Section 45Z(f)(1)(A)(iii), as amended by the One, Big, Beautiful Bill Act (OBBBA), fuel produced after December 31, 2025, must be derived exclusively from feedstock grown or produced in the United States, Mexico, or Canada. This North American sourcing requirement aims to incentivize domestic and regional agricultural and industrial activity. Furthermore, Section 45Z(f)(8), also added by the OBBBA, restricts the Section 45Z credit for "specified foreign entities" and "foreign-influenced entities," as defined in Section 7701(a)(51)(B) and (D). Specifically, no Section 45Z credit is allowed for taxable years beginning after July 4, 2025, if the taxpayer is a specified foreign entity. For taxable years beginning after July 4, 2027, the credit is also disallowed if the taxpayer is a foreign-influenced entity (unless that entity made certain payments to a specified foreign entity). This provision targets entities with significant foreign ownership or influence, ensuring that the credit primarily benefits domestic actors.

Industry Impact: Winners, Losers, and Next Steps

As the preceding sections detail, these proposed regulations represent a significant shift in how clean fuel incentives operate under Section 45Z, added to the tax code by the Inflation Reduction Act (IRA) and subsequently amended by the One Big Beautiful Bill Act (OBBBA). This provision provides an income tax credit for clean transportation fuel produced domestically. The core change involves moving away from incentives focused on fuel blending and towards supporting domestic production. Here's a breakdown of the likely impacts:

• Winners:

  • Domestic Producers: The emphasis on domestic production, coupled with the restriction on foreign feedstocks (effective after 2025), directly benefits U.S.-based producers of clean transportation fuels. Section 45Z(f)(1)(A)(iii) mandates that fuel produced after 2025 must be derived from feedstock grown or produced in the United States, Mexico, or Canada.
  • Intermediaries: The "qualified sale" fix, detailed in proposed § 1.45Z-1(b)(29), addresses concerns about sales to wholesalers and dealers. By incorporating a broader "look-through" rule, producers can still qualify for the credit even when selling through related intermediaries.
  • Renewable Natural Gas (RNG) Producers: Using the gasoline gallon equivalent as a baseline, as defined in proposed § 1.45Z-1(b)(20), gives RNG producers an advantage in calculating their credit. The proposed regulations define "gallon equivalent" for non-liquid fuel as the amount of such fuel that has the energy equivalent of a gallon of gasoline.

• Losers:

  • Blenders: By explicitly excluding blending from the definition of "production" under proposed § 1.45Z-1(b)(27)(i), the IRS is signaling a move away from incentivizing mere mixing of fuels.
  • Electric Producers: The proposed regulations specifically exclude electricity from the definition of "transportation fuel." This limits the applicability of Section 45Z to liquid and gaseous fuels.
  • Importers of Non-North American Feedstock: After December 31, 2025, only feedstock grown or produced in the United States, Mexico, or Canada will qualify for the Section 45Z credit. This restriction, under Section 45Z(f)(1)(A)(iii), as added by the OBBBA, impacts importers of feedstocks from other regions.

Next Steps:

Stakeholders are encouraged to submit written or electronic comments on these proposed regulations. The deadline for comments and requests to speak at the public hearing is April 6, 2026. The public hearing is scheduled for May 28, 2026, at 10 a.m. Eastern Time (ET). If no outlines are received by April 6, 2026, the public hearing will be cancelled. Commenters can submit their input via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG–121244–23).