Guidance issued by Treasury and the IRS clarifies how fuel used for corporate aircraft can qualify for the Section 40B sustainable aviation fuel credit or the Section 45Z clean fuel production credit.
The Section 40B credit applies to sustainable aviation fuel that is sold or used after 2022 and before 2025. Section 45Z replaces Section 40B for clean transportation fuel, including sustainable aviation fuel, that is produced after 2024 and sold before 2028. Treasury and the IRS have issued several notices providing guidance on Sections 40B and 45Z. The Section 40B notices address eligibility for the credits, fuel standards, claim procedures, and certification and registration requirements, and provide definitions and several safe harbors for determining emissions reduction. A notice providing initial guidance on Section 45Z defines certain critical terms and provides registration procedures and advises taxpayers to submit a completed registration application by July 15, 2024, to receive approval in time to claim the credit for production in 2025.
Owners of corporate aircraft should determine how the IRS guidance affects their eligibility to benefit from these credits. Taxpayers that intend to claim the Section 45Z credit for production beginning on January 1, 2025, should take steps now to submit a registration application as soon as possible.
Section 40B provides a credit of $1.25 per gallon of sustainable aviation fuel included in a qualified fuel mixture produced by a taxpayer and used or sold after 2022 and before 2025. Sustainable aviation fuel must reduce lifecycle greenhouse gas emissions by at least 50%. A supplemental credit of one cent applies for each percentage that the reduction exceeds 50%. A taxpayer may claim the Section 40B credit as a credit against Section 4081 excise tax. To the extent that the credit against excise tax exceeds the taxpayer’s excise tax liability, the taxpayer may claim a direct payment or a refundable income tax credit. Notice 2023-6 provided initial guidance on standards for sustainable aviation fuel, computing the supplemental credit, credit claim procedures, and certification and registration requirements. See the PwC Insight IRS issues guidance on sustainable aviation fuel credit, requests comments. Notice 2024-6 provided a safe harbor allowing taxpayers to compute a fuel’s emission reduction percentage under EPA’s Renewable Fuel Standard. The notice advised that taxpayers could not use the Greenhouse gases, Regulated Emissions, and Energy use in Transportation (GREET) model developed by the Argonne National Laboratory and similar models, which were not compliant with required standards, but that an acceptable GREET model was being developed. See the PwC Insight IRS supplements guidance on sustainable aviation fuel tax credit. Most recently, Notice 2024-37 provided additional safe harbors for computing and certifying a fuel’s emissions reduction percentage, including a GREET model developed by the Department of Energy and certification from a California Air Resources Board Low Carbon Fuel Standard program accredited verifier. A second safe harbor reduces a fuel’s emissions reduction percentage when a taxpayer participates in the Department of Agriculture Climate Smart Agriculture Pilot Program in connection with using the DOE GREET model. See the PwC Insight IRS notice provides additional safe harbors for sustainable aviation fuel tax credit.
Section 45Z applies to clean transportation fuel that an eligible taxpayer (1) produces at a qualified facility and (2) sells to an unrelated person either to (a) use in the production of a fuel mixture, (b) use in a trade or business, or (c) sell at retail and place in the buyer’s fuel tank. The Section 45Z credit amount generally is 20 cents per gallon of clean transportation fuel and 35 cents per gallon for sustainable aviation fuel. These amounts are multiplied by five if the taxpayer meets prevailing wage and apprenticeship requirements or exceptions in constructing, repairing, or altering the facility. The credit is equal to the product of the applicable amount per gallon and the emissions factor of such fuel. The emissions factor is equal to the quotient of [50 kilograms of CO2e per one million British thermal units minus the fuel’s emissions rate] divided by [50 kilograms of CO2e per one million British thermal units]. Treasury is required to annually publish a table providing emissions rates for similar types and categories of transportation fuels. To claim the Section 45Z credit, a taxpayer must register under Section 4101 as a producer of clean fuel and, for sustainable aviation fuel, provide certification from an unrelated party of compliance with certain requirements. Notice 2024-49 provides the procedures for registering with the IRS as a producer of clean fuel and advises that a taxpayer must have a signed registration letter from the IRS before it may claim the Section 45Z credit. Accordingly, taxpayers that intend to claim the Section 45Z credit for production beginning on January 1, 2025, must have a signed registration letter from the IRS by that date. The IRS states in Notice 2024-49 that it intends to process completed registration applications received by July 15, 2024, in time to allow an eligible taxpayer to receive its registration letter by January 1, 2025, and cautions that a taxpayer that applies for registration after that date is less likely to receive its letter by January 1, 2025. Notice 2024-49 also provides preliminary substantive guidance by defining critical terms. The notice advises that the IRS and Treasury intend to provide additional Section 45Z guidance on emissions rates, fuel feedstocks, unrelated-party certification, and other aspects of the credit at a later time.