Proposed regulations provide rules on Section 45V credit eligibility, greenhouse gas emissions rate

In brief

What happened?

On December 26, the IRS and Treasury published proposed regulations on the Section 45V tax credit for production of qualified clean hydrogen. For the proposed applicability date, deadline for submission of comments, and public hearing date, see the PwC insight Proposed regulations issued on Section 45V clean hydrogen production tax credit. This insight discusses the rules relating to eligibility for the credit and determining the lifecycle greenhouse gas (GHG) emissions rate. A later insight will discuss the placed-in-service date for a modified or retrofitted facility, procedures for third-party verification of credit requirements, and the election to claim the Section 48 energy property investment credit instead of the Section 45V production credit.

Why is it relevant?

Section 45V was first enacted by the Inflation Reduction Act of 2022. These proposed regulations provide the first IRS and Treasury guidance interpreting these new provisions.

Action to consider:

To avoid confusion, taxpayers may note that, consistent with Section 45V, the proposed regulations require that GHG emissions are determined under the Argonne National Laboratory GREET model, in contrast with guidance that rejects this model (as inconsistent with the Clean Air Act) to determine a GHG reduction percentage for purposes of the Section 40B credit. See the PwC insight IRS supplements guidance on sustainable aviation fuel tax credit.

Proposed regulations

Allowance of credit

Definitions

The proposed regulations define a qualified clean hydrogen production facility as a single production line that includes all components of property that function interdependently to produce qualified clean hydrogen. Multi-purpose components that function interdependently with other components may be part of a facility. Equipment used to condition or transport hydrogen beyond the point of production and electricity production equipment used to power the hydrogen production process are not part of a facility.

Sale or use means the primary purpose of making hydrogen ready and available for sale or use and may include storage following production.

The taxpayer is the owner of a qualified clean hydrogen production facility at the time of production.

Tax year of credit

The proposed regulations provide that the credit is allowable in the tax year the hydrogen is produced, although sale and verification may occur in a later tax year. However, a taxpayer may not claim the credit until the production and sale or use requirements are verified. The credit claim must be made within the general period of limitations on credits and refunds.

Observation: The preamble to the proposed regulations explains that a taxpayer would be required to file an amended return or administrative adjustment to claim the Section 45V credit for the year the hydrogen is produced if verification occurs in a later tax year than production.

Anti-abuse rule

The proposed regulations disallow the credit if the production and sale or use of the hydrogen is wasteful, for example by producing qualified clean hydrogen that is vented, flared, or used to produce hydrogen.

Coordination with Section 45Q

The proposed regulations provide that a taxpayer may claim the Section 45V credit for a facility that includes retrofitted carbon capture equipment (1) for which the fair market value of used components is no more than 20% of the equipment's total value and (2) no new Section 45Q credit has been allowed to any taxpayer for that equipment.

Determination of GHG emissions rate

In general

The proposed regulations provide that a taxpayer determines the lifecycle GHG emissions rate of hydrogen (1) separately for each hydrogen production facility the taxpayer owns, (2) following the close of each tax year, and (3) to include all hydrogen production during the tax year. “Emissions through the point of production” includes emissions associated (1) with feedstock growth, gathering, extraction, processing, and delivery to a facility and (2) with the hydrogen production process, including electricity used by the facility and carbon dioxide capture and sequestration.

GREET model

The proposed regulations identify as the most recent GREET model the latest version of 45VH2-GREET developed by Argonne National Laboratory that is publicly available on the first day of a taxpayer’s tax year, as provided in instructions to Form 7210, Clean Hydrogen Production Credit. The taxpayer must calculate the GHG emissions rate by accurately entering information requested in 45VH2-GREET.

Observation: The preamble to the proposed regulations advises that taxpayers must comply with the GREET User Manual, which currently can be found at www.energy.gov/45vresources. The preamble describes certain content and uses of the User Manual, such as hydrogen production pathways included and examples of fixed assumptions.

Provisional emissions rate

The proposed regulations specify that a GHG emissions rate has not been established, and a taxpayer may request a provisional emissions rate (PER), if the most recent GREET model does not include either the feedstock used by the facility or the facility’s hydrogen production technology.

A taxpayer attaches a PER petition to the federal income tax return for the first tax year for which the taxpayer claims the Section 45V credit and a GHG emissions rate has not been determined. The petition must include (1) an emissions value obtained from the Department of Energy (DOE), in accordance with forthcoming DOE procedures, that provides an analytical assessment of the GHG emissions for the facility’s hydrogen production pathway, (2) a copy of the taxpayer’s request to DOE, and (3) any information the taxpayer provided to DOE in connection with the emissions value request process. The taxpayer must retain all raw data in connection with the request for at least six years after the extended due date for filing the return to which the petition is attached.

Observation: The preamble to the proposed regulations advises that the emissions value request process will open on April 1, 2024.

The IRS’s acceptance of the taxpayer’s return that includes the PER petition is an acceptance of the specified emissions value of the hydrogen and may be used in determining the credit.

Energy attribute certificates

A taxpayer that has determined a GHG emissions rate may treat a qualified hydrogen production facility’s use of electricity as being from a specific electricity generating facility rather than the regional electricity grid if the taxpayer acquires and retires qualifying energy attribute certificates (EACs) for each unit of electricity that the taxpayer claims from the specific generating facility.

An EAC is a tradeable contractual instrument that is issued through a qualified EAC registry or accounting system and represents the energy attributes of a specific unit of energy produced. A qualifying EAC must include certain specified information, be verified, and meet the technical requirements of incrementality (the generating facility that produced the electricity related to the EAC begins commercial operations and had an increase in rated nameplate capacity no more than 36 months before the relevant hydrogen production facility was placed in service), temporal matching (the electricity related to the EAC is generated in the same hour that the facility uses electricity to produce hydrogen), and deliverability (the EAC-generating facility is in the same region as the hydrogen production facility).

Observation: The preamble to the proposed regulations explains that qualifying EACs are included as part of the basis for assessing emissions because they are an established mechanism for substantiating the purchase of electricity from zero GHG-emitting sources, the use of EACs with certain attributes is an appropriate way to document electricity inputs to electrolytic hydrogen production, and these qualifying EACs may be a reasonable methodology for quantifying certain indirect emissions from electricity.