While you may be familiar with the potential income tax credit available to offset the purchase of an electric or hybrid automobile, few taxpayers are aware of the tax credits available to organizations for the purchase and utilization of equipment to capture and sequestrate carbon from the environment.
The Environmental Protection Agency's description of carbon capture and sequestration can be summarized into three main points:
In 2008, Congress passed Section 45Q to provide a tax credit based on the type and amount of CO2 sequestered. The law was very restrictive, focused purely on CO2, and designed for oil companies. A taxpayer had to sequester over 500,000 metric tons of CO2 to qualify for the tax credit.
However, the investment cost necessary to capture at least 500,000 metric tons of CO2 was so unattainable for most taxpayers that only a few large oil companies ever qualified for the credits.
Additionally, this benefit had a limit. The tax credit would be eliminated once the EPA certified that 75,000,000 metric tons of CO2 had been sequestered.
In 2018, Congress amended Section 45Q with the goal of increasing industry investment in carbon capture technologies. The taxpayer-friendly changes included:
Taxpayers in the following industries should consider the economic implications of investing in carbon capture and sequestration technologies:
The credit is calculated as follows:
Carbon capture equipment must be placed in service after February 9, 2018, to qualify for the above rates. Equipment placed in service before that date is subject to lower rates. The taxpayer can claim the credit for 12 years after the date the carbon capture equipment is ready for service at an eligible facility.
An eligible facility begins construction before January 1, 2026, and emits carbon more than the following thresholds:
A robust discussion of the CCS tax credit is complicated and beyond the scope of this article. The regulations include, but are not limited to, the following:
Contact your P&N advisor to learn more about the CCS tax credit and to discuss tax strategies related to your carbon capture requirements.