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IRS offers safe harbor for carbon capture credits

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The Internal Revenue Service provided guidance and a safe harbor Wednesday for businesses that claim carbon capture credits in an effort to reduce emissions of carbon dioxide.

As part of the Bipartisan Budget Agreement that Congress enacted in February 2018, the Tax Code provided a tax credit of $20 per metric ton of qualified carbon oxide captured using carbon capture equipment. The guidance issued Wednesday by the IRS explains the definition of “beginning of construction” and offers a safe harbor for partnership allocations of the credit.

After the Bipartisan Budget Agreement was signed into law, the IRS issued Notice 2019-32, asking for comments from taxpayers about the changes to the carbon capture credit in the 2018 law. After considering the comments, the IRS issued Wednesday’s guidance to spell out the details with greater clarity, particularly about what the “beginning of construction” means.

In the new Notice 2020-12, the IRS offers guidance to help businesses determine when construction has started on a qualified facility or on carbon capture equipment that can be eligible for the carbon capture credit. The notice aims to give broad guidance on the subject so taxpayers won’t need to ask for private letter rulings on this topic.

In the new Revenue Procedure 2020-12, the IRS also created a safe harbor for the allocation rules for carbon capture partnerships similar to the safe harbors that have already been developed for partnerships receiving the wind energy production tax credit and the rehabilitation credit. The safe harbor aims to simplify the application of carbon capture credit rules to partnerships that can claim the credit.

The IRS expects to release further guidance in the near future on related issues, including secure geological storage and recapture of the credit for taxpayers claiming credits for carbon capture.

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