The Treasury Department and the IRS provided guidance for taxpayers Dec. 19 on how to claim the tax credit for carbon capture and sequestration, which was expanded and modified in the One Big Beautiful Bill Act.
Notice 2026-01 provides a safe harbor for businesses that wish to claim the credit for qualified carbon oxide captured and disposed of in secure geological storage occurring during calendar year 2025.
The Internal Revenue Code Section 45Q tax credit for carbon capture is available for carbon dioxide that’ss captured and then permanently sequestered, used in enhanced oil recovery, or put to another commercial use.
The credit amount had been higher for a sequestration use case compared to the others on the theory that sequestration is uneconomic without the tax incentive, according to law firm Latham & Watkins.
The OBBBA puts all use cases on equal footing so that both enhanced oil recovery and commercial utilization can qualify for a credit of up to $85 per metric ton (or more in the case of direct air capture).
Similar to the 45Z tax credit for clean fuels, projects will become subject to the ownership-related “foreign entity of concern” restrictions, but not material assistance restrictions. The credit is disallowed for projects that are owned or “influenced” by certain foreign countries, such as China.
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Notice 2026-01 provides a safe harbor for determining eligibility for and the amount of the credit for the capture of qualified carbon oxide that is disposed of in secure geological storage in the manner described in Section 45Q during calendar year 2025.
Under the safe harbor, if the Environmental Protection Agency doesn’t launch its electronic greenhouse gas reporting tool for reporting year 2025 by June 10, 2026, taxpayers will be allowed to prepare and submit an annual report to a qualified independent engineer or geologist.
The engineer or geologist must then certify that the capture and disposal described in the annual report is in compliance with relevant greenhouse gas reporting program requirements as in effect on Dec. 31, 2025, in the manner specified in Notice 2026-01, the IRS said.
This notice also informs taxpayers that the Treasury Department and IRS intend to issue regulations under Section 45Q, including with respect to measurement and verification standards, and that taxpayers may rely on this guidance until the regulations are issued.
Last Friday’s guidance primarily affects businesses planning to claim credits for qualified carbon oxide captured in secure geological storage occurring during calendar year 2025, according to the IRS.
Photo credit: gregobagel/iStock
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