On February 3, 2026, the Department of the Treasury and the Internal Revenue Service (IRS) issued proposed regulations under Internal Revenue Code Section 45Z (the Proposed Regulations). The Proposed Regulations modify and supersede previous guidance issued by the IRS, including last year’s draft regulations, which were appended to IRS Notice 2025-10 (the Former Draft Regulations). The Proposed Regulations address significant issues posed by the Former Draft Regulations, providing welcome clarifications and guidance for clean fuel producers seeking to claim the 45Z Credit.
Section 45Z provides a tax credit (the 45Z Credit) for the production and sale of low-carbon transportation fuels. The transportation fuel must be produced in the US and sold to an unrelated person for a specific type of use. Any fuel produced after December 31, 2025, must be derived from a feedstock that is produced or grown in the US, Mexico, or Canada. The 45Z Credit for each year is calculated as:
(Applicable Amount)
x (Gallons produced at a qualified facility and sold during the tax year)
x (Emissions Factor)
= 45Z Credit
The emissions factor equals (50 mmBTU − emissions rate)/50 mmBTU, with the emissions rate expressed as kilograms (kg) of carbon dioxide equivalent (CO2e) per Million British Thermal Units (mmBTU). The applicable amount is a dollar value for gallon, which depends on the year and whether the fuel is SAF or non-SAF transportation fuel.
|
|
Base rate |
PWA rate (pre-2026) |
PWA rate (post-2025) |
|
Non-SAF transportation fuel |
$0.20 |
$1.00 |
$1.00 |
|
SAF |
$0.35 |
$1.75 |
$1.00 |
The 45Z Credit can only be generated with respect to fuel produced at a qualified facility. The Proposed Regulations provide that a “facility” means a single production line that produces a transportation fuel. A single production line includes all components that function interdependently (meaning the use of each component is dependent upon the use of each other component) to produce a transportation fuel through a process that results in the lifecycle greenhouse gas (GHG) emissions rate used to determine the 45Z credit. Geographic proximity is not a prerequisite to a finding of interdependence. Carbon capture equipment may be considered part of a facility if such equipment contributes to the lifecycle GHG emissions rate of the transportation fuel for which the 45Z Credit is determined.
Generation of a credit under Section 45Z requires a qualified sale, which requires a sale of transportation fuel to an unrelated person if either (i) the fuel is sold for use in the production of a fuel mixture by such person; (ii) the fuel is sold for use in a trade or business by such person; or (iii) such person sells such fuel at retail to another person and places such fuel in the fuel tank of such other person.
The Proposed Regulations adopt a sensible approach to the related party sale rule that is consistent with long-standing production tax credit principles. A sale will be treated as made to an unrelated party when there is an intermediate sale to a related person followed by a sale to an unrelated party, whether the first sale is made within a consolidated group or not.
The Section 45Z statute treats sales to an unrelated person for use in such person’s trade or business as qualified sales. The Former Draft Regulations provided that the term “sold for use in a trade or business” would mean “sold for use as a fuel in a trade or business.” The introduction of this requirement caused significant uncertainty for producers of clean fuels who sell their fuel through wholesalers or marketers. The Proposed Regulations acknowledge this business practice, and accordingly do not incorporate the requirement that a fuel be sold for use “as a fuel.” Further, the Proposed Regulations clarify that the term “sold for use in a trade or business” includes the sale of fuel to an unrelated person that subsequently resells the fuel in its trade or business.
The Proposed Regulations make clear that it is acceptable for the production of a transportation fuel to have occurred in an earlier tax year than the year in which the qualified sale occurs, so that fuel produced at the end of one tax year can be sold at the beginning of another tax year. The 45Z Credit is then generated in the year of the qualifying sale. However, a qualified sale cannot take place before the fuel is produced; if a taxpayer enters into a forward sale, the qualified sale is deemed to occur at the later date, upon actual fuel production. Additionally, if a taxpayer sells to a related party intermediary that later sells to an unrelated party, the qualified sale occurs at the time of the sale to the unrelated party.
The emissions rate for a transportation fuel is the fuel’s lifecycle GHG emissions rate, which may be based on a published rate table or, if none is available, a provisional emissions rate (PER). The Proposed Regulations indicate that the applicable emissions rate table for a taxpayer is the emissions rate table that is in effect on the first day of the taxpayer’s taxable year of production.
If an emissions rate table establishes an emissions rate (because it includes both the type and category of fuel), the taxpayer must use the corresponding allowed methodologies included in that table to determine the emissions rate for all of the fuel produced during the tax year.
For non-SAF transportation fuel, emissions rates must be determined using the 45ZCF-GREET model, which was developed by the Argonne National Laboratory and published by the Department of Energy (DOE) specifically for use in determining lifecycle GHG emissions for purposes of Section 45Z. For SAF transportation fuel, taxpayers may choose to use the 45ZCF-GREET model, the CORSIA Default Life Cycle Emissions Values, or the CORSIA Actual methodology.
The Proposed Regulations clarify that while taxpayers must use the first version of an allowed methodology that is publicly available in the year of production that includes the type and category of the applicable fuel, if the methodology is updated during the tax year, then the taxpayer may choose to use either the original or updated methodology to determine the emissions rate.
The Proposed Regulations incorporate specific emissions accounting rules adopted from last year’s regulations under Section 45V (the 45V Regulations) for emissions associated with hydrogen (as a production input), natural gas alternatives (as a production input or as the transportation fuel produced), electricity, and carbon capture and sequestration. These rules would allow taxpayers to make use of energy attribute certificates (EACs) in order to take into account the low emissions value associated with certain production inputs, such as power and alternative natural gas, provided that the EACs meet certain criteria “similar” to those established under the 45V Regulations.
The 45V Regulations adopted a stringent “three pillars” approach that limits the ability of EACs to be used for a particular project unless the EACs meet requirements around “deliverability,” “incrementality,” and “matching.” A more flexible approach for natural gas alternatives EACs may emerge as the Proposed Regulations contemplate that an updated 45ZCF-GREET model may differ from the 45V Regulations with respect to technical and modeling issues. For more on the 45V Regulations, see this Latham Client Alert.
If the emissions rate table does not establish an emissions rate for a transportation fuel, a taxpayer producing such fuel may file a petition with the Treasury Secretary for determination of the emissions rate with respect to such fuel, known as a PER. The Proposed Regulations require a taxpayer to submit an emissions value request (EVR) to the DOE and obtain a calculated emissions value letter (CEVL) from the DOE, prior to filing a PER petition.
As noted above, the 45Z Credit is available to the producer of fuel at a qualified facility. Ownership of the qualified facility is not required to establish eligibility for the 45Z Credit. If multiple taxpayers produce fuel at a facility they do not all own, production is allocated by interests in gross sales under the relevant contracts.
A transportation fuel produced after December 31, 2025, must be exclusively derived from feedstock produced or grown in the US, Mexico, or Canada to be eligible for the 45Z Credit. The Proposed Regulations request taxpayer comment on substantiation and recordkeeping requirements for feedstocks imported from Canada and Mexico and industry practices to track the source of feedstock.
Additionally, certain Foreign Entity of Concern (FEOC) limitations restrict eligibility for the 45Z Credit, denying the 45Z Credit with respect to specified foreign entities for taxable years beginning after July 4, 2025, and for foreign-influenced entities (subject to specified exceptions) for taxable years beginning after July 4, 2027. For more on the FEOC limitations, see this Latham Client Alert.
The Proposed Regulations provide that if a transportation fuel has a primary feedstock that itself qualifies as a transportation fuel eligible for the 45Z Credit, then the transportation fuel does not qualify for the 45Z Credit. This rule is intended to prevent double crediting by ensuring that only the first transportation fuel in a production chain qualifies for the 45Z Credit. However, the Proposed Regulations do allow a fuel to qualify for the 45Z Credit if its production process uses a transportation fuel solely as a process fuel or other non-primary-feedstock input.
The Proposed Regulations also provide that if the credit under Sections 45Q or 45V or pursuant to an election under Section 48(a)(15) (each, an “anti‑stacking credit”) is allowed with respect to a facility for a particular taxable year, then that facility is not a qualified facility for Section 45Z purposes in such year for any taxpayer. The determination is made annually and on a facility‑by‑facility basis. Taxpayers cannot split the same production between Section 45Z and an anti‑stacking credit for the same facility and year, but they may generally elect which credit to claim when both could otherwise apply.
Robust recordkeeping and substantiation is required to establish eligibility and credit amount, including proof of transportation fuel status, feedstocks (including origin), compliance with fuel specifications, emissions rate determination, facility qualification and in‑service date, qualified sale, and any certifications or PER materials. The Proposed Regulations facilitate compliance by providing safe harbors to substantiate (i) non‑SAF emissions rates via certification and (ii) a qualified sale by obtaining a purchaser certificate prior to the sale. A model purchaser certificate is provided in the Proposed Regulations.
The Proposed Regulations provide welcome clarifications and guidance for clean fuel producers seeking to claim the 45Z Credit, especially regarding the ability to sell through intermediaries, the application of the related party sale rule, the flexibility in emissions rate methodology selection, and the comprehensive registration and substantiation requirements. Given the complexity of these rules, taxpayers producing clean transportation fuels should carefully review the Proposed Regulations and consider providing comments before the rules are finalized. Written or electronic comments must be received by April 6, 2026.