New IRS Revenue Decision Offers Funding Opportunities for Carbon Capture Equipment | Liskow & Lewis

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On July 1, 2021, the Internal Revenue Service released Revenue Ruling 2021-13, which provides guidance on three important issues related to the Section 45Q Carbon Monoxide Sequestration Income Tax Credit. of the Internal Revenue Code. Recall that article 45Q provides for a credit against the income tax of a taxpayer based on the amount of carbon monoxide (a) captured using carbon capture equipment, (b) put into service in an eligible installation and (c) disposed of, injected or used in a specified manner. For more information on carbon capture and section 45Q tax credits, see here, here and here.

Tax decision 2021-13 deals with the application of article 45Q to carbon dioxide captured using carbon capture equipment installed in a methanol plant that had carbon dioxide separation equipment. carbon. The plant produces methanol by first creating syngas from the input of natural gas to an acid gas removal unit which removes carbon dioxide, and then converts the purified syngas to methanol. The acid gas removal unit was installed by the owner of the methanol plant and commissioned on January 1, 2017, after which the separated carbon dioxide was released into the atmosphere. In 2021, an investor installed new carbon capture equipment at the plant to create a unique process train to capture, process and prepare for transport of carbon dioxide previously released into the atmosphere. The investor owned the new carbon capture equipment, but did not acquire any interest in the acid gas removal unit or the methanol plant.

Tax Decision 2021-13 concludes that: (1) the acid gas removal unit is carbon capture equipment as that term is defined in section 1.45Q-2 (c) of the Treasury regulations because that one of its functions is to separate carbon dioxide from a flow of natural gas; (2) the investor could claim the tax credit of section 45Q even if he only had the equipment he installed to capture carbon dioxide and not any other equipment in the single process train ; and (3) the relevant commissioning date of the carbon capture equipment for the purposes of qualifying for the Section 45Q credit was 2021, the date on which the investor first placed the train process in a state of readiness for the function of capturing, processing and preparing carbon dioxide for transport for disposal, injection or use, rather than going back to 2017, when the acid gas removal unit has been put into operation. This third conclusion was important because the amount of the article 45Q tax credit was increased in 2018, which means that the highest credit could be claimed by the investor and not the lowest credit in place during commissioning of the acid gas elimination unit.

This is the second conclusion above this decision which offers new opportunities for plant owners to fund the investment in carbon capture equipment necessary to prevent the emission of carbon dioxide produced at their facilities in the atmosphere. Instead of using internal capital to fund the entire investment needed for plant installation and carbon capture equipment, plant owners can look to low-profile investors for financing. ‘help in building, owning and operating carbon capture equipment in a single process train, especially investors who can use the Section 45Q tax credit to reduce their future taxes to pay. Take the case of a new factory under construction by a project company whose equity financing will be provided by a private equity company whose investors are mostly tax-exempt institutions. Income tax credits such as the Article 45Q credit have no value for these tax-exempt institutional investors and would therefore not be taken into account in their determination of the overall rate of return of the project. But while the ownership of the carbon capture equipment can be isolated in a separate investment vehicle from the project entity that owns the plant facility, the investment vehicle that owns the capture equipment carbon generating Section 45Q tax credit can target taxable investors who will value Section 45Q tax credits and factor these credits along with annual cash flow distributions in their determination of the project’s rate of return. . This is of course exactly what is happening today in the electricity production projects of wind farms in which taxable investors such as certain financial institutions invest in “tax equity” to benefit from the tax credit for renewable energies. of Section 45. Following this revenue decision, project owners may target additional sources of equity capital in situations where ownership of the primary facility may be separated from ownership of the capture equipment of the project. carbon creating the unique process train.

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