Section 45Z Proposed Regulations: First Look
The release this past week of proposed Section 45Z clean fuel regulations marks an important early inflection point for the transferable tax credit market.
Birch Risk Advisors has already placed several Section 45Z credit transactions with buyers, and many of our seller clients have been eagerly awaiting regulatory guidance before accelerating financings and forward sales. The proposed regulations do not appear to introduce wholesale changes that would disrupt well structured transactions. We are continuing to review them and will provide further commentary as appropriate.
Lifecycle Analysis and Carbon Intensity Clarifications
At a high level, the proposed rules appear to largely reinforce existing market assumptions around lifecycle analysis and carbon intensity determinations, while also providing important clarifications. In particular, the IRS appears to validate established methodologies for measuring lifecycle emissions, the use of recognized modeling frameworks, and the linkage between documented production pathways and resulting carbon intensity scores. The proposed regulations also clarify that carbon intensity scores generally may not be negative, except for certain animal manure based pathways, and that indirect land use change emissions are excluded on a prospective basis. For many projects, this suggests prior diligence and structuring efforts were directionally aligned with regulatory expectations.
Related Party Sales Structures
The proposed regulations provide helpful clarity on sales made through related party structures by looking through related intermediaries to the ultimate sale to an unrelated person, which aligns with common commercial distribution models.
Substantiating Qualified Sales and Buyer Diligence
Separately, and of particular importance to Section 45Z tax credit buyers from a diligence perspective, the regulations clarify the approach to substantiating qualified sales. The IRS places emphasis on purchaser certifications or attestations regarding qualifying end use, supported by ordinary course documentation such as contracts, invoices, and delivery records. While verification and auditability remain central, the framework suggests that properly documented end use attestations, when consistent with production volumes and sales records, can play a key role in establishing a qualified sale without requiring fundamentally new execution mechanics.
Feedstock Sourcing and Foreign Ownership Guardrails
In addition, the proposed rules introduce clearer guardrails around feedstock sourcing and foreign ownership and influence. After 2025, feedstocks generally must be produced or grown in the United States, Mexico, or Canada, providing a more defined geographic framework for eligibility. The regulations also implement new restrictions on credits where production involves prohibited foreign entities or foreign influenced entities, with phased effective dates that will require careful attention to ownership structures, contractual arrangements, and governance rights.
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