Proposed regulations on 45Z production credit provide clarity

Proposed regulations

The new proposed regulations provide definitions of key terms used to implement the rules, many of which are similar to those previewed in Notice 2025-10 but with updates and clarifications for taxpayers. Key definitions include:

• Gallon equivalent: Nonliquid fuels are measured using gallon equivalents rather than volumetric gallons. A gallon equivalent represents an amount of fuel with energy content comparable to gasoline, which refers to the amount of such fuel that has a British thermal unit (Btu) content of 116,090 (lower heating value). The proposed regulations also provide the lower heating value of certain nonliquid fuels.
• Producer: The person that engages in the production of a transportation fuel. With respect to renewable natural gas (RNG), this means the person that processes the untreated sources of alternative natural gas to remove water, carbon dioxide and other impurities such that it is interchangeable with fossil natural gas.
• Production: All steps and processes used to make a transportation fuel are included, beginning with the processing of primary feedstock and ending with a transportation fuel ready to be sold. Production must involve substantial processing to create a transportation fuel and thus does not include minimal processing, such as creating a fuel mixture. However, for purposes of Low-GHG conventional or alternative natural gas, production includes the act of processing untreated sources of alternative natural gas such that it is interchangeable with fossil natural gas.

The proposed regulations also provide helpful definitions of facility, qualified facility, sustainable aviation fuel and non-SAF transportation fuel.

Qualifying sales

One of the more notable changes in the proposed regulations from the 2025 notice is the significant expansion and clarification of the qualifying sale requirement. Under prior guidance in Notice 2025‑10, the IRS defined “for use in a trade or business” for purposes of Section 45Z to be “for use as fuel in a trade or business,” which raised concerns that sales through intermediaries could fail to qualify and created uncertainty for producers that rely on common marketing and distribution structures.

The proposed regulations remove the “as fuel” language from the definition of a qualifying sale, making it clear that fuel sold through intermediaries may result in a qualifying sale for purposes of Section 45Z.

In general, qualifying sales include those to an unrelated person that subsequently resells the fuel in its own trade or business, as well as sales for further processing, including the use of the fuel as a primary feedstock to produce another fuel. However, the regulations continue to exclude certain transactions from qualifying sale treatment, including sales of fuel for blending.

The proposed regulations allow taxpayers to treat the sale of transportation fuel to related parties as a qualified sale if the related person subsequently sells the fuel to an unrelated person in a qualified sale. This expanded provision applies to corporate members of a consolidated group as well as to other nonconsolidated structures, which include partnerships. 

Determining the emission factor

The amount of credit available also depends on the fuel’s lifecycle emissions profile. The emissions factor reflects how much a fuel’s emissions are reduced relative to a statutory baseline and is determined using either published emissions rate tables or an approved provisional emissions rate (PER). The proposed regulations establish specific methodologies for different fuel types and include limitations and adjustments intended to ensure consistent and accurate emissions measurement.

Preliminary procedures are provided for taxpayers who cannot use the emissions rate table and must obtain a PER. However, additional guidance from the Department of Energy will be needed as the agency will largely control the process.

Anti-stacking and anti-abuse rules

The proposed regulations provide clarification on the anti‑stacking rules that restrict a facility’s ability to claim the Section 45Z credit in combination with certain other federal energy tax credits. While the anti‑stacking rules allow taxpayers engaged in multiple credit‑eligible activities at a single facility to choose which credit to claim, they prohibit claiming more than one covered credit for the same facility within the same taxable year.

In general, a facility may not claim a Section 45Z credit for any taxable year in which another specified credit is allowed for that same facility, including the Section 45V clean hydrogen credit, the Section 45Q carbon oxide sequestration credit, or the Section 48(a)(15) clean hydrogen energy credit.

Whether a facility qualifies for the Section 45Z credit is determined separately for each taxable year, so eligibility may change from year to year depending on which credits are claimed. The regulations further clarify that a Section 48(a)(15) election is irrevocable and permanently disqualifies the facility from eligibility for the Section 45Z credit for the year of the election and all future years.

Taxpayers operating multiple facilities must evaluate anti‑stacking eligibility on a facility‑by‑facility basis, as the rules apply independently to each facility.

The proposed regulations also include an anti-abuse rule that disallows the credit for any taxpayer whose primary purpose in producing and selling a transportation fuel, based on all the facts and circumstances, is to obtain the benefit of the Section 45Z credit in a manner that is wasteful and does not put the fuel to a productive use.

Facility ownership

The proposed regulations include a rule that legal ownership of a production facility is not required to claim the Section 45Z credit. In cases where multiple taxpayers produce transportation fuel at a facility that is not owned by all those taxpayers, production of the transportation fuel should be allocated among the taxpayers in proportion to their respective interests in the gross sales from the fuel, determined under the applicable contract or other legal arrangement.  

Recordkeeping requirements

The proposed regulations require taxpayers claiming the Section 45Z credit to maintain records sufficient to support both credit eligibility and the amount claimed.

• Taxpayers must retain documentation supporting the type of fuel produced, feedstock sourcing, qualified facility status, emissions rate determinations, fuel testing documentation, production and sale information, and any required third‑party certifications.
• Taxpayers also must maintain all information used to determine a PER, including underlying data supporting any PER petition.
• The regulations provide a safe harbor for substantiating emissions rates for non‑SAF [SS1] determined using the applicable emissions model, provided the taxpayer obtains a certification similar to that required for SAF.
• An additional safe harbor was included in the proposed regulations, allowing taxpayers to substantiate that a transaction is a qualified sale by relying on a purchaser certificate in the format provided in the regulations, prepared under penalty of perjury, provided the taxpayer does not have reason to believe the information is inaccurate. Taxpayers must obtain the purchaser certificate at or before the time of sale and retain the certificate as part of their books and records.

The IRS has requested comments on additional recordkeeping requirements specific to the required use of feedstocks from the U.S., Canada or Mexico for clean fuel produced and sold after Dec. 31, 2025.

Finally, the proposed regulations also include conforming updates to the regulations under Section 4101 related to the registration as a producer of clean fuel, Section 6417 related to the elective payment election, and Section 6418 related to the transfer election.

Next steps

Taxpayers that produce or market clean transportation fuels should consider reviewing their operations promptly in light of the proposed regulations. In particular, taxpayers should ensure that documentation and recordkeeping processes are in place to support credit eligibility, emissions determinations, and qualifying sales, which may require additional coordination with feedstock suppliers, contract manufacturers and purchasers.