AndreTaxCo, PLLC

Background – IRC §45Q Carbon Capture Credit

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IRC §45Q was enacted in 2008, expanded by the Inflation Reduction Act (IRA) of 2022, and further modified by the One Big Beautiful Bill Act (OBBBA) of 2025. The IRA expanded rates, eligibility, and monetization options, and OBBBA adds Foreign Entity of Concern (FEOC) restrictions, enhanced operational compliance, and potential recapture exposure if FEOC or operational rules are violated.

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Credit Term & Construction Deadline

The IRA expanded §45Q for carbon capture, utilization, and sequestration (CCUS), added enhanced credits for direct air capture (DAC), lowered capture thresholds, and extended the begin‑construction deadline to January 1, 2033. The deadline remains January 1, 2033. However, OBBBA imposes FEOC restrictions that can disqualify projects with prohibited foreign ownership, control, financing, or material assistance in the supply chain and can trigger credit denial or recapture.

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Election to Start the 12‑Year Credit Term

The IRA permits certain taxpayers to elect to start the 12‑year credit period on the first day of the first tax year the credit is claimed if all conditions are met. This applies to carbon capture equipment originally placed in service at a qualified facility on or after the Bipartisan Budget Act (BBA) of 2018 was enacted if

• (1) no prior §45Q credits were claimed for that equipment;

• (2) the facility is in a federally‑declared disaster area after original in‑service; and

• (3) the disaster caused cessation of facility/equipment operations after original in‑service.

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Direct Pay (Elective Payment) & Transferability

Under the IRA, “applicable entities” (for example, tax‑exempt organizations, states, political subdivisions, Tribal governments, rural electric cooperatives, and the Tennessee Valley Authority) may elect direct pay under Internal Revenue Code (IRC) §6417. Other taxpayers may transfer §45Q credits for cash under IRC §6418. OBBBA overlays FEOC eligibility screens and pre‑filing registration/certification requirements for elective pay or transfers; noncompliance may cause disallowance or recapture (up to ten years).

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Prevailing Wage & Apprenticeship (PWA) – Bonus Multiplier

Meeting prevailing wage and apprenticeship (PWA) requirements unlocks bonus rates (5× base). OBBBA adds reporting/attestation expectations—failure can jeopardize the bonus and, in some cases, the underlying credit.

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Related Federal Funding (Bipartisan Infrastructure Law)

§45Q credit complements the Infrastructure Investment and Jobs Act (IIJA)—also known as the Bipartisan Infrastructure Law (BIL) (Infrastructure Investment and Jobs Act, Pub. L. No. 117-58, 135 Stat. 429 (2021)) programs for carbon capture utilization storage (CCUS) and direct air capture (DAC), including the Carbon Capture Demonstration Projects Program, Carbon Capture Large-Scale Pilot Programs, and Regional Clean Direct Air Capture Hubs.  

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Tax‑Exempt Bond Interaction

Projects financed with tax‑exempt bonds face a §45Q reduction equal to the lesser of 15% or the tax‑exempt‑proceeds / total‑financing fraction. OBBBA adds disclosure/certification duties to confirm no FEOC‑linked debt or prohibited counterparties.  

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Credit Benefits & Summary 

Begin‑Construction Deadline & Credit Period

Under prior law, projects had to begin construction before January 1, 2026. However, the IRA extends the begin‑construction deadline to January 1, 2033 and preserves the twelve‑year credit period after a qualified facility is placed in service.

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Under the IRA, fixed tiers apply (base → bonus with PWA):

• Permanent geological storage: $17 per metric ton → $85 per metric ton

• Enhanced oil recovery (EOR) / utilization: $12 per metric ton → $60 per metric ton

• Direct air capture (DAC) with geological storage: $36 per metric ton → $180 per metric ton

• Direct air capture (DAC) with utilization/EOR: $26 per metric ton → $130 per metric ton

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Capture Thresholds (post‑IRA):​

• For direct air capture (DAC) facilities, at least 1,000 metric tons of qualified carbon oxide

• For an electricity-generating facility, (1) at least 18,750 metric tons of qualified carbon oxide, and (2) with respect to any carbon capture equipment for the applicable electric generating unit at such facility, has a capture design capacity of at least 75% of the baseline carbon oxide production of such unit (the IRA contains detailed definitions of the applicable electric generating unit, the baseline carbon oxide production, the capacity factor and others); or

• For all other facilities, at least 12,500 metric tons of qualified carbon oxide.

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Credit Amounts (Base vs. Bonus w/PWA)

The IRC § 45Q carbon oxide sequestration tax credit is subject to the two-tiered credit regime, with a lower base rate and a higher bonus rate (if the prevailing wage and apprenticeship (PWA) requirements are met; see "Bonus Credit Amount" below). Under the IRA, the applicable credit rates are as follows:

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• (1) Base Credit Amounts (see also "Bonus Credit Amount" below)

  • Permanent sequestration: $17 per metric ton for carbon oxide that is captured and geologically sequestered and and not used.

    • Increases to $85 per tonne of CO2 permanently stored,​ provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. 

  • Utilization or enhanced oil or natural gas recovery (EOR): For qualified carbon oxides that are captured and either (1) utilized in an approved manner, or (2) used as a tertiary injectant in a qualified EOR project and disposed of by the taxpayer, the base rate is $12 per metric ton of qualified carbon oxide.

    • Increases to $60 per tonne of CO2 used for enhanced oil recovery (EOR) or other industrial uses of CO2, provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. 

  • Direct Air Capture (DAC) facilities: 

    • ​For projects that (1) use DAC facilities to capture carbon oxides and (2) dispose of the qualified carbon oxides in secure geological storage (and do not use them), the base rate is $36 per metric ton of qualified carbon oxide.

      • Increases to $180 per tonne of CO2, provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. 

    • For taxpayers that either (1) "utilize" the carbon oxides in an approved manner or (2) use the carbon oxides in an approved EOR project and dispose of them properly, the base rate is $26 per metric ton of qualified carbon oxides.

      • Increases to $130 per tonne of CO2, provided emissions reductions can be clearly demonstrated, respectively, and would be available for facilities that pay prevailing wages during the construction phase and during the first 12 years of operation and meet registered apprenticeship requirements. ​​

• (2) Bonus Credit Amount: 5 times the base credit amounts, may be available if the facility meets prevailing wage and registered apprenticeship (PWA) requirements. OBBBA expects enhanced recordkeeping/attestations around labor compliance and, where applicable, domestic sourcing for critical components. See also guidance on the labor provisions.​

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Direct Pay & Transfer—Who Qualifies and For How Long

• Direct pay (§6417): Section 13801 of the Inflation Reduction Act, adding §6417 of the Internal Revenue Code, extends numerous tax incentives, including the IRC § 45Q credit, to entities that generally do not benefit from income tax credits, such as tax-exempt organizations, states, political subdivisions, the Tennessee Valley Authority, Indian Tribal governments, Alaska Native Corporations, and rural electricity co-ops (applicable entities) may be eligible for direct pay. Specifically, these entities can elect to receive these tax credits in the form of direct payments.

• Transfer (§6418): Available to most other taxpayers (for cash from unrelated transferees).

• For non‑applicable entities, direct pay is limited (up to 5 years for §45Q equipment originally placed in service after Dec 31, 2022).​​