IRS Issues Guidance Regarding Safe Harbor for Section 45Q Carbon Oxide Sequestration Credit

The IRS today released guidance regarding certain reporting requirements for determining eligibility for the Section 45Q carbon oxide sequestration credit.  The guidance, Notice 2026-1 (the Notice), addresses proposed regulations issued by the Environmental Protection Agency (the EPA) impacting certain reporting obligations regarding the geological sequestration of carbon dioxide imposed under subpart RR of 40 CFR part 98 (subpart RR).

Section 45Q provides a tax credit for qualified carbon oxide that is captured by a taxpayer and disposed of or stored in ways that comply with the applicable requirements.  A taxpayer that owns a facility that is subject to subpart RR must prepare reports on an annual basis (Annual Reports).  Generally, these Annual Reports must be submitted no later than March 31 for the previous calendar year through the EPA’s electronic reporting system, e-GGRT.  The EPA’s proposed regulations would eliminate many of the reporting obligations under subpart RR and would extend the reporting deadline for 2025 to June 10, 2026.

2025 Safe Harbor

The Notice provides a safe harbor that a taxpayer may use to satisfy the requirements of Section 45Q related to subpart RR and certain related certification requirements, which would apply if the EPA does not relaunch the e-GGRT system by June 10, 2026. 

If the EPA does not relaunch the e-GGRT system by June 10, 2026, the capture and disposal of carbon oxide in secure geological storage for calendar year 2025 will be considered to have satisfied the Section 45Q subpart RR requirements if (i) such storage is in compliance with the applicable requirements of subpart RR as in effect on December 31, 2025, and (ii) the taxpayer prepares and submits the Annual Report, including all information and documentation that would have been required under subpart RR as in effect on December 31, 2025, to an independent engineer or geologist who certifies the Annual Report in the manner described below.

Secure geological storage will be considered to have satisfied the certification requirements of Section 45Q if the following requirements are satisfied:

(1) The taxpayer must submit the Annual Report for reporting year 2025 to a qualified independent engineer or geologist.  The qualified independent engineer or geologist certifying the information must be duly registered or certified in any state.

(2) The qualified independent engineer or geologist must certify that (i) the capture and disposal is in compliance with subpart RR as in effect on December 31, 2025, and (ii) the information and documentation contained in the Annual Report for reporting year 2025 is accurate and complete based on the requirements under subpart RR as in effect on December 31, 2025.  The certification must contain an affidavit from the certifying engineer or geologist, made under penalties of perjury, stating the she or he is independent from the taxpayer. 

To rely on the safe harbor, a taxpayer must complete all documentation and obtain the certification by the time it timely files its tax return.

The Notice provides helpful guidance in light of the EPA’s proposed regulations under subpart RR and the extended subpart RR reporting deadline.  This should provide significant relief and added certainty for a taxpayer seeking to claim the Section 45Q carbon oxide sequestration credit for 2025.