By: Eide Bailly LLP – Kerry Gordon, Director, National Tax; Trina Pinneau, Sr. Manager, National Tax
The Inflation Reduction Act (IRA) (enacted in August of 2022) represents the largest green energy investment in U.S. history and directly effects the ethanol industry by addressing two important issues: CO2 and methane. The IRA encourages the decarbonization of the ethanol sector through carbon capture and usage sequestration projects (CCUS projects), and also encourages offset investments in qualified biogas property through the utilization of expanded credits.
Carbon Oxide Sequestration Credit
Internal Revenue Code (IRC) Section 45Q provides a credit for capturing, storing, or using carbon oxide or dioxide. Section 45Q was first introduced in 2008, but the IRA significantly enhances the credit’s impact by increasing it from $50 to $85 per ton for captured and stored carbon and from $35 to $60 per ton for carbon captured from industrial and power generation processes and put to use.
Ethanol production results in a relatively pure CO2 stream compared to other sources. According to a previous estimate by JP Morgan, the cost of capturing and storing carbon dioxide from an ethanol plant could be around $46 per ton (before taxes), producing a potential tax benefit of more than $39 per ton for capturing and storing carbon.
Section 48 Energy Credit
The IRC Section 48 energy credit is another possibility for ethanol plants looking to maximize the tax benefits from green-energy investment. Section 48 provides a credit of up to 50 percent of the cost of eligible investment property, provided that location, domestic content, and prevailing wage and apprenticeship requirements are met. Alongside the traditional incentives for installing things like solar panels and windmills, the IRA expanded this credit to include investments in qualified biogas property.
Qualified biogas property refers to a system that converts biomass (defined as any organic material other than oil, natural gas and coal) into a gas containing at least 52 percent methane and that captures the gas for sale or productive use. Using this credit, the federal government will cover up to 50 percent of the expenses associated with purchasing and installing the equipment necessary for an ethanol plant to convert biofuel into natural gas for on-site use.
Maximizing Energy Efficiency Incentives
The IRA extended and introduced numerous incentives for low-carbon biofuels like ethanol. While carbon capture and sequestration are favorable options for the ethanol industry, ethanol plants can also consider other incentives, such as the IRC Section 48 energy credit, to generate potential tax savings.
The first – and often most difficult – step is understanding what you qualify for. An experienced advisor can help assess your eligibility and then work with you to maximize the potential benefit of energy efficient incentives.
