IRS Clean Fuel Tax Credit Notice Leaves Mixed Use Rules Muddled

In this article for Bloomberg Law, Sam Kamyans and Bastian Shah discuss the clean fuel production credit under section 45Z of the Internal Revenue Code and Notice 2025-10 and the clarifications that are needed.

A recent IRS notice on the clean fuel production credit under Section 45Z of the tax code provides important guidance for the clean fuels industry, but the agency still needs to issue several important clarifications.

Specifically, future guidance should confirm that standard agency/broker commercial contracts allow producers to claim the tax credit, provide streamlined approaches for unique pathways and feedstocks to qualify for the tax credit, and offer guidance for owners and co-owners of mixed-use facilities.

The Jan. 10 notice, and proposed regulations within, help clean fuel producers determine when a sale of clean fuel is a “qualifying sale” for which the Section 45Z credit is available. It suggests that sales to intermediaries and brokers that purchase and resell fuel can disable the tax credit, because the taxpayer must sell the fuel to be sold for use “as a fuel” in the purchaser’s trade or business.

This potential disabling appears unintentional—the notice suggests that the IRS’s focus is to ensure that transportation fuel is sold for use as a fuel by the end user rather than as a feedstock to produce other fuels, such as ethanol-to-jet fuel production.

To that end, the IRS should revise the notice to require any intermediaries to inform a producer of who the end user will be. The producer can contractually ensure an intermediary only sells to parties that enable the producer to qualify for the credit. This allows producers to price their fuels appropriately if a sustainable aviation fuel producer purchases the fuel and shifts the credit away from the transportation fuel producer.

When computing emissions rates to calculate the per-gallon amount of the credit, the notice directs taxpayers to use a new model for non-aviation transportation fuel developed by the Department of Energy in partnership with Argonne National Laboratory. Producers of aviation fuel are directed to continue using the most recent model released by the International Civil Aviation Organization, a leading industry group.

Although taxpayers may only rely on the notice after it’s published in the Federal Register, the release of the new model for non-aviation transportation fuel improves producers’ ability to compute their emissions score and, consequently, the value of their tax credit.

However, the new model for non-aviation fuel doesn’t provide inputs for unique production methods, such as low carbon ethanol using certain non-corn-based feedstocks. Taxpayers which use these methods must apply for provisional emissions rates from the Department of Energy. Applying for one may be challenging, and other approaches to determining emissions rates are available.

The Treasury Department and the IRS should consider allowing taxpayers to use alternative models—such as those published by the International Civil Aviation Organization or the California Air Resource Board—that provide substantially similar emissions scores for the pathways that were included in the new model.

Proposed regulations in the notice would resolve unanswered questions over which taxpayers can claim Section 45Z credits when there are multiple parties in the supply chain.

Production of a transportation fuel would include all steps and processes necessary to take a primary feedstock (such as corn) and chemically transform it into a transportation fuel (such as ethanol) ready to be sold. A person who provides only minimal processing of fuel in the supply chain—such as concentrating, dehydrating, or blending fuels—may not claim the Section 45Z credit.

Consistent with the qualifying sale rules that disable sales of transportation fuel for use as a feedstock, only the producer of the final transportation fuel is eligible to claim the credit.

The guidance also clarifies that any fuel suitable for use in a highway vehicle or aircraft qualifies as transportation fuel, even if it isn’t used as such. This enables marine diesel fuel and marine methanol to qualify, provided they could be used as transportation fuel in a highway vehicle but instead are used in seafaring craft.

The proposed regulations introduce ambiguity to the anti-stacking rules. These rules intend to prevent taxpayers from receiving Section 45Z credits for a facility in the same year for which the taxpayer is allowed a credit for the same facility under Sections 45Q and 45V, or the election in Section 48(a)(15).

Future guidance should clarify that consistent with case law, a taxpayer is only allowed an anti-stacking credit in a tax year for which the taxpayer actually claims such a credit.

Fortunately, with multiple opportunities to revise the proposed regulations, future guidance can clarify these ambiguities and enable the industry to use the tax credit in a commercially sound manner.