Proposed Regulations for Section 45Z Clean Fuel Production Credit, Provide Greater Certainty for Biofuel Producers

The Internal Revenue Service recently released proposed regulations implementing the Section 45Z Clean Fuel Production Credit after statutory changes enacted in last year’s tax legislation expanded and extended the credit through 2029. Although the rules are not yet final, the proposed regulations provide long-awaited clarity after years of uncertainty and are expected to encourage additional investment in low-carbon fuel production.

Section 45Z replaced a collection of prior fuel tax incentives and adopts a technology-neutral approach that rewards transportation fuels produced using low-emission methods. The value of the credit depends on the lifecycle greenhouse gas emissions of the fuel, making emissions modeling central to determining eligibility and benefit amounts. Farmers, fuel producers, fuel sellers, and airlines may all benefit from the credit, which applies to qualifying fuels produced beginning in 2025.

A key change in the proposed regulations revises guidance issued earlier this year that would have significantly limited eligibility by restricting “qualified sales” to fuel users only. That interpretation conflicted with standard industry distribution practices, which frequently involve wholesalers, dealers, and other intermediaries. The revised proposal broadens the definition of qualified sales, allowing sales through customary commercial channels to qualify for the credit. This change removes a major obstacle that had raised concerns among producers and potential credit purchasers and threatened to curtail participation in the program.

The proposed regulations also introduce compliance safe harbors related to substantiating emissions rates and documenting qualified sales. These provisions are intended to reduce administrative burdens and audit risk for taxpayers while providing a more workable framework for calculating and claiming the credit. Collectively, these revisions signal a more practical and commercially aligned regulatory approach.

Despite this progress, important uncertainties remain. Fuel producers continue to await updated guidance from the Department of Energy regarding the emissions modeling framework that taxpayers must use to calculate lifecycle greenhouse gas rates. Because emissions intensity directly determines the amount of the credit, this forthcoming model will play a central role in shaping both eligibility and economic outcomes for producers.

The Section 45Z credit has drawn bipartisan support but also criticism regarding its fiscal impact and effectiveness in reducing consumer fuel prices. The Joint Committee on Taxation estimates that the extension and expansion of the credit will reduce federal revenues by approximately $25.7 billion over the 2025–2034 period. Critics argue that the credit disproportionately benefits fuels derived from corn and soybeans that already receive support under other public policies.

Nevertheless, the IRS’s proposed regulations represent a meaningful step toward regulatory certainty and program viability. By aligning the rules more closely with industry practices and providing substantiation safe harbors, the proposal is expected to increase market confidence and stimulate additional investment in clean fuel production. 

Fuel producers, distributors, and investors should begin evaluating how the proposed rules may affect their operations and consider submitting comments during the rulemaking process to address remaining technical and practical concerns. If you have questions about this update, please contact Liskow attorneys Leon Rittenberg III, John Rouchell, Caroline Lafourcade, and Kevin Naccari and visit our Tax practice page.