Enacted by the Inflation Reduction Act and recently amended by the One Big Beautiful Bill Act (“OBBBA”), Section 45Z of the Internal Revenue Code offers a tax credit for the domestic production and sale of certain low-emission transportation fuels (“45Z Credit”). The 45Z Credit is worth $0.20 (or $1.00 for producers meeting prevailing wage and apprenticeship requirements) per gallon of renewable diesel, sustainable aviation fuel (“SAF”), renewable natural gas (“RNG”), and certain other low-carbon fuels produced domestically and sold.
On February 3, 2026, the U.S. Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “IRS”) issued proposed regulations implementing the 45Z Credit and potentially resolving several key uncertainties that have constrained market activity, including clarifications on qualified sales to intermediaries, emissions rate determination, and transferability mechanics.
Background
Prior to the issuance of the proposed regulations, the Treasury and the IRS released guidance on January 10, 2025, in the form of Notice 2025-10, which included a notice of intent to propose Section 45Z regulations, and Notice 2025-11, which provided the annual emissions rate table for Section 45Z that referred taxpayers to the appropriate methodologies to determine fuel life cycle greenhouse gas (“GHG”) emissions.
The proposed regulations follow years of waiting for industry professionals and taxpayers, who voiced worries about the lack of a finalized process for claiming the credit and the negative impact of ambiguous language and calculation methods. Industry estimates for total 45Z Credit-eligible fuel supply suggest $2-3 billion in annual tax credit generation, with significant volume remaining unsold in the market due to regulatory uncertainty. In the 45Z Credit transactions that do move forward, some key uncertainties have been excluded from insurance policies and indemnified by the selling company.
Key Provisions
While the proposed regulations do not resolve all uncertainties, they do provide meaningful guidance that should enhance liquidity within the 45Z Credit market. Some of the key provisions are as follows:
Registration Requirements
The proposed regulations require transportation fuel producers to apply for registration with the IRS through Form 637 (“Application for Registration (For Certain Excise Tax Activities))” using the appropriate activity letter depending on whether they produce SAF or non-SAF. The IRS will register an applicant only if the applicant meets the three registration tests: (1) the activity test, which requires the applicant to be regularly engaged, or likely to be regularly engaged within six months, in the activity for which registration is sought; (2) the acceptable risk test, which examines whether the applicant or related persons have been penalized for wrongful acts; and (3) the satisfactory tax history test, which evaluates the filing, deposit, and payment history for all Federal taxes.
Special rules are provided for situations in which a person other than a registered producer of transportation fuel may claim the 45Z Credit, including disregarded entities, S corporations that own a subchapter S subsidiary, and agents for a consolidated group.
The regulations tie credit eligibility to the qualified facility itself, requiring facility-level registration. Importantly, producers need not own the facility—they must simply “conduct the activities giving rise to the Section 45Z credit.” Facilities may be co-located with other credit-eligible operations (subject to certain anti-stacking provisions), and production equipment may be dispersed across multiple locations or buildings.
Qualified Sales Clarifications
The proposed regulations significantly expand the definition of “sold for use in a trade or business” by removing the restrictive “use as fuel” language from Notice 2025-10 and explicitly clarifying that sales to fuel intermediaries—wholesalers and dealers that resell fuel—qualify as qualified sales, provided the purchaser is unrelated to the producer. For renewable diesel and SAF producers that typically sell through trading desks and distribution networks rather than directly to end users, this provision removes a critical source of deal uncertainty. Prior to this clarification, tax insurers typically excluded coverage for the qualified sale issue, forcing sponsors to provide indemnities to 45Z Credit buyers. The proposed regulations also adopt a broader ‘look-through’ rule, authorized by the OBBBA, under which a taxpayer is treated as selling fuel to an unrelated person if a related person sells the fuel to an unrelated person.
Emissions Rate Methodology
The proposed Section 45Z regulations make clear that the emissions rate for the fuel is determined by the 45ZCF-GREET model and the emissions-rate table in effect when the fuel was produced, meaning that the emissions rate could change each year for the same fuel from the same facility when the Treasury Secretary publishes the annual update to the emissions-rate table. Additionally, if the GREET model includes a pathway, the taxpayer must use the emissions rate associated with that pathway.
For fuels without an established emissions rate in 45ZCF-GREET, producers may petition the Treasury for a provisional emissions rate (“PER”) after first requesting a calculated emissions value letter from the U.S. Department of Energy (“DOE”). This process is particularly relevant for RNG producers seeking lower carbon intensity scores than the current GREET model provides.
For emissions associated with hydrogen, natural gas alternatives, electricity, and carbon capture, rules similar to Section 45V of the Internal Revenue Code apply, including energy attribute certificate treatment and incrementality requirements.
Safe Harbors for Qualified Sales and Emissions Rates
The proposed regulations also establish two safe harbors: one for substantiating emissions rates with respect to non-SAF transportation fuel, and another for substantiating qualified sales of transportation fuel:
Safe Harbor for Emissions Rates: For non-SAF transportation fuel, taxpayers may substantiate the emissions rate determined using the 45ZCF-GREET model by obtaining certification in substantially the same form and manner described for SAF transportation fuel certification requirements. The taxpayer must provide the qualified certifier with all information necessary to provide the certification. This safe harbor allows non-SAF producers to benefit from the same certainty that SAF producers receive through the statutory certification requirement.
Safe Harbor for Qualified Sales: Taxpayers may substantiate whether a sale of transportation fuel is a qualified sale by obtaining from the purchaser a certificate prepared under penalty of perjury in substantially the same form and manner as the model certificate. If the certificate relates to a single purchase, the taxpayer must obtain the certificate from the purchaser prior to or at the time of sale. If the certificate relates to purchases made over a period, the taxpayer must obtain the certificate from the purchaser prior to or at the same time as the initial sale to which the certificate relates. The safe harbor requires that a taxpayer has no reason to believe that any information in the certificate regarding the use of the transportation fuel is false, and the taxpayer must maintain the certificate with respect to the sale of transportation fuel in its books and records.
The model certificate requires purchasers to certify under penalty of perjury that the fuel will be: (i) used by the purchaser in the production of a fuel mixture; (ii) used by the purchaser in a trade or business; or (iii) sold by the purchaser at retail to another person and placed in the fuel tank of such other person. The certificate must also confirm that the purchaser is unrelated to the taxpayer.
The timing requirements for the qualified sales safe harbor warrant particular attention, as failure to obtain certification prior to or at the time of sale could disqualify otherwise eligible transactions from safe harbor protection, exposing producers to heightened risk even if the sale ultimately qualifies under the statute.
Elective Payment and Transfer Rules
The proposed regulations also tie 45Z Credit transferability to the facility, in addition to the taxpayer. Each facility must complete annual IRS pre-filing registration before credits can be transferred. No retroactive elections are permitted—transfers must be elected on the original filed return with no amended-return flexibility, meaning transactions must be executed by the tax filing deadline for the production year, including extensions.
Compliance Documentation and Recordkeeping
Producers must keep all records: (1) establishing that each fuel produced is a transportation fuel; (2) establishing any relevant information relating to the primary feedstock(s) used to produce each fuel; (3) establishing that each fuel meets any additional specifications for the type of fuel; (4) substantiating how the emissions rate for each fuel was determined (including, if applicable, the specific type(s) and category(ies) under the applicable emissions-rate table); (5) relating to any fuel testing obtained by the taxpayer; (6) establishing that each facility used to produce fuel is a qualified facility; (7) establishing the date each facility was placed in service; (8) establishing that each fuel was sold in a qualified sale; (9) establishing any certification from an unrelated person and substantiating the information contained therein; (10) related to information and raw data used for or related to any petition for a PER; and (11) establishing that the taxpayer satisfies the prevailing wage and apprenticeship requirements, if applicable.
Takeaways and Implications
The proposed regulations represent a significant step forward in providing certainty to clean fuel producers and market participants. The increased regulatory clarity should enhance market liquidity for producers currently holding unsold 45Z Credits, particularly renewable diesel and SAF producers that typically sell through trading desks and distribution networks.
It’s important to note that these regulations are not yet finalized, and further clarification from the Treasury/IRS is needed. It remains unclear whether the negative emissions rate exemption for animal manure-derived RNG as a transportation fuel also applies when used as a process fuel. The rules also lack detail on RNG deliverability and market-based procurement for process fuel, such as book-and-claim or mass balance practices. Public comments are due by April 6, 2026, with a hearing set for May 28, 2026.
In addition to the finalized 45Z regulations, ethanol producers are also awaiting a revised version of the 45ZCF-GREET model. One key input into the 45ZCF-GREET model is the carbon intensity of agricultural feedstocks. The U.S. Department of Agriculture (“USDA”) published a beta version of its USDA Feedstock Carbon Intensity Calculator (“USDA FD-CIC”) in January 2025 to calculate the carbon intensity of agricultural practices such as no-till, reduced till, cover crops, and nutrient management. When the USDA’s model is finalized, the IRS expects to incorporate a Section 45Z-specific version of the USDA FD-CIC as an input to the 45ZCF-GREET model. Although the USDA FD-CIC is not expected to be finalized until later in 2026, the proposed regulations indicate that the “45ZCF FD-CIC may be used for fuel produced and sold in 2025.”