The White House review of proposed rules for an expanded credit for capturing and storing carbon dioxide resulted in changes that give the IRS more time to take back the credits in case of carbon leaks.
Officials changed the “recapture” period to 5 years while the rules were under review, an increase from the 3 years proposed in the initial draft submitted to the office on 13 March and obtained by Bloomberg Tax. This increases the financial risk for investors in these projects; they’re generally the ones reaping the tax benefits and want some assurance that the IRS won’t take them back.
“That provides some markers that there’s a difference of opinion in the administration,” said Hunter Johnston, a partner at Steptoe and Johnson in Washington, who is involved with the Carbon Capture Coalition lobbying group. “Where 5 years came from, I don’t know, but I’m going to find out.”
The White House review became a standard element of the IRS and Treasury’s regulatory process roughly 2 years ago. Significant tax regulations must be reviewed by Office of Information and Regulatory Affairs officials before they can be released. The review process gives companies and their lobbyists a chance to sway the guidance process through meetings with officials.
White House officials scheduled seven meetings with companies and organizations while the rules were under review. Representatives of Occidental Petroleum, the Environmental Defense Fund, ExxonMobil, and Shell Oil were among those making their case, according to the Office of Management and Budget’s website.
The IRS released the proposed rules (REG-112339-19) on 28 May. Another detail added during White House review highlighted that earlier guidance (Rev. Proc. 2020-12) allowed investors financing the projects to get insurance for the risk that the IRS might take back their credits. But the change to the recapture period would make that insurance more expensive, said Amish Shah, a partner at Eversheds Sutherland in Washington.
“It’s kind of the low-probability, very high-dollar value risk,” Shah said. “You look at that and you say, ‘Well, we might be confident that we don’t think there’s a risk, but it’s still there, and if it happens, it’s just a lot of dollars on the line.’”
The tax code Section 45Q rules follow Congress’s 2018 expansion of the tax credit, which is meant to encourage investment in carbon-capture technology. The amount of the credit varies based on the type of storage used, but, for companies, the total value can be millions of dollars.