Section 45Q Carbon Credit: IRS Broadens Safe Harbor Through 2026

The Section 45Q carbon oxide sequestration tax credit is navigating a period of significant regulatory turbulence in 2025-2026. Between the EPA’s overhaul of Subpart RR reporting and the IRS’s successive publication of Notices 2026-1 and 2026-50, US taxpayers now benefit from an expanded safe harbor to secure their filings.

Legislative history and recent amendments (OBBBA)

Section 45Q of the Internal Revenue Code was introduced through Section 115 of the Energy Improvement and Extension Act of 2008, then amended several times by the American Recovery and Reinvestment Tax Act (2009), the Tax Increase Prevention Act (2014), the Bipartisan Budget Act (2018), and the Taxpayer Certainty and Disaster Tax Relief Act (2020). The Inflation Reduction Act (IRA) of 2022 had pushed the construction start deadline to January 1, 2033, compared to the original January 1, 2023 date.

The most recent amendment comes from the One, Big, Beautiful Bill Act (OBBBA), enacted on July 4, 2025 as Public Law 119-21. The law introduces two substantive changes: it disqualifies the credit for specified foreign entities and foreign-influenced entities within the meaning of Section 7701(a)(51) for tax years beginning after July 4, 2025; it also establishes parity between credit amounts for the various uses of qualified carbon oxide and secure geological storage for facilities placed in service after that date.

Credit amounts and eligibility conditions

Amounts vary depending on when the capture equipment was placed in service. For equipment placed in service before February 9, 2018, the credit equals $20 per metric ton of qualified carbon oxide stored in secure geological storage (without use as a tertiary injectant or for utilization under Section 45Q(f)(5)), and $10 per metric ton when the oxide is used as a tertiary injectant or for utilization.

For equipment placed in service on or after February 9, 2018, the credit is calculated by linear interpolation between $22.66 and $50 per metric ton for calendar years 2017 through 2027, then indexed for inflation thereafter. Under the OBBBA, for facilities placed in service after July 4, 2025 and tax years beginning after 2024 but before 2027, the base amount is now $17 per metric ton for geological sequestration and $36 per metric ton for direct air capture (DAC). Multiplied by five, these amounts reach $85 and $180 per metric ton respectively, provided prevailing wage and apprenticeship requirements are met during construction, alteration, repair, and the first twelve years of operation.

The EPA regulatory context and Subpart RR

Taxpayers claiming the credit must meet inter-agency reporting obligations, notably under Subpart RR of the EPA’s Greenhouse Gas Reporting Program (40 CFR Part 98). Under this subpart, CO2 injection facilities must prepare annual reports through the e-GGRT electronic system, generally due before March 31 for the preceding calendar year.

On September 16, 2025, the EPA published proposed regulations (90 F.R. 44591) aimed at eliminating Subpart RR reporting obligations for reporting years after 2024. These proposed rules also push the 2025 reporting deadline to June 10, 2026. The reform creates a significant compliance gap: if the rules are finalized and e-GGRT is unavailable, taxpayers claiming the credit for carbon oxide stored via permanent geological sequestration would have no mechanism to submit the reports required by Treasury regulations.

The IRS response: Notice 2026-1

On December 19, 2025, the IRS released Notice 2026-1, providing interim guidance and a safe harbor allowing taxpayers to determine their eligibility for the credit for qualified carbon oxide captured and stored via secure geological sequestration in 2025. Under this framework, secure geological storage is deemed to satisfy Subpart RR requirements if two cumulative conditions are met: the storage must comply with the Subpart RR requirements in effect on December 31, 2025; and the taxpayer must prepare and submit an annual report to a qualified independent engineer or geologist who certifies the report.

« This safe harbor does not apply to carbon oxide used as a tertiary injectant in an enhanced oil recovery project or to utilized carbon oxide within the meaning of Section 45Q(f)(5), as those methods have alternatives to the Subpart RR requirements. »

Notice 2026-1, IRS

The independent certifier, duly registered or certified in a state, must produce a certification accompanied by an affidavit under penalty of perjury attesting to independence from the taxpayer. If an election has been made under Section 45Q(f)(3)(B), the affidavit must attest to independence from both the electing taxpayer and the credit claimant. All documentation must be finalized before filing the return, including extensions. The safe harbor does not change the obligation to file Form 8933 (Carbon Oxide Sequestration Credit) with the federal return.

Expansion via Notice 2026-50

On August 14, 2026, the Treasury Department and the IRS released Notice 2026-50, which broadens the Notice 2026-1 safe harbor across three main dimensions. The temporal scope now covers secure geological storage conducted from January 1, 2025 through December 31 of the calendar year in which Treasury and the IRS publish interim guidance or proposed regulations under Section 45Q. The safe harbor therefore applies retroactively to all of 2025 and extends beyond.

Treasury and the IRS have indicated that additional interim guidance and proposed regulations will be published. Comments are requested before October 30, 2026, opening a consultation window for industry stakeholders.

Secure geological storage definition and recommendations

Secure geological storage under Section 45Q includes storage in deep saline formations, hydrocarbon reservoirs, and unmineable coal seams, provided that the carbon oxide does not escape into the atmosphere. Section 1.45Q-3(b) specifies that carbon oxide is considered securely stored if injected into a well compliant with applicable Underground Injection Control (UIC) regulations, located onshore or offshore under submerged lands within state or federal waters.

Carbon oxide injected into an oil reservoir that is not a qualified enhanced oil recovery project cannot be treated as qualified carbon oxide. However, this restriction does not apply if the reservoir has permanently ceased production, the operator has obtained a Class VI UIC permit, and the operator complies with Subpart RR.

Experts recommend that taxpayers maintain their compliance activities, including the MRV (monitoring, reporting, and verification) plan, even if the EPA eliminates Subpart RR reporting obligations. According to observers at White & Case and Stoel Rives, this guidance provides significant relief and increased certainty for taxpayers seeking to claim the carbon oxide sequestration credit for 2025.

Conclusion

The safe harbors in Notices 2026-1 and 2026-50 provide a regulatory lifeline for operators of carbon capture and sequestration projects during the transition between the EPA’s previous framework and Treasury’s forthcoming regulations. Taxpayers should act now: prepare their 2025 reports as soon as possible, identify a qualified independent certifier, and preserve all MRV documentation.

In the medium term, Treasury is expected to publish new proposed regulations establishing an updated compliance framework that will likely no longer rely on EPA Subpart RR reporting. Given the politically sensitive nature of the 45Q credit, operators will also need to monitor potential legislative changes during upcoming US budget cycles.

Sources

• IRS – Notice 2026-1
• White & Case – IRS Expands Safe Harbor Under Section 45Q
• Stoel Rives – IRS Issues Guidance on Section 45Q Safe Harbor
• Jackson Walker – IRS Section 45Q Carbon Capture Credits
• IRA Tracker – Section 13104 Tax Credit for Carbon Oxide Sequestration
• Federal Register – Credit for Carbon Oxide Sequestration

This article is published for informational and educational purposes only. It does not constitute investment advice. Do your own research (DYOR) before making any decision.