IRS Proposes Rules on GOP-Extended Clean Fuel Tax Credit (2)

The IRS Tuesday proposed long-awaited rules for a tax credit that aims to encourage production of more climate-friendly fuels—a rare break created by Democrats but also backed by the GOP.

The proposed regulations (REG: 121244-23, RIN: 1545-BR30) for the 45Z clean fuel production credit give more details about which taxpayers are eligible and how much the credit is worth. The credit encourages fuel produced with low greenhouse gas emissions.

Democrats’ 2022 climate law and extended in the 2025 GOP tax-and-spending package. It replaces a suite of prior fuel tax credits and affects a broad swath of industries, from agriculture to fuel producers, sellers, and airlines.

The proposal largely responds to taxpayer concerns on the 45Z tax credit and the initial guidance released in January 2025, said Kurt Kovarik, vice president of federal affairs for Clean Fuels Alliance America, which represents biodiesel and renewable diesel producers.

“We anticipate this proposal will provide additional market certainty for biodiesel and renewable diesel producers,” Kovarik said in a statement.

Eligibility rules, emissions rates, and certification and registration requirements for taxpayers claiming the credit are spelled out in the proposal. Three sets of final regulations—for elective payment, credit transfer election, and excise tax registration—also are amended to make them more consistent with the clean fuel registration requirements.

Taxpayers must use the 45ZCF-GREET model to calculate the emissions rates of the fuel, and will receive the credit the same year that they sell eligible fuel to an unrelated person in a qualified sale. The Department of Energy is expected to update the GREET model to reflect changes in the IRS proposal and GOP law.

Guidance Called ‘Workable’

The initial January 2025 guidance included a provision that would have allowed fuel producers to only receive the credit if they sold fuel for use, which industry stakeholders said was unrealistic. Producers typically sell fuel to intermediary wholesalers which then sell fuel to customers. The proposal updates this requirement based on industry feedback.

The GOP tax law made a few changes to the 45Z tax credit that aimed to benefit farmers, including ensuring that eligible fuel is derived from feedstock produced or grown in North America. The IRS proposal implements the law’s changes.

Sen. Roger Marshall (R-Kansas) in a Tuesday statement applauded the “clear and workable” IRS guidance.

“Today’s guidance gives producers the certainty they need to invest, expand, and keep America at the forefront of clean, homegrown energy,” he said.

Critics of the tax credit say it gives too much benefit to biofuel producers that already have other policy incentives and doesn’t help reduce fuel prices. NATSO, SIGMA, and NACS—associations that represent truck stops and fuel retailers—say the tax credit should be replaced in favor of the prior incentive structure.

“Although the Treasury Department has done its best to make lemonade out of lemons, ‘45Z’ simply will not lower fuel prices,” said David Fialkov, executive vice president of government affairs for NATSO and SIGMA, in a Tuesday statement.

The proposal underwent White House review at the end of 2025 and into 2026. The tax credit expires at the end of 2029.

The proposed rules clarify that fuel doesn’t actually have to be used in a highway vehicle or aircraft to qualify. For example, it ultimately could be used as marine fuel, but electricity production isn’t allowed. It also gives more details on when a producer uses a 45Z-eligible fuel to produce more fuel. The rules provide examples illustrating what is “suitable for use” and “produced from a fuel for which a section 45Z credit is allowable.”

The credit took effect in 2025. Lawmakers and industry groups have urged Treasury and IRS to propose the rules multiple times in an effort to speed up investments in the industry.