What Is the Section 45Z Clean Fuel Production Credit?
This is a tax credit enacted under Public Law 119-21 (One, Big, Beautiful Bill) for domestic producers of clean transportation fuel. It rewards clean energy innovation by offering credit for fuel produced after December 31, 2024, but sold no later than December 31, 2029. (irs.gov)
Key Changes and New Rules Under OBBB
- Geographic feedstock restriction: Fuel must be derived from feedstocks grown or produced in the U.S., Mexico, or Canada after December 31, 2025. (irs.gov)
- Prohibited foreign entities: Specified foreign or foreign-influenced entities (as defined in the law) are disallowed from claiming the credit for tax years beginning after respective effective dates. (irs.gov)
- Emissions rate changes: Negative emissions rates (e.g., carbon capture or offsets) are prohibited after December 31, 2025 — except for fuel derived from animal manure. Additionally, indirect land use changes are excluded from emissions calculations. (irs.gov)
- Sustainable Aviation Fuel (SAF): The special rate for SAF is eliminated; SAF fuel for sales after December 31, 2025 receives the same rates as other transportation fuel. (irs.gov)
Claiming the Credit: Requirements & Process
- Producers must be registered with the IRS via Form 637, using Activity Letter “CN” (non-SAF) or “CA” (SAF) before production begins. (irs.gov)
- The credit amount per gallon (or gallon equivalent) is multiplied by an emissions factor determined under new and existing rules. (irs.gov)
- Fuel must be produced domestically, sold by the producer in a qualifying transaction, and meet all timing and feedstock standards. (irs.gov)
Example Scenario
Suppose you operate a biodiesel plant in Texas:
- You produce non-SAF clean fuel using feedstock sourced in Mexico, starting in early 2026.
- Negative emissions rates aren’t allowed unless your feedstock is animal manure. So, unless your methodology is tightly aligned with the law, you may only get credit under standard emissions rates.
- You must register via Form 637 before production, and your fuel must be sold to an unrelated party. If you have a contract, make sure it reflects compliance with feedstock and domestic production rules.
What Actions Should Fuel Producers Take Now?
- Register immediately if not yet registered — Form 637 activity letters CN or CA needed. Timing matters.
- Review supply chain — ensure feedstocks are eligible (U.S./Mexico/Canada) and check for possible prohibited entity exposure.
- Calculate emissions rates carefully — prepare to discard indirect land-use changes and focus on direct emissions unless dealing with animal manure feedstocks.
- Monitor rulemaking — regulations are proposed (as of IR-2026-20), and issuances related to anti-abuse and attribution are expected. Stakeholder comments are open. (irs.gov)
By aligning operations with these new rules, producers can access significant incentives for clean fuel — but any misstep in registration, timing, or documentation risks losing eligibility.