Entity Setup
Navigating the Clean Fuel Production Credit: Proposed Regulations Explained
Businesses producing clean transportation fuel now have sharp new rules under proposed IRS regulations—see what qualifies, what’s restricted, and how to prepare comments.
By NomadicTax Research Team • 5-8 min read • February 27, 2026
## What’s the Clean Fuel Production Credit (Section 45Z) Under OBBB
The One, Big, Beautiful Bill Act made major amendments to Section 45Z, which provides an income tax credit for **domestic clean transportation fuel produced after December 31, 2024 and sold through December 31, 2029**. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai)) Key changes include stricter feedstock requirements, rules around emissions rates, and restrictions on certain foreign-influenced entities. ([irs.gov](https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions?utm_source=openai))
## What’s in the Proposed Regulations (IR-2026-20)
Treasury and the IRS issued proposed regulations (Feb 3, 2026) that clarify:
- Feedstocks must be **grown or produced in the US, Mexico, or Canada** to qualify. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai))
- The rules **ban negative emissions rates**, except when fuels are derived from animal manure. Emissions measurement rules for manure-derived fuels must be feedstock-specific. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai))
- Special rules for **foreign entities**: Certain foreign-influenced entities are prohibited in claiming the credit. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai))
- Sustainable Aviation Fuel (SAF) special rate eliminated: SAF mixtures now subject to same credit rates as other transportation fuels. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai))
- Clarification around sale attribution, registration (via Form 637), certification and anti-abuse provisions. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai))
## Action Steps for Clean Fuel Producers
- **Checklist before claiming**
1. Ensure feedstock origin is US/Mexico/Canada and documentation exists.
2. Confirm emissions rates method—especially if using manure feedstock—versus non-manure.
3. Register timely with IRS using Form 637.
4. Be aware of who owns or controls your entity—avoid prohibited foreign influence if applicable.
- **Public comment**: Stakeholders have a chance to comment via the Federal e-Rulemaking portal, citing “REG-121244-23.” Comments and requests to speak at the scheduled public hearing are accepted. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-proposed-regulations-on-the-clean-fuel-production-credit-under-the-one-big-beautiful-bill?utm_source=openai))
## Compliance & Strategic Implications
- **Business planning**: If you produce fuel from multiple feedstocks, shifting toward domestically produced sources becomes more valuable. Non-US feedstock risk may eliminate eligibility.
- **Entity structures**: Entities with foreign investment or ownership should review whether they are “foreign-influenced” under the new definitions. It may affect eligibility or force disqualifications.
- **Anti-abuse rules**: New regulations aim to prevent double counting, misuse of emissions credits, or counting indirect land use. Documentation and certifications will be more detailed.
## Example
A producer in Texas, CleanBio Fuels LLC, uses corn grown in Iowa (US) and animal manure. Their fuel production meets the origin requirement and they have registration via Form 637. For manure-derived fuel, they calculate emissions rates per feedstock and avoid negative emissions treatment. Because of the changes, they can reliably predict credit amounts per gallon sold after Dec 31, 2025.
However, another producer imports sugarcane from outside US/Canada/Mexico. Despite selling fuel after Dec 31, 2024, their feedstock is now ineligible. Without quick restructuring of supply chain, they lose access to the 45Z credit.
## What’s Next & Deadline Highlights
- Proposed rules give clarity **before final regulations**; taxpayers *may rely on some sections* (depending on guidance) for property/fuel produced before the finalization date. ([irs.gov](https://www.irs.gov/irb/2026-06_IRB?utm_source=openai))
- Summarize opportunities now to align strategy with upcoming enforcement.
## Bottom Line
These proposed rules give much‐needed clarity, but with tighter restrictions. Clean fuel producers should review feedstock sourcing, entity ownership, emissions accounting, registration status—and consider commenting during the rulemaking process to shape final regulation.