Section 48 Proposed Regulations Detail Treatment of Qualified Biogas Property

The U.S. Department of the Treasury on Nov. 17, 2023, issued proposed regulations (Proposed Regulations) regarding the investment tax credit (ITC) under Section 48 of the Internal Revenue Code (Code) that, following passage of the Inflation Reduction Act of 2022, includes a tax credit for "qualified biogas property." This Holland & Knight alert summarizes the provisions of Section 48 and the Proposed Regulations specifically relevant to qualified biogas property. The firm's Energy Tax Team is reviewing the Proposed Regulations and will provide additional analysis. To receive this analysis, please subscribe to our alerts.

Statute

The Inflation Reduction Act of 2022 added "qualified biogas property" to the list of property eligible for a Section 48 ITC. Section 48(c)(7) provides this definition of "qualified biogas property":

(A) In general – The term "qualified biogas property" means property comprising a system which

(i) converts biomass (as defined in section 45K(c)(3), as in effect on the date of enactment of this paragraph) into a gas which (I) consists of not less than 52 percent methane by volume, or (II) is concentrated by such system into a gas which consists of not less than 52 percent methane, and

(ii) captures such gas for sale or productive use, and not for disposal via combustion.

(B) Inclusion of cleaning and conditioning property. The term "qualified biogas property" includes any property which is part of such system which cleans or conditions such gas.

Proposed Regulations

Definition of Qualified Biogas Property

The Proposed Regulations further define "qualified biogas property" – specifically, Prop. Treas. Reg. § 1.48-9(e)(11)(i) states:

"Qualified biogas property is property comprising a system that converts biomass (as defined in section 45K(c)(3) of the Code, as in effect on August 16, 2022) into a gas that consists of not less than 52 percent methane by volume (tested at the point described in paragraph (e)(11)(ii) of this section), or is concentrated by such system into a gas that consists of not less than 52 percent methane (tested at the point described in paragraph (e)(11)(ii) of this section), and captures such gas for sale or productive use and not for disposal via combustion. Qualified biogas property also includes any property that is part of such system that cleans or conditions such gas. For example, qualified biogas property includes, but is not limited to, a waste feedstock collection system, a landfill gas collection system, mixing or pumping equipment, and an anaerobic digester. However, gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not included in qualified biogas property." (emphasis added)

"(ii) Methane content requirement. The methane content requirement described in section 48(c)(7)(A)(i) of the Code and paragraph (e)(11)(i) of this section is measured at the point at which gas exits the biogas production system, which may include an anaerobic digester, landfill gas collection system, or thermal gasification equipment. This is the point at which a taxpayer generally must determine whether it will convert the biogas to fuel for sale or use it directly to generate heat or to fuel an electricity generation unit."

Exception to Prevailing Wage and Apprenticeship Requirements

The Proposed Regulations also address the prevailing wage and apprenticeship requirements. Specifically, Prop. Reg. § 1.48-13(e), Nameplate capacity for purposes of the One-Megawatt Exception, states:

"For purposes of paragraph (b)(1) of this section, the determination of whether an energy project has a maximum net output of less than 1 MW of electrical (as measured in alternating current) or thermal energy is determined based on the nameplate capacity. Where applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output or usable energy capacity of an energy project."

"(5) Qualified biogas property. In the case of qualified biogas property, 3.4 mmBtu/hour can be used as equivalent to the One-Megawatt Exception. Taxpayers may convert the maximum net output of 3.4 mmBtu/hour into an equivalent maximum net volume flow in scf per hour using the appropriate high heat value conversion factors found in the EPA GHGRR at table C-1 to subpart C of part 98 (40 CFR part 98). Otherwise, taxpayers may calculate their own equivalent volumetric flow if the heat content of the gas is known."

Although the Proposed Regulations provide some clarity for qualified biogas property, they include a very unfavorable outcome for RNG projects as it relates to gas upgrading equipment. Comments on the Proposed Regulations are due 60 days after they are published in the Federal Register, which is expected to be on Nov. 22, 2023.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.