Treasury Department, IRS Correct Section 48 Proposed Regulations on Qualified Biogas Property

The U.S. Department of the Treasury and IRS on Feb. 16, 2024, released a correction to Internal Revenue Code Section 48 Proposed Regulations relating to the new investment tax credit (ITC) for biogas. The correction provides that "gas upgrading equipment that is necessary to concentrate the gas from qualified biogas property into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen, would be energy property if it is an integral part of an energy property as defined in proposed §1.48-9(f)(3)."

The Inflation Reduction Act of 2022 (IRA) 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.

Prior to the correction, the Proposed Regulations provided that "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." The Treasury Department's prior proposed position contradicted the statutory provision that specifically includes cleaning and conditioning equipment of gas that is at or above the 52 percent threshold and was inconsistent with its position with regard to similar equipment for other ITC-eligible technologies. (See Holland & Knight's previous alerts, "Section 48 Proposed Regulations Detail Treatment of Qualified Biogas Property," (Nov. 20, 2023), and "Breaking Down the Section 48 Investment Tax Credit Proposed Regulations," Nov. 28, 2023.)

Notably, the corrected regulations provide that such gas upgrading equipment is "not a functionally interdependent component (of qualified biogas property)." Instead, the correction takes the position that gas upgrading equipment may be integral property. The Proposed Regulations provide that all property that is an "integral part" of the energy property is considered energy property for purposes of the ITC. Property owned by a taxpayer is an integral part of an energy property owned by the same taxpayer if it is used directly in the intended function of the energy property and is essential to the completeness of the intended function. Multiple energy properties may include shared property that may be considered an integral part of each energy property. In such instances, if owned by a taxpayer at least in part, the cost basis for the shared property should be allocated to each energy property.

Further, the correction does not address concerns raised regarding the 80/20 percent rule. The statute should be interpreted to incentivize adding gas upgrading equipment to an existing landfill or digester. In some instances, the existing equipment may have a value that exceeds 20 percent of what would be the fair market value of the entire system if the 80/20 test were applied to the entire system, including the preexisting equipment. Applying the 80/20 test in a manner that encourages the addition of gas upgrading equipment to existing landfills and digesters is critical to fully achieve the goals of the IRA.

The Holland & Knight Energy Tax Team is available for questions regarding the Section 48 ITC guidance. To receive additional analysis from the team, please subscribe to our alerts.

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