Guidance, Model Provide Additional Clarity for 40B Sustainable Aviation Fuel Tax Credit

The U.S. Department of the Treasury and IRS released Notice 2024-37 on April 30, 2024, regarding the Sustainable Aviation Fuel (SAF) Tax Credit found at Section 40B of the Internal Revenue Code as an income tax credit and also available as an excise tax credit under Sections 6426 and 6427. In conjunction with the guidance, the U.S. Department of Energy (DOE) released a 40BSAF-GREET model.

Effective for qualified mixtures sold or used after Dec. 31, 2022, and before Jan. 1, 2025, Section 40B provides an income tax credit for the gallons of SAF contained in the mixture. A "qualified mixture" is a mixture of SAF and kerosene that is produced in the U.S. and used by the taxpayer or sold by the taxpayer for use in an aircraft. The sale or use must be done in the ordinary course of the taxpayer's business, and the fueling of the aircraft must occur in the U.S. Sections 6426 and 6427 allow excise tax credit or payment in lieu of the income tax credit.

Notice 2024-37, which follows the initial guidance of Notice 2023-06 and Notice 2024-06, provides additional safe harbors under which the life cycle greenhouse gas (GHG) emissions reduction percentage of the SAF can be calculated.

Background

In order to generate a credit under Section 40B, the SAF in the qualified mixture must be certified as having a life cycle GHG emissions reduction percentage of at least 50 percent as compared to petroleum-based jet fuel. Once the SAF meets the minimum 50 percent reduction threshold, the life cycle GHG emissions reduction percentage is then used to calculate the applicable supplementary amount of the credit. The supplemental amount increases the $1.25 base tax credit by 1 cent for each whole percentage point by which the life cycle GHG emissions reduction percentage exceeds 50 percent. The maximum increase is 50 cents, capping the total credit at $1.75 per gallon. For these reasons, how to determine life cycle GHG emissions reduction of the SAF is of utmost interest.

The statute provides that such determination is made in accordance with "1) the most recent Carbon Offsetting and Reduction Scheme for International Aviation which has been adopted by the International Civil Aviation Organization with the agreement of the United States, or 2) any similar methodology which satisfies the criteria under section 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)), as in effect on the date of enactment of this section." This statutory language, as determined by the Treasury Department, is a reference to the International Civil Aviation Organization (ICAO) CORSIA model and the U.S. Department of Energy (DOE) Argonne National Laboratory's GREET model (ANL-GREET), respectively.

GREET and ICAO

The ICAO CORSIA model and ANL-GREET model are substantially similar in their approach to collecting, analyzing and reporting life cycle GHG emissions data. However, a single fuel may generate different life cycle GHG emission profiles from the two models due to differences in various assumptions and default, or "background," values.

In a prior Notice 2024-06, the Treasury Department and IRS concluded that the existing ANL-GREET model and other existing GREET-based models did not satisfy the applicable requirements to calculate life cycle GHG emissions for SAF under Section 40B, including the registration, sustainability, traceability and unrelated party certification requirements. Notice 2024-06 indicated that the DOE was collaborating with other federal agencies to develop a new version of the GREET model to satisfy the requirements of Section 40B, which was slated for release on March 1, 2024.

40BSAF-GREET 2024

IRS Notice 2024-37 and the new 40BSAF-GREET model represent the culmination of that work, creating a pathway for qualifying for the Section 40B tax credit using this updated model. The notice provides a safe harbor for:

• calculating the life cycle GHG emissions reduction percentage by using the new 40BSAF-GREET model
• obtaining a certification, using a California Air Resources Board Low Carbon Fuel Standard (CARB LCFS) program, from an accredited verifier
• use of the U.S. Department of Agriculture (USDA) Climate Smart Agriculture (CSA) practices for cultivating domestic corn and soybeans to further reduce the life cycle GHG emissions calculated using the 40BSAF-GREET model or any CARB program, including the LCFS

The notice also provides additional administrative clarity including registration requirements and procedures

Within the new 40BSAF-GREET model, there are options to take advantage of GHG emission reduction strategies such as carbon capture and storage (CCS), renewable natural gas (RNG) and renewable electricity. However, extensive restrictions apply to each strategy.

Currently, the model calculates life cycle GHG emissions associated with SAF from two production routes, hydroprocessed esters and fatty acids (HEFA), as well as alcohol-to-jet using an ethanol feedstock (ATJ-Ethanol). Using the most relevant feedstocks, the model provides seven distinct SAF pathways:

• HEFA – U.S. soybean
• HEFA – U.S. and Canadian canola/rapeseed
• HEFA – tallow
• HEFA – used cooking oil (UCO)
• HEFA – U.S. distillers corn oil
• ATJ-Ethanol – U.S. corn
• ATJ-Ethanol – Brazilian sugarcane

The 40BSAF-GREET model was accompanied with an explanatory DOE document to further explain the model.

DOE opted to utilize GTAP-BIO modeling for background data on indirect effects, including those from induced land use change, that impact the pathways for soybean and canola oil HEFA, as well as corn and sugarcane ATJ-ethanol. More detail on the GTAP-BIO modeling and these emissions profiles can be found in Argonne National Lab's technical documentation.

USDA CSA Pilot Program

For purposes of Section 40B, the USDA has established a CSA pilot program incorporating specific CSA practices separate from the 40BSAF-GREET 2024 model and any CARB programs. Using this USDA pilot program, corn-based alcohol-to-jet fuel using ethanol and soybean HEFA may earn additional reductions of 10 gCO2e/MJ and 5 gCO2e/MJ, respectively, for calculating overall life cycle assessment scores.

To qualify, corn farmers must engage in three CSA practices on the same acreage: no-till farming, planting cover crops and applying enhanced-efficiency nitrogen fertilizer. For the HEFA production pathway using soybeans, only no-till farming and cover cropping must be employed.

Notice 2024-37 details specific recordkeeping and certification requirements for implementation of this pilot program, which are separate from other certification requirements under the LCFS and 40BSAF-GREET 2024 model.

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

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