LINCOLN, Neb. (DTN) -- The Internal Revenue Service released 45Z Clean Fuels Production tax credit guidance that opens the door for farmers, ethanol producers and livestock operations tracking their carbon scores to benefit from the credit.

In particular, the guidance gives special treatment to manure-based fuels, rewards regenerative agriculture and limits the use of foreign feedstocks in fuels that generate the credit. In addition, the U.S. Department of Energy released an updated Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) model this week.

The IRS is giving special relief for 2025 and 2026 crops that were planted prior to the agency guidance, noting in the guidance, "for fuel produced in 2025 and 2026, the requirements (under the law) regarding the pre-application development of a nutrient budget are deemed satisfied for purposes of 45Z."

The IRS makes clear that taxpayers will have to prove any regenerative agriculture claims with actual evidence.

"A taxpayer must be able to substantiate the application of any nutrients (such as nitrogen, phosphorus and potassium) and measurable nutrient sources and removals that the taxpayer inputs into 45ZCF FD-CIC," the IRS said in the guidance.

"A taxpayer must also keep records sufficient to substantiate its claim for the 45Z credit."

Taxpayers qualify for the 45Z using only farming practices identified by USDA in its technical guidelines, the IRS said. Those practices include cover crops, no-till or reduced tillage, enhanced nutrient management, nitrogen inhibitors and manure applications.

Farmers will not be penalized for failing to have nutrient budgets prepared in advance for 2025 and 2026, because many crops were planted before USDA finalized its guidelines, the IRS said.

The National Corn Growers Association said on Wednesday the actions will "give safe harbor" to previously recognized on-farm practices in reducing the carbon intensity of fuels.

"We are very pleased to see these agencies reaffirm the positive actions from the administration earlier this year, which recognized the importance of existing regenerative practices," NCGA President Jed Bower said in a statement.

"We have been encouraged by the strong cooperation and emphasis on how this tax credit will benefit the individual farmer throughout the implementation process."

In addition, the IRS guidance excludes indirect land-use change as a factor in calculating carbon emissions for 45Z.

"For taxpayers using a version of the 45ZCF-GREET model that includes ILUC emissions to determine the emissions rate for a transportation fuel produced after Dec. 31, 2025, the ILUC value published in the 45ZCF-GREET model must be subtracted from the total life cycle analysis results (total LCA results)," the IRS said.

ANIMAL MANURE

The IRS said it was updating its emissions model to allow for dairy and swine manure to qualify for the 45Z.

"The Treasury Department and the IRS anticipate that an update to the 45ZCF-GREET model including dairy manure and swine manure as distinct primary feedstocks is forthcoming," the IRS said.

"As such, dairy manure and swine manure are included as primary feedstocks in the 2026 emissions rate table."

As part of that, livestock operations will be allowed to use a farm's actual manure management history instead of relying on a national average when calculating carbon scores.

The IRS notice said, "A taxpayer producing a transportation fuel derived from animal manure may use an alternative fate reflecting farm-specific prior manure management practices for the animal manure from which the taxpayer derived its transportation fuel."

Prior practices include manure storage in uncovered lagoons, deep pits, liquid/slurry, pasture/range/paddock, dry lot and solid storage.

So, if a dairy or swine operation has historically managed manure in a way that led to higher methane emissions, capturing that methane through an anaerobic digester and converting it to renewable natural gas may receive greater recognition in carbon counting.

Those operations, however, will be required to have records to support exactly how manure was handled before a given digester project was implemented.

"A taxpayer that cannot substantiate the farm-specific prior manure management practices of a given farm will not have avoided emissions included in the 45ZCF-GREET model for such farm's portion of the taxpayer's manure inputs," the IRS said.

New farms, however, would not qualify for the farm-specific benefit. The IRS said it was concerned that new livestock facilities could intentionally choose high-emitting manure systems to later create larger carbon reductions.

In addition, the IRS guidance said manure-based fuels qualify for negative emissions rates after Dec. 31, 2025.

Patrick Serfass, executive director of the American Biogas Council, said in a statement the IRS guidance was much needed.

"Since Congress created 45Z four years ago, the biogas industry has been waiting for the certainty needed to fully put this tax credit to work," he said.

"Billions of dollars of potential investment have been sidelined in recent years while companies waited to understand how 45Z would apply to their projects. Today's guidance provides a path to move that investment forward, build new biogas systems and turn more of the organic waste produced in our communities into domestic renewable fuel."

FOREIGN FEEDSTOCKS

The IRS guidance said transportation fuel produced after Dec. 31, 2025, must be exclusively derived from feedstocks grown in the U.S., Mexico or Canada to qualify for the 45Z.

"The Treasury Department and the IRS remain concerned about the ability to reliably distinguish between imported used cooking oil and palm oil, and the resulting risk of crediting ineligible fuels," the IRS said in its guidance.

In addition, fuel produced only in 2025 using non-North American used cooking oil imported into the U.S. potentially qualifies for the 45Z, according to the guidance, using the "applicable pathway."

Read the IRS guidance here: https://www.irs.gov/….

Read more on DTN:

"45Z Rule Still Hinges on USDA Tool," https://www.dtnpf.com/…

Todd Neeley can be reached at todd.neeley@dtn.com

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