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What the proposed section 45Z rules mean for clean fuels

On February 3, 2026, the Treasury and IRS released proposed Section 45Z clean fuel tax credit.

On 3 February 2026, the US Department of the Treasury and Internal Revenue Service (IRS) released proposed regulations to section 45Z, which were then published in the Federal Register on 4 February. The credit was enacted by legislation commonly known as the Inflation Reduction Act of 2022 and amended by legislation commonly known as the One, Big, Beautiful Bill Act, or OB3, in 2025.

Section 45Z provides a production tax credit for certain clean transportation fuel produced after 31 December 2024, and sold by 31 December 2029. In January 2025, the Treasury and IRS released initial section 45Z guidance in the form of Notice 2025-10, which included a notice of intent to propose section 45Z regulations, and Notice 2025-11, which provided the annual emissions rate table for section 45Z calculations. 

Importantly, OB3, which followed soon after:

  • Extends the availability of the section 45Z credit from 2027 to 2029
  •  Requires that eligible fuel produced after 31 December 2025 come from feedstock produced or grown in the US, Canada, or Mexico
  • Imposes certain aspects of the foreign entity of concern (FEOC) rules on the credit

For calendar-year taxpayers, the FEOC-related changes mean that its specified foreign entity rules are generally applicable starting in 2026 and its foreign influenced entity rules are generally applicable starting in 2028. After the enactment of OB3 (and if the taxpayer meets certain prevailing wage and apprenticeship requirements), the amount of the credit is up to $1 per gallon (or gallon equivalent) for sustainable aviation fuel produced after 31 December 2025 and low-emission transportation fuel.

Taxpayers generally cannot claim both a section 45Z credit and a section 45Q carbon sequestration credit for the same emissions/facility in the same tax year. Therefore, they must select one of these credits, keeping in mind that it may be more beneficial to initially claim the 45Z credit before later claiming a section 45Q credit, which is a 12-year credit for carbon capture or utilisation-related projects, the construction of which begins before 1 January 2033 (among other section 45Q requirements). Additional anti-stacking rules apply if a taxpayer seeks to claim the section 45V hydrogen credit or a section 46 credit (in certain circumstances).   

A closer look at the proposed regulations

The clean fuel industry and its key stakeholders have been awaiting the release of these rules for quite some time.

The preamble to these rules provides that “[t]axpayers may rely on these proposed regulations until final regulations are published in the Federal Register, provided taxpayers follow them in their entirety and in a consistent manner.”

At a high level, the proposed section 45Z regulations set forth rules to determine eligibility for the credit as well as rules for registration and filing claims for the credit. In response to numerous industry comments, the proposed regulations clarify the 2025 qualifying sale rule by deleting the “use as a fuel” language from Notice 2025-10, confirming that the sale of transportation fuel to resellers or intermediaries is a “qualified sale.”

The proposed regulations preserve positive aspects of the 2025 IRS guidance, including the flexibility to use a more beneficial 45ZCF-GREET model in a specific year and the safe harbour for substantiation of emissions rate. In addition, the proposed regulations provide guidance on anti-stacking, anti-abuse, and foreign feedstock rules.

Although section 45Z requires that the fuel must be sold to an unrelated person, the proposed regulations clarify that the sale of transportation fuel to related parties (including by members of a consolidated group and non-corporate entities) is treated as the sale of fuel to an unrelated person, if an unrelated person ultimately purchases that fuel.

The proposed rules also address certain technical qualification requirements for various types of fuels. For example, they clarify that the proposed specifications from the American Society for Testing and Materials for specific fuels are both non-exhaustive and non-exclusive for purposes of determining whether fuel is a section 45Z “transportation fuel.” The proposed regulations provide procedures for obtaining a provisional emission rate for certain fuels not listed in the annual emissions rate table, subject to further Department of Energy guidance on this point. The preamble also previews potential changes to the 45ZCF-GREET model, including introduction of a new module for calculating carbon intensity adjustments for feedstocks produced from certain agricultural practices.

The implications going forward

The proposed section 45Z regulations provide greater certainty to producers and purchasers of clean fuels who are claiming section 45Z credits. Further guidance, however, is needed in certain areas, including:

  • Clarifications on the use of energy attribute certificates in the 45ZCF-GREET model
  • Application of the safe harbour for substantiation of qualified sales (including the timing for collection of certificates from purchasers and application of any transition rules for 2025 and portions of 2026 prior to the issuance of the final regulations)
  • Timing of sales through related parties

Additional FEOC guidance will also benefit the clean fuels industry. To learn more about section 45Z credits and how our specialists can assist in facilitating the placement of tax insurance in connection with the purchase and sale of these credits (or any other renewable energy tax credits), speak with a Marsh Risk representative.

Our team

Patrick Browne

Patrick J. Browne Jr

Senior Vice President, Transactional Risk Practice

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Nika Antonikova

Senior Vice President/Tax Insurance Specialist