By Baker Tilly’s Gideon Gradman, Bob Hofacker, Shristhi Negi, Beckett Woodworth
The Treasury Department and the IRS have issued proposed regulations on Feb. 3, 2026, providing expanded guidance on the Clean Fuel Production Credit under IRC section 45Z and significantly building on the framework previewed last year in Notice 2025-10. The proposed rules formalize definitions and procedures and introduce several important clarifications regarding who qualifies as a producer, what constitutes “production,” how qualified sales through intermediaries are treated, and safe harbors for substantiating a fuel’s emissions rate and qualified sales.
Background
Section 45Z, enacted by the Inflation Reduction Act and later amended by the One Big Beautiful Bill Act (OBBBA), provides an income tax credit for domestic production of qualifying clean transportation fuels sold after Dec. 31, 2024, and before Jan. 1, 2030. For production years after 2025, the credit amount equals to $0.20 per gallon or gasoline gallon equivalent, depending on the fuel emissions factor.
The credit amount is increased to $1.00 if prevailing wage and apprenticeship requirements are satisfied. Additionally, OBBBA imposed new prohibited foreign entity (PFE) and foreign feedstock limitations for purposes of claiming a section 45Z PTC beginning in taxable years after enactment, generally Jan. 1, 2026.
Earlier guidance included:
- Notice 2024-49: addressing registration requirements
- Notice 2025-10: announcing forthcoming regulations and proposed rule concepts
- Notice 2025-11: issuing initial emissions-rate methodologies and tables
The proposed regulations now consolidate and expand these rules into a comprehensive regulatory framework.
Key updates and clarifications from the proposed regulations
Broader “qualified sale” rules for producers
One of the most notable changes from Notice 2025-10 involves defining a qualified sale. The earlier draft language in Notice 2025-10 suggested a narrow interpretation that required fuel to be “sold for use in a trade or business” to mean sold for “use as a fuel” in a trade or business. Industry commenters noted this would disqualify common wholesale and intermediary sales structures.
The proposed regulations revise Treasury’s initial approach by removing the restrictive “use as a fuel” standard introduced in Notice 2025-10, clarifying that sales to wholesalers and resellers may qualify, and adding a look-through rule that allows sales made through related intermediaries to count as sales to unrelated persons. These changes are expected to make it easier for producers operating through dealers, marketers, or related distribution entities to satisfy the statutory sale requirement.
The proposed regulations would also clarify the term “suitable for use as a fuel in a highway vehicle or aircraft” (suitable for use) to mean that the fuel has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft, or may be blended into a fuel mixture that has practical and commercial fitness for use as a fuel in a highway vehicle or aircraft. Actual use as a fuel in a highway vehicle or aircraft is not required.
The look-through rule provides that a producer does not lose eligibility for the section 45Z credit merely because fuel is first sold to a related entity, provided that the related party ultimately sells the fuel to an unrelated person. While Notice 2025-10 primarily followed the statutory consolidated group rule, the proposed regulations adopt a broader look-through framework that applies to both corporate and non-corporate structures, including partnerships, limited liability companies, and other pass-through structures. Under this approach, a sale to a related intermediary is treated as a qualified sale if that intermediary subsequently resells the transportation fuel in a qualifying transaction to an unrelated customer.
Finally, Notice 2025-10 used the term “qualifying sale.” The proposed regulations instead standardize the term “qualified sale.”
Blending with fossil fuels permitted prior to sale
The proposed regulations also clarify that, although blending activities generally do not themselves constitute “production” for purposes of section 45Z, a producer does not forfeit credit eligibility merely because a qualifying transportation fuel is blended with fossil fuels or other components prior to sale. In other words, blending does not constitute production, but it also does not disqualify an otherwise qualifying producer. So long as the taxpayer has already completed the substantive production process (i.e., transforming feedstocks into a finished clean fuel), the subsequent mixing of that fuel is treated as a post-production handling step rather than a new production activity.
RNG processor, not compressor, treated as producer
The proposed regulations also reaffirm which party is treated as the “producer” of renewable natural gas (RNG) for purposes of section 45Z, confirming that the credit attaches to the entity that performs the substantive upgrading of raw biogas rather than to downstream service providers. Specifically, the proposed regulations provide that the person who processes and conditions raw landfill gas or digester gas so that it becomes interchangeable with fossil natural gas, by removing water, carbon dioxide, and other impurities to meet pipeline-quality specifications, is treated as the producer, even if that entity does not perform subsequent compression to satisfy American Society for Testing and Materials (ASTM) D8080 or other transportation standards. Compression and similar steps are characterized as post-production handling activities rather than fuel production.
Negative emissions rates
The proposed regulations also confirm that negative emissions rates are only possible for animal manure feedstocks. A revised 45ZCF-GREET model will still need to be released to determine the exact value, but no caps or restrictions were noted for animal manure feedstocks. Other feedstocks are barred from utilizing negative emissions rates for production years after 2025.
Safe harbors for substantiating emissions rates and qualified sales
The proposed regulations move beyond general recordkeeping concepts and establish two formal, certificate-based safe harbors to substantiate both a fuel emissions rate and whether a sale qualifies under section 45Z.
First, for non-SAF transportation fuels whose lifecycle emissions are determined using the 45ZCF-GREET model, Proposed Reg. section 1.45Z-4(g)(2) allows taxpayers to rely on a safe harbor if they obtain third-party certification in substantially the same form and manner required for SAF under Proposed Reg. section 1.45Z-5. In effect, Treasury extends the SAF-style independent verification framework to non-SAF fuels, permitting taxpayers to rely on certified emissions determinations rather than recreating or defending technical modeling assumptions during an IRS examination.
Second, Proposed Reg. section 1.45Z-4(g)(3) provides a safe harbor for demonstrating that a transaction constitutes a “qualified sale.” Under this rule, the producer must obtain a certificate from the purchaser, signed under penalties of perjury, attesting that the fuel will be used in a qualifying manner. For single transactions, the certificate must be secured at or before the time of sale; for ongoing sales, it must be obtained before or contemporaneously with the first covered purchase. The producer may rely on the certificate so long as it has no reason to know the information is false and retains the documentation in its books and records. The proposed regulations include an example of a qualified sale certificate in Proposed Reg. section 1.45Z-4(g)(3)(ii).
Clarity on facility definition and anti-stacking rules
The proposed regulations also adopt a more precise definition of a “qualified facility,” narrowing the scope of what constitutes credit-eligible property, and providing clearer boundaries for purposes of coordinating section 45Z with other clean energy tax credits.
Rather than defining a facility broadly by geographic location or site, the proposed regulations treat a facility as a single production line comprised of interdependent equipment that collectively performs the fuel production process. Equipment that is ancillary or post-production—such as storage, transportation, or compression assets—is generally excluded. The proposed regulations did not add additional detail about what components specifically qualify or offer concrete examples of components included in the qualified facility definition.
This definition also facilitates compliance with statutory anti-stacking rules by clarifying which specific production line is eligible for section 45Z and ensuring that the same property or process cannot simultaneously generate benefits under other clean energy credit provisions, such as sections 45V (clean hydrogen), 45Q (carbon capture), or 48(a)(15) investment tax credit elections. In practice, this approach provides clearer credit boundaries for multi-technology or co-located sites.
In addition, the proposed regulations introduce clear anti-double-crediting rules designed to prevent multiple section 45Z credits from being claimed across successive stages of a fuel production chain. The rules provide that transportation fuel produced from another fuel that has already generated a section 45Z credit generally does not independently qualify for an additional credit, effectively limiting eligibility to the first qualifying production activity. This provision addresses scenarios in which an intermediate clean fuel is later converted into a second fuel product and could otherwise create opportunities for stacked incentives. For example, sustainable aviation fuel (SAF) produced from ethanol, or hydrogen produced from renewable natural gas that has already been treated as section 45Z-eligible, may not generate a second credit if the upstream fuel has already benefited from section 45Z.
Registration and compliance framework
The proposed regulations also clarify and expand the registration requirements under section 4101. Building on the framework first introduced in Notice 2024-49, the proposed regulations require each credit-claiming entity to register separately at the EIN level, including disregarded entities and other business units that might otherwise be consolidated for tax purposes.
The rules further clarify that registration is not always a one-time exercise: taxpayers must update or re-register when there are material changes in ownership, organizational structure, or business activities. Importantly, the proposed regulations emphasize that a registration letter is not a substantive determination of eligibility and does not preclude later IRS examination of the credit. Treasury also expressly reserves the authority to deny, suspend, or revoke registrations where a taxpayer fails to satisfy the regulatory requirements or maintain adequate records.
The proposed regulations also maintain the safe harbor in Notice 2025-10 for entities that are required to re-register as a producer of transportation fuel due to a change in ownership or EIN as of the date the IRS received the application for re-registration, even if, at the time of fuel production, the IRS has not yet approved the re-registration.
Transferability and elective pay ownership rules clarified
The proposed regulations also include conforming amendments to the elective payment and transferability rules under sections 6417 and 6418 to address a technical issue specific to section 45Z. Unlike other clean energy credits that are tied to ownership of tangible credit property, section 45Z is based on the production and sale of qualifying fuel, raising questions about whether the general requirement to own “eligible credit property” could inadvertently restrict elective payment or credit transfers. The proposed regulations resolve this uncertainty by clarifying that ownership of underlying production assets is not required for section 45Z purposes when making an elective pay election or transferring the credit.
Energy attribute certificates
The proposed regulations also introduce new, explicit rules governing the use of energy attribute certificates (EACs) when calculating lifecycle emissions rates under the 45ZCF-GREET model, an area that Notice 2025-10 did not address. Rather than simply allowing modeled electricity inputs, the proposed regulations incorporate by reference the framework used for the section 45V clean hydrogen credit, providing that rules similar to Reg. section 1.45V-4(d) apply to EAC usage. As a result, taxpayers must satisfy an incrementality requirement, meaning EACs generally must be associated with newly placed-in-service generation rather than legacy renewable assets.
The proposed regulations further impose a 36-month commercial operations date (COD) test, under which the electricity-generating facility tied to an EAC must have begun operations no earlier than 36 months before the first taxable year the fuel facility produces qualifying transportation fuel. The rules also clarify that, for purposes of applying this timing test, a clean fuel facility is treated as placed in service in the first year it produces transportation fuel and include an example illustrating how older production sites retrofitted for section 45Z eligibility must rely only on relatively recent power generation.
PER process explained and expanded
The proposed regulations also describe the mechanics for obtaining a Provisional Emissions Rate (PER), converting the conceptual framework in Notice 2025-10 into a practical guide. While Notice 2025-10 previewed that taxpayers could seek a PER by first obtaining an emissions value from the Department of Energy (DOE), the proposed rules now establish detailed procedures under Prop. Reg. section 1.45Z-2(f).
Taxpayers must submit an emissions value request (EVR) to DOE, obtain a calculated emissions value letter (CEVL), and then file a formal PER petition with Form 7218 attached to the first return on which the section 45Z credit is claimed. The proposed regulations further provide that a properly filed petition is deemed accepted by the IRS, with the deemed acceptance constituting the Secretary’s PER determination, and allows taxpayers to rely on the DOE-provided emissions value absent inaccuracies in the underlying representations.
In addition, the proposed regulations clarify that PERs are available only for fuels or categories not already covered by the annual emissions rate table and introduce a relation-back rule under which newly established emissions rates or PER determinations apply retroactively to production beginning Jan. 1, 2025.
However, at the time the proposed regulations were published, the PER application was not yet available on the DOE website. Credit claimants must continue to wait for the PER application to open before submitting an EVR.
Section 45Z-specific Feedstock Carbon Intensity Calculator
The proposed regulations also preview the incorporation of a section 45Z-specific version of the U.S. Department of Agriculture’s Feedstock Carbon Intensity Calculator (FD-CIC) to account for emissions reductions associated with certain agricultural practices used to produce qualifying feedstocks. The preamble explains that, once finalized, this 45Z-specific FD-CIC module will be integrated into the 45ZCF-GREET model and used to calculate carbon intensity adjustments for feedstocks grown using practices such as no-till or reduced-till farming, cover cropping, and improved nutrient management.
Other key considerations
The proposed regulations also address anti-abuse concerns, particularly regarding imported used cooking oil (UCO). To mitigate potential abuse, UCO will initially be excluded from the 45ZCF-GREET model until the Treasury and IRS issue further guidance on appropriate substantiation and recordkeeping.
The proposed regulations did not expand on foreign entities of concern rules, alter prevailing wage and apprenticeship compliance requirements promulgated in Reg. section 1.45Z-3, or offer concrete examples of components included in the qualified facility definition.
Conclusion
Baker Tilly is actively monitoring developments related to the proposed section 45Z regulations and is continuing to evaluate the technical and operational impacts for fuel producers, developers, and investors. We will share additional insights and guidance as the Treasury and IRS issue further updates or move toward final rules.
In the meantime, the Treasury and IRS are inviting public comments on these proposed regulations. All written and electronic comments must be submitted by April 6, 2026. A public hearing on the proposed rules has been scheduled for May 28, 2026. Parties interested in submitting comments or who wish to speak at the hearing can do so through the Federal e-Rulemaking portal.
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