The 45Z Tax Credit Gets a “Big Beautiful” Alteration 

We recently covered the state of the Clean Fuels Production Credit (better known as 45Z for the section of the tax code) in our article 45Z – Emerging From the Mists published back in January. That article discussed the preliminary guidance for implementation of the 45Z credit which was published in the final days of the outgoing Biden administration. Since then, the new administration has yet to take any action to either advance this proposal or replace it. This has left a large portion of the renewable fuels industry struggling with what they can safely assume about the tax credit. As this tax credit represents a significant portion of the value created by many biofuels, particularly biomass-based diesel, a number of producers have either shut down or reduced production.

The U.S. House of Representatives recently passed its budget reconciliation bill known as H.R.1 or “The Big, Beautiful Tax Act.” This 1,038-page bill covers a great many topics, as has been widely reported in the press. Included is the cancellation of many of the renewable energy and environmental provisions of the Inflation Reduction Act of 2022. However, due to strong support from farm state Republican members of congress, whose support was critical to assure passage of this bill,[1] the 45Z tax credit was not only retained but also extended with some important modifications.[2]

1. Expiration Date – extended to December 31, 2031 (45Z had been scheduled to expire December 31, 2027).
2. Eligible feedstocks are now restricted to those produced in the U.S., Canada, or Mexico. (The preliminary guidance had excluded imported used cooking oil but otherwise permitted imported feedstocks).
3. Indirect Land Use Change is to be excluded from the required lifecycle analysis (LCA). This will have the effect of significantly increasing the credit value for biofuels produced from crop-based feedstocks (e.g., corn ethanol, soy biodiesel and renewable diesel, and canola biodiesel and renewable diesel).
4. Treasury is directed to develop separate pathways for renewable natural gas produced from different types of manure (e.g., dairy, swine, and poultry).
5. Certain foreign entities or foreign-influenced entities are no longer eligible to claim the credit.
6. All changes are effective January 1, 2026.

For any of these changes to take effect, H.R.1 must pass the Senate without amendments or both chambers need to agree on an amended version of H.R.1. Many of the provisions of H.R.1 are controversial and may require further, and lengthy, negotiation between the chambers before a mutually agreeable measure can be adopted and sent to the president for signature. However, the proposed changes to 45Z appear to be much less controversial amongst Republican members (and no Democrats are expected to vote for any version of H.R.1.) Thus, while the timeline for the “Big Beautiful Bill” is difficult to predict, any version which ultimately passes is very likely to include the 45Z changes listed above. Assuming that happens, Treasury will still need to issue final guidance for the amended 45Z before biofuel producers can be confident of how it will impact the value of their products. 

We will continue to monitor this topic and report as details emerge.