Understanding the new IRS guidance for Sustainable Aviation Fuel Credit

Irina Pisareva and Christopher B. Younger, partners at law firm Crowell, examine the key issues with Sustainable Aviation Fuel (SAF) Tax Credit following recent guidance from the US Treasury and Internal Revenue Services (IRS).

On December 19, 2022, the Treasury Department (“Treasury”) and Internal Revenue Service (“IRS”) issued Notice 2023-06 (“Notice”) regarding the Sustainable Aviation Fuel (“SAF”) tax credit (“SAF Tax Credit”). The SAF Tax Credit was created by the Inflation Reduction Act of 2022. It applies to a qualified fuel mixture containing sustainable aviation fuel for certain sales or uses in calendar years 2023 and 2024.

The SAF Tax Credit is $1.25 for each gallon of sustainable aviation fuel in a “qualified mixture.” To qualify for the credit, the sustainable aviation fuel must have a minimum reduction of 50 percent in lifecycle greenhouse gas emissions. Additionally, there is a supplemental credit of one cent for each one percent that the lifecycle greenhouse gas emissions reduction exceeds 50 percent. The notice provides a safe harbor for calculating the lifecycle greenhouse gas emissions reduction percentage.

The Notice explains the requirements for fuel produced and either sold or used to be eligible for the SAF Tax Credit, the various methods in which a claimant may claim the SAF Tax Credit, and the IRS registration requirements that a taxpayer must complete to be eligible to claim the SAF Tax Credit.

The Notice explains that a claimant may choose between methods for claiming the SAF Tax Credit. One method for making such a claim is through the federal excise tax system. The second is a general business income tax credit that is nonrefundable and must be included in income. The Notice also clarifies what constitutes SAF and a qualified mixture.

The Notice also asks for public comments on various aspects of the statute, which will help Treasury and IRS in developing additional guidance. The deadline for submission of comments is February 17, 2023.

Sustainable Aviation Fuel Requirements

SAF may be categorized as either (i) an SAF synthetic blending component or (ii) a co-processed liquid fuel that was produced by co-processing petroleum with synthesized hydrocarbons derived from synthesis gas via the Fischer Tropsch process (FT hydrocarbons).

More specifically, under the Notice, SAF is the portion of liquid fuel that is not kerosene[1] that:

1. either meets the specifications of “ASTM D7566” (defined to mean the ASTM D7566 Annexes),[2] or meets the specifications of ASTM D1655 Annex A1;[3] and
2. satisfies the sustainability requirements detailed in the Notice.

The Notice provides that a liquid fuel that meets the specifications of one of the ASTM D7566 Annexes or meets the specifications of ASTM D1655 Annex A1, but does not meet sustainability requirements detailed in the Notice, is ineligible for the SAF Tax Credit.

Aviation fuel does not qualify for the SAF Tax Credit if it is:

• derived from co-processing an “applicable material” (or materials derived from an applicable material) with a feedstock that is not “biomass”: [4] – the term “applicable material” for this purpose means (i) monoglycerides, diglycerides, and triglycerides, (ii) free fatty acids, and (iii) fatty acid esters. [5] – the term “biomass” is defined as any organic material other than oil and natural gas (or any product thereof), and coal (including lignite) or any product thereof. [6]
• derived from palm fatty acid distillates or petroleum.

Qualified Mixture

An SAF “qualified mixture” means a mixture of an SAF synthetic blending component with ASTM D1655 kerosene that meets the requirements of ASTM D7566 and which may be regarded as ASTM D1655 compliant SAF.[7]

A “qualified mixture” means a mixture of sustainable aviation fuel and kerosene, but only if such mixture is:

1. produced by the taxpayer in the United States (defined in § 7701(a)(9) of the Code to mean the states and the District of Columbia);
2. used by the taxpayer (or sold by the taxpayer for use) in an aircraft in the ordinary course of a trade or business of the taxpayer; and
3. transferred into the fuel tank of an aircraft in the United States.[8]

A qualified mixture may be produced by either mixing an SAF synthetic blending component with kerosene or by co-processing SAF FT hydrocarbons with petroleum to produce a co-processed liquid fuel referred to as an SAF co-processed qualified mixture. [9]

Only the portion of the SAF co-processed qualified mixture attributable to the SAF FT hydrocarbons (derived from biomass) qualifies for the SAF Tax Credit. Conversely, no portion of the kerosene derived from a petroleum-based source in an SAF co-processed qualified mixture qualifies for the SAF Tax Credit.

Safe Harbor for Calculating the Lifecycle Greenhouse Gas Emissions Reduction Percentage

The IRS will accept a lifecycle greenhouse gas emissions reduction percentage calculated from the International Civil Aviation Organization’s (“ICAO”) most recent publication of the Carbon Offsetting and Reduction Scheme for International Aviation (“CORSIA”) Default Life Cycle Emissions Values for CORSIA Eligible Fuels.[10] The IRS will also accept a lifecycle greenhouse gas emissions reduction percentage calculated from the ICAO’s most recent publication of the CORSIA Methodology for Calculating Actual Life Cycle Emissions Values.[11]

Registration Requirements

The Notice contains detailed registration requirements for a taxpayer to be eligible to claim the SAF Tax Credit. No SAF Tax Credit is allowed with respect to any sustainable aviation fuel unless the producer or importer of such fuel is registered with the IRS under the fuel excise tax provisions,[12] and provides such information, including certification from an unrelated party demonstrating compliance with:

1. any general requirements, supply chain traceability requirements, and information transmission requirements established under the CORSIA, or
2. other methodology in the established SAF Tax Credit rules.[13]

Until further notice, the IRS will treat the producer or importer of an SAF synthetic blending component and the United States producer of an SAF co-processed qualified mixture as the persons required to register under the fuel excise tax rules. The IRS will not register an importer of a co-processed liquid fuel or an importer of an SAF qualified mixture as an importer of sustainable aviation fuel due to the requirement that a qualified mixture be produced in the United States.[14]

SAF Claims for Credit or Payment

The person eligible to claim the SAF Tax Credit is the person who produces the SAF qualified mixture, assuming all other statutory requirements are met. With respect to an SAF qualified mixture, the person who produces the SAF qualified mixture does not have to be the same person that produced or imported the SAF synthetic blending component. With respect to an SAF co-processed qualified mixture, the person who produces the SAF co-processed qualified mixture is the proper claimant.

Excise Tax Credit, Payment and Refundable Excise Tax Credit Claims

First, the claimant may claim an SAF Tax Credit under the excise tax provisions,[15] along with any applicable alcohol fuel mixture credit[16] or alternative fuel mixture credit[17] against its excise tax liability.[18] If the sum of all credits exceeds the claimant’s excise tax liability for a particular quarter, the claimant may claim a direct payment from the IRS under Section 6427(e)(1) or a refundable income tax credit under Section 34(a)(3). A claimant may only make one claim for each gallon of SAF used in a qualified mixture. A claimant may not make a claim for a direct payment or a refundable credit for an amount that will be claimed or is required to be claimed under the excise tax SAF Tax Credit provisions. Thus, only alcohol fuel mixture and alternative fuel mixture credits are refundable and eligible for direct payment.

A claimant claiming an excise tax SAF Tax Credit must first make the claim on a Form 720, Quarterly Federal Excise Tax Return, if reporting excise tax liability, in accordance with the instructions for that form. For federal income tax purposes, a claimant’s expense for the § 4081 excise tax, whether taken as a deduction or as a component of cost of goods sold, is reduced by the amount of the excise tax SAF Tax Credit.[19]

The direct payment is claimed on Form 720 or Form 8849, Schedule 3, Certain Fuel Mixtures and the Alternative Fuel Credit, in accordance with the instructions for those forms. A person may not make a claim on a Form 8849, Schedule 3 for an amount that is claimed (or will be claimed) on Form 720, Form 720X, Amended Quarterly Federal Excise Tax Return, or Form 4136, Credit for Federal Tax Paid on Fuels.

The Section 34(a)(3) refundable income tax credit is claimed on Form 4136 in accordance with the instructions for that form, for amounts otherwise allowable to be claimed as direct payments, but that were not claimed on Form 720 or Form 8849, Schedule 3.

Although the SAF Tax Credit applies to fuel sold or used after December 31, 2022, a claimant will be ineligible to make a claim immediately after the credit goes into effect before satisfying the applicable registration requirements discussed in the Notice. In general, a claimant will be able to file an amended return (Form 720X) to claim an excise tax SAF Tax Credit with respect to qualified mixtures produced beginning on January 1, 2023, once the appropriate persons are registered and the other requirements of this Notice are met. Similarly, a claimant will be able to claim a refundable income tax credit which it would otherwise be eligible to claim as a direct payment.

Nonrefundable Income Tax Credit Claims

A claimant may claim the income tax SAF Tax Credit on Form 8864, Biodiesel, Renewable Diesel, and Sustainable Aviation Fuels Credit, in accordance with the instructions for that form. The claimant must include the amount of income tax credit in its gross income. [20]

The income tax SAF Tax Credit amount is reduced by any benefit claimed under the excise tax SAF Tax Credit provisions or received as direct payment under excise tax provisions. [21] In addition, for purposes of biodiesel and renewable diesel used as fuel credit, [22] the term “biodiesel” shall not include any liquid with respect to which income tax SAF Tax Credit or income tax alcohol fuels credit may be claimed.

A claimant will be ineligible to make a claim immediately after the SAF Tax Credit became effective due to the registration requirements; however, a claimant generally will be able to file a Form 8864 with an amended income tax return to claim a credit once the appropriate persons are registered and the other requirements of this notice are met.

Each claim for an SAF Tax Credit or with respect to an SAF qualified mixture must contain an original Certificate for SAF Synthetic Blending Component and, if applicable, the Statement(s) of SAF Synthetic Blending Component Reseller. In the case of a certificate and statement that support a claim made on more than one claim form, the certificate and statement are to be included with the first claim and the claimant is to provide information related to the certificate on any subsequent claim in accordance with the instructions applicable to the claim form.

Each claim for an SAF Tax Credit must contain a Declaration for SAF Qualified Mixture. The Declaration consists of a statement that is signed under penalties of perjury by a person with authority to bind the claimant. The Declaration must contain the Certificate of Analysis (“COA”) reference number for the COA associated with the SAF qualified mixture, as well as the COA reference numbers for the SAF synthetic blending component and the D1655 kerosene that the claimant blended to produce the SAF qualified mixture. Separate COAs are generated for each synthetic blending component, for the kerosene used to mix with the synthetic blending component, and for the SAF qualified mixture. The COA reference number for the SAF synthetic blending component must match the COA reference number for the SAF synthetic blending component on the Certificate for SAF Synthetic Blending Component.

Model documents necessary to comply with the above requirements are provided in appendices to the Notice.

Specific Comments Requested in the Notice

The IRS anticipates issuing additional guidance on the SAF Tax Credit. In the Notice, the Treasury and the IRS request comments on whether any issues related to the SAF Tax Credit provided in the Notice require clarification or additional guidance. The Treasury Department and IRS also requested comments on the following specific issues:

• The SAF Tax Credit provisions provide that “any similar methodology, which satisfies the criteria under § 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)), as in effect on December 31, 2022 may be used to determine the reduction in lifecycle greenhouse gas emissions.What methods exist that could qualify as a “similar methodology”?
• Do the lifecycle emissions values that have been developed by the Environmental Protection Agency for the Renewable Fuel Standard qualify as a “similar methodology”?
• Does the Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation (GREET) model developed by the Argonne National Laboratory qualify as a “similar methodology”?
• What CORSIA requirements are needed to ensure supply chain traceability of information related to lifecycle greenhouse gas emissions and what unrelated party or parties are qualified to demonstrate compliance?
• Are any SAF co-processed qualified mixtures currently being produced in the United States? Are any SAF FT hydrocarbons currently being produced in the United States?
• With respect to the registration requirements under the fuel tax provisions, the Notice treats the person who produces an SAF co-processed qualified mixture as a sustainable aviation fuel producer. Is it more appropriate to treat the producer of the SAF FT hydrocarbons as the sustainable aviation fuel producer?
• What types of verification exist to show what portion of an SAF co-processed qualified mixture is attributable to FT hydrocarbons versus petroleum? Are carbon dating or mass balancing appropriate types of verification?
• What entities are capable of providing the certifications relating to a lifecycle greenhouse gas emissions reduction percentage of at least 50 percent and concerning general requirements, supply chain traceability requirements, and information requirements established under CORSIA or a similar methodology under the Clean Air Act with respect to SAF co-processed qualified mixtures?
• What types of verification exist to show that the qualified mixture is transferred to the fuel tank of an aircraft in the United States?

For more information please contact:

Christopher B. Younger
Senior Counsel – Washington, D.C.
Phone: +1.202.508.8761
Email: [email protected]

Footnotes

[1] Section 40B(d)(1). All references to sections are either references to sections within the Internal Revenue Code of 1986, as amended, or to sections within the Treasury Regulations.

[2] The term ASTM D7566 Annexes means any of the annexes in ASTM D7566 that provide the specifications for a pathway to create a synthetic blending component that can be blended with ASTM D1655 kerosene to make a qualified mixture. The term ASTM D1655 kerosene means petroleum-based kerosene that meets the specifications set forth in ASTM D1655 and does not include liquid fuel co-processed with FT hydrocarbons or the addition of a synthetic blending component.

[3] The term ASTM D1655 Annex A1 means the Fischer Tropsch provisions of ASTM D1655 Annex A1 that are contained in section A1.2.2.2, which provides a pathway for producing a liquid fuel by co-processing up to five percent of FT hydrocarbons with petroleum to make a qualified mixture. For purposes of the Notice, the term “petroleum” includes any conventionally sourced hydrocarbons permitted under ASTM D1655 Annex A1.

[4] Section 45K(c)(3).

[5] Section 40B(d)(2)(A).

[6] Section 45K(c)()3).

[7] The term “ASTM D1655 compliant SAF” means ASTM D1655 kerosene that has been blended with an SAF synthetic blending component described in a specific ASTM D7566 Annex and meets the batch specifications described in ASTM D7566, Table 1. It also means kerosene produced by co-processing SAF FT hydrocarbons with petroleum under ASTM D1655 Annex A1. Once the mixture meets those batch specifications or is produced under ASTM D1655 Annex A1, the mixture may be regarded as jet fuel under ASTM D1655. ASTM D1655 compliant SAF is fully fungible with ASTM D1655 kerosene. The terms “ASTM D1655 kerosene” and “ASTM D1655 compliant SAF” are not ASTM designations, but rather are used in the Notice to distinguish between two types of fuel (for federal excise tax purposes) that qualify as jet fuel under the ASTM D1655 specifications for jet fuel. The term “ASTM D7566” means the batch specifications set forth under ASTM D7566, Table 1, which includes the blending requirements for each synthetic blending component and the overall specifications and requirements for the blended mixture to be regarded as ASTM D1655 compliant SAF. Blending percentage requirements for various synthetic blending components with ASTM D1655 kerosene are listed in section 6 of ASTM D7566 and range from 10 to 50 percent.

[8] Section 40B(c).

[9] The term “SAF co-processed qualified mixture” means a co-processed liquid fuel that meets the requirements of ASTM D1655 Annex A1 biomass used to create the FT hydrocarbons. ASTM D1655 Annex A1 provides a pathway for producing a liquid fuel by co-processing FT hydrocarbons with petroleum that results in a qualified mixture if the producer uses SAF FT hydrocarbons. This process is functionally different from mixing two distinct products, such as a synthetic blending component and kerosene, to create a qualified mixture. Here, petroleum-based hydrocarbons and up to five percent of SAF FT hydrocarbons are processed together to produce kerosene, a portion of which was derived from sustainable sources. Before processing, neither the petroleum-based hydrocarbons nor the SAF FT hydrocarbons qualify as kerosene.

[10] At the time of publication of the Notice, the most recently published version (Fourth Edition, June 2022) was available at: https://www.icao.int/environmental-protection/CORSIA/Pages/CORSIA-Eligible–Fuels.aspx.

[11] At the time of publication of the Notice, the most recently published version (Third Edition, June 2022) was available at: https://www.icao.int/environmental-protection/CORSIA/Pages/CORSIA-Eligible–Fuels.aspx.

[12] Section 40B(f), Section 4101.

[13] Sections 40B(e)(2) and 40B(f)(2)(A)(i). See also Section 6426(k)(3).

[14] Section 40B(c)(1).

[15] Section 6426(k).

[16] Section 6426(c).

[17] Section 6426(e).

[18] Section 4081.

[19]  Exxon Mobil Corp. v. United States, 43 F.4th 424 (5th Cir. 2022).

[20] Section 87, Section 40B(a).

[21] Section 40B(g).

[22] Section 40A.