Farm and biofuel groups welcome new federal tax credit rules for clean fuels

Biofuels sit at the crossroads of farming, fuel production, and tax. When tax rules change, the impact does not stay on paper. It shows up in investment decisions, supply contracts, and how much risk producers and lenders are willing to take.

That is the context behind the latest update from the IRS and Treasury. This week, both agencies released proposed regulations for the Section 45Z clean fuel production credit. The credit applies to transportation fuels produced in the United States and is tied to lifecycle greenhouse gas emissions, not just how much fuel is produced.

Farm and biofuel groups welcomed the guidance because it reduces guesswork. The rules make it easier to estimate credit value, plan operations, and decide whether projects, expansions, or long-term supply commitments make financial sense.

Key takeaways

• The proposed 45Z rules clarify eligibility and how the credit is calculated.

• Credit value depends on lifecycle emissions, not just gallons produced.

• A standardized emissions model reduces uncertainty across producers.

• Sales structure and tolling arrangements affect whether credits apply.

• Agriculture groups gain clearer planning signals for feedstock demand.

What the Section 45Z credit rewards

Section 45Z is a federal production tax credit for clean transportation fuels produced in the United States, calculated on a per-gallon or gasoline gallon equivalent basis. The amount is not fixed and increases or decreases based on the fuel’s lifecycle greenhouse gas emissions.

That distinction matters in practice. Two producers can manufacture the same fuel and receive different credit amounts, depending on feedstocks, energy sources, production methods, and logistics. Output alone does not determine value. Process, inputs, and documentation do.

Why farm and biofuel groups are reacting positively

When producers and agriculture groups welcome a tax rule, it is usually because it removes uncertainty that blocks investment and slows planning.

For biofuel producers, uncertainty shows up as delayed plant upgrades, paused sustainable aviation fuel projects, and hesitation around contracting, hedging, and long-term supply commitments. For farmers, the impact appears earlier, through weaker demand signals for feedstocks like corn and oilseeds that influence planting and pricing decisions well before tax season.

Coverage around this update reflects that dynamic. Industry groups are responding to rules that help them estimate credit value and plan operationally instead of guessing at outcomes.

Clean Fuels Alliance America, for example, has pointed to estimated credit ranges of roughly 50 to 60 cents per gallon for certain fuels made from oilseeds, while estimates for corn ethanol land closer to 30 to 40 cents per gallon. The precise amount still varies based on production methods, inputs, and emissions outcomes.

Those are not compliance numbers. They are planning numbers. Even an estimated range can determine whether a facility expands capacity, whether a lender is comfortable with a pro forma, and whether growers expect stronger or weaker demand in the years ahead.

What the proposed regulations are trying to clarify

The IRS and Treasury framed the proposed regulations as guidance to help domestic producers determine eligibility and calculate the credit, which signals a focus on real-world application rather than abstract policy.

Across tax technical summaries and industry responses, several themes appear consistently, each tied to how the credit works in practice.

1. How clean fuel is measured

Under the credit structure, both eligibility and value depend on lifecycle carbon intensity, measured using the Department of Energy’s 45ZCF-GREET model. This approach evaluates emissions across the full lifecycle of the fuel rather than focusing solely on production output.

That shift makes recordkeeping central. If credit value depends on lifecycle factors, substantiation depends on inputs and assumptions. Gallons produced are no longer enough. Feedstocks, energy usage, and production choices must be documented clearly and defended consistently.

2. Credit value mechanics

The credit can be worth up to one dollar per gallon or gasoline gallon equivalent, depending on emissions outcomes and whether the requirements for claiming the full amount are met.

The phrase “up to” matters because most producers will not land at the ceiling. Businesses will model best-case and base-case outcomes, and those models hinge on operational choices, emissions assumptions, and documentation posture. Small changes can materially alter the final credit amount.

3. Transactions and sales structure

Industry responses have also emphasized clarifications around qualified sales and tolling arrangements, which are common in biofuel production.

Many facilities operate under contract manufacturing or tolling structures where title transfer does not follow a simple path. If a transaction falls outside the definitions in the proposed rules, the credit may not apply at all. That outcome is not theoretical. It directly affects the cash value of the project.

4. Feedstock sourcing and eligibility boundaries

The proposed regulations also tighten parameters around feedstocks and sourcing rules, bringing agricultural supply chains directly into the tax analysis.

Procurement decisions now influence tax outcomes. For anyone advising on the 45Z credit, feedstock definitions should be treated as a primary risk area. Sourcing documentation belongs in the planning phase, not after the return is filed.

How tax teams should approach 45Z planning

The Section 45Z credit rewards early, structured planning rather than last-minute compliance.

For tax teams supporting clean fuel producers, the work typically falls into a few clear areas:

• Identify qualifying activities early by determining whether the client is treated as the producer under the proposed rules and confirming fuel types, production locations, and sale timing before modeling value.

• Evaluate lifecycle emissions assumptions by reviewing feedstocks, energy inputs, and production methods, since small changes in assumptions can materially affect the credit amount.

• Review transaction and sales structure to confirm that tolling, contract manufacturing, and title transfer mechanics align with qualified sales definitions.

• Assess feedstock sourcing and documentation as a tax issue, ensuring records support the emissions profile claimed rather than treating sourcing as purely operational.

• Build documentation alongside operations so emissions data, contracts, and assumptions live in the tax file from the start instead of being reconstructed later.

• Monitor guidance as it evolves, because the 45Z rules are proposed and subject to refinement.

Bottom line

The proposed Section 45Z regulations do not simplify clean fuel credits, but they make them usable.

Producers gain clearer planning signals. Farmers see more predictable demand. Tax professionals can support positions with stronger documentation instead of retroactive explanations.

That's why farm and biofuel groups welcomed the rules. The credit has moved from theory into practice.

If keeping up with changes like this feels harder each year, it is because the rules keep getting more detailed. Bizora helps tax professionals turn developments like the 45Z guidance into clear, usable insight they can rely on throughout the year.

FAQ

What is the Section 45Z clean fuel production credit?

It is a federal tax credit for clean transportation fuel produced in the United States. The credit is calculated per gallon or gasoline gallon equivalent and depends on lifecycle greenhouse gas emissions.

How is the credit amount determined?

The amount varies based on carbon intensity. Fuels with lower lifecycle emissions generally receive a higher credit.

Why does lifecycle emissions modeling matter?

Because it directly affects eligibility and credit value. Emissions assumptions and inputs become part of tax substantiation.

How do tolling arrangements affect the credit?

Transaction structure can determine who is treated as the producer. Certain tolling or contract manufacturing arrangements may not qualify depending on how sales are structured.

Why are farmers affected by this credit?

Many clean fuels rely on agricultural feedstocks. Clear credit rules improve demand predictability for crops like corn and soybeans.