IRS Drops Long Awaited 45Z Update

The Internal Revenue Service recently issued guidance on the Section 45Z Clean Fuels Production Tax Credit in a move the organization says is meant to "empower America’s crop and livestock farmers, ranchers, and fuel producers across the country and help them access the growing domestic biofuels market in a way that makes the Clean Fuels Production Credit work for them."

The new update provides the 2026 emissions rate table used to calculate the clean fuel production credit and provides additional guidance, including on the use of manure-derived fuels and regenerative agricultural practices, meant to boost American biofuel production.

The new guidance also contains certain technical modeling language used to implement WFTC-mandated model updates for manure-derived fuels. Additionally, the notice is meant to address how producers should account for WFTC changes when using the emissions rate table and allowed models.

“Today's guidance helps America’s farmers, ranchers, and fuel producers access growing opportunities in the domestic biofuels market,” said IRS Chief Executive Officer Frank J. Bisignano. “This guidance helps unlock billions of dollars for America’s agricultural producers, provides greater certainty for investment across rural America, strengthens domestic biofuel production, and helps lower fuel costs for American consumers.”

According to IRS.gov, the notice also provides transition rules for applying changes made by the WFTC when an allowed methodology has not yet been updated to reflect those changes, including rules addressing used cooking oil and other feedstocks. 

Among other changes, the new guidance:

- Requires emissions rates to exclude emissions attributable to indirect land use change;
- Limits eligible transportation fuel to fuel derived exclusively from feedstocks produced or grown in the United States, Mexico or Canada;
- Prohibits negative emissions rates, except for transportation fuel derived from animal manure; and
- Requires distinct emissions rates for transportation fuels derived from specific animal manure feedstocks.

The full update can be found at IRS.gov. Since its release, reactions have been coming in from around the industry. 

In a statement, ethanol trade association Growth Energy said, “Specifically, the guidance stipulates that qualifying low-carbon agricultural practices consistent with the technical guidelines released earlier this year by the USDA can be used in the calculation of the 45Z credit. The guidance also provides transition rules for applying changes made to 45Z by the One Big Beautiful Bill Act, including a requirement that emissions rates exclude emissions attributable to flawed, outdated, and inaccurate indirect land use change calculations.”

Dave Walton, vice president for the American Soybean Association, said, “the ASA appreciates DOE, IRS, USDA, and the administration for taking this important step to make the 45Z Clean Fuel Production Credit usable for biofuel producers. These actions provide greater economic certainty for the biofuels industry, which is a critical source of domestic demand for U.S. soybeans.”

Mitchell Hora, founder of Continuum Ag, a soil health data intelligence company, said “The USDA did their job to bring farmers to the 45Z table, and now the Department of Energy has followed through with their part. On-farm practices are closer than ever to being a major lever to increase 45Z tax credit claims for U.S. biofuel producers.”

According to Trinity Consultants, the Treasury’s final 45Z regulations remain the last major piece of the current 45Z puzzle. That guidance is expected to be published in November. Experts say producers should also watch how the IRS integrates USDA’s feedstock framework into the final rule, and – for RNG producers – the development of species-specific manure pathways in future GREET updates.