The US government is continuously introducing regulations to combat climate change, encouraging industries to reduce pollution. Taking another step in this direction, the federal government has offered Section 45Q tax credits to companies that capture and store carbon dioxide underground instead of releasing it into the atmosphere.
Regarding a particular issue, a practical problem has arisen for the year 2025. The ERA had proposed changes to some rules for greenhouse gas-related reporting, which made it unclear whether the online reporting system would be available in time. It has created uncertainty among taxpayers as to whether they will be able to claim tax credits even if they comply with the regulations.
To address these very problems faced by taxpayers, the Internal Revenue Service has issued Notice 2026-1. This notice provides taxpayers with a safe harbor, allowing eligible taxpayers to claim the Section 45Q tax credit without online reporting to the Environmental Protection Agency. We have discussed this in detail below; please read the entire article.
What is the Section 45Q tax credit?
The Section 45Q tax credit is a legal provision that provides tax credits to companies that capture carbon dioxide or other carbon oxides instead of releasing them into the atmosphere and safely store them underground.
It has two main objectives: firstly, to reduce harmful gases released into the environment, and secondly, to provide financial incentives to industries to adopt new technologies.
This tax credit is based on the amount of carbon emitted per metric ton, and many companies benefit from it, claiming credits worth millions of dollars.
Why did the problem arise in 2025?
To claim the Section 45Q tax credit, taxpayers must submit a detailed report annually to the Environmental Protection Agency, which is submitted through an online system called e-GGRT under the rules of Subpart RR.
In September 2025, the ERA proposed that several reporting requirements could be eliminated after 2024. There was also discussion about extending the reporting deadline for 2025, which raised uncertainty about whether the e-GGRT system would be available on time for 2025.
What solutions does IRS Notice 2026-1 offer?
Notice 2026-1, released by the Internal Revenue Service, addresses the uncertainty regarding what taxpayers should do to claim tax credits under Section 45Q if the e-GGRT system is not available on time.
Basically, this notice states that if the system is not available by June 10, 2026, taxpayers will be able to use the Safe Harbour. A safe harbor is an optional but legitimate procedure that, if followed, will lead the IRS to presume that the taxpayer has complied with the rules correctly.
Who can benefit from Safe Harbor?
The safe harbor provision will only apply to cases where carbon dioxide has been safely injected into a geological storage reservoir, and the carbon has not been used to enhance oil or gas production. Keep in mind that these activities must be related to the calendar year 2025.
Please note that if the Environmental Protection Agency launches the e-GGRT system on or before June 10, 2026, the safe harbor provision will not apply, and only the general reporting provisions will be valid.
What needs to be done under Safe Harbor?
To claim the Section 45Q tax credit using the safe harbor provision, the first step is to prepare the same annual report that is submitted to the EPA. It includes a detailed explanation of the amount of carbon captured, how it was monitored after disposal, and proof that it was not released back into the environment.
Secondly, instead of submitting the prepared report to the ERA, it must be handed over to an independent, qualified engineer or geologist. And thirdly, that the expert will thoroughly review the report and certify that all the details in the report are accurate and that all regulations have been properly followed.
Independent Certification Role
To obtain the Section 45Q tax credit, independent certification plays a crucial role in the safe harbor provisions. The certifying individual must be licensed in any U.S. state, be independent of the taxpayer, and declare under oath that the report is accurate.
It assures the Internal Revenue Service and the Environmental Protection Agency that the carbon storage is safe and has been carried out in accordance with regulations.
It is very important for you to know that even after adopting Safe Harbor, the taxpayer will still need to file Form 8933 with the tax return, and you must also keep all the documents safe for future reference. Because if all these conditions are not met, the tax credit will be denied.
