IRS Proposes Regulations for 45Z Clean Fuel Tax Credit – Key Updates for 2026

The Internal Revenue Service (IRS) and the Department of the Treasury recently issued proposed regulations concerning tax credits for clean fuels, specifically under Section 45Z of the tax code. These regulations, released on February 3, 2026, build upon existing legislation—the Inflation Reduction Act of 2022 and the One Big Beautiful Bill Act—aiming to incentivize the production of eligible fuels through tax credits available after December 31, 2024 and before January 1, 2030.

Clarifying the Rules for Clean Fuel Tax Credits

The proposed regulations address a number of complex issues related to claiming these credits. They provide guidance on what constitutes a “qualified sale” of eligible fuels, how to avoid stacking credits with other incentives, and how to properly account for feedstock used in production. The regulations are extensive and intended to provide greater clarity for taxpayers navigating these new provisions.

Expanding the Definition of “Qualified Sale”

A key clarification concerns the definition of a “qualified sale.” The IRS initially proposed a narrow interpretation requiring fuel purchasers to use the fuel “as a fuel.” However, the proposed regulations now confirm that a sale to a reseller, such as a wholesaler or distributor, qualifies as a “qualified sale.” This change removes uncertainty for taxpayers concerned about the earlier, more restrictive interpretation. A broad “look-through rule” is now in place, allowing credits to be claimed even when sales are made through related intermediaries, provided the fuel ultimately reaches an unrelated end user.

Navigating Credit Stacking and Feedstock Rules

The proposed regulations also address the issue of “stacking” credits, clarifying that Section 45Z credits cannot be claimed alongside certain other clean energy incentives. For example, if a credit under section 45Q is claimed in one year but not the next, a 45Z credit could be claimed in the latter year. Regarding feedstock, the rules prevent taxpayers from claiming credits for fuel produced from another fuel already eligible for a 45Z credit. However, using an eligible fuel as a process input—rather than a primary feedstock—is permitted.

Animal Manure and “Suitable for Use”

Fuels derived from animal manure—including dairy, swine, and poultry manure—may qualify for an enhanced 45Z credit. The Treasury has the authority to identify additional sources of animal manure eligible for this enhanced rate, but has not yet done so in these proposed regulations. The regulations confirm that a fuel only needs to be “suitable for use” in a vehicle or aircraft to qualify for the credit; actual use is not required. This means diesel fuel meeting all other requirements would qualify even if sold for use as marine diesel.

Alternative Natural Gas Production

For alternative natural gas—including renewable natural gas—the regulations clarify that the credit is available to the entity processing the untreated gas to remove impurities like water and carbon dioxide. This means a producer delivering gas to a pipeline is eligible for the credit, even if further compression or processing occurs downstream.

Frequently Asked Questions

What is a “qualified sale” for the purposes of the 45Z credit?

A “qualified sale” is a sale of eligible transportation fuel to an unrelated person for use in a trade or business, for production of a fuel mixture, or for a retail fuel sale. The proposed regulations confirm that sales to resellers, like wholesalers, qualify.

Can I claim both a 45Z credit and a 45Q credit for the same facility?

No, the proposed regulations prohibit “stacking” these credits. If a 45Q credit is claimed for a facility in one year, a 45Z credit cannot be claimed for that same facility in that year.

Does the fuel actually need to be used in a vehicle to qualify for the 45Z credit?

No, the fuel only needs to be “suitable for use” in a highway vehicle or aircraft. Actual use is not required.

As these regulations are proposed, they are subject to change based on public comment and further review. Businesses operating in the clean fuel sector should carefully consider these developments and how they may impact their operations.