Proposed Section 45Z Clean Fuel Production Credit Regulations

The Treasury Department and IRS released proposed Section 45Z Clean Fuel Production Credit regulations (REG-2026-02246) in the Federal Register on Feb. 4, 2026, responding to extensive stakeholder feedback and aiming to clarify key ambiguities in the statute. The rules directly affect domestic clean transportation fuel producers, taxpayers claiming the credit, and entities registered for federal fuel excise taxes.

A public hearing is scheduled for May 28, 2026, with written comments due within 60 days. Until final rules are issued, taxpayers may generally rely on the proposed regulations if applied consistently.

Core Section 45Z Eligibility Requirements

To claim the Section 45Z credit, a taxpayer must meet the following requirements:

  1. Produce a qualifying transportation fuel, which must:
    1. Be “suitable for use” in highway vehicles or aircrafts. Actual use as transportation fuel is not required, only fitness for that purpose.
    2. Maintain emissions of no more than 50 kg CO₂e/mmBTU. The proposed regulations did not alter the ability for a clean fuel producer to purchase renewable energy certificates (RECs) to offset a facility’s carbon intensity.
    3. Not be derived from coprocessing an applicable material (fuel used to make other fuels is not eligible).
    4. Avoid double crediting. Fuel produced from fuel already receiving 45Z credit does not qualify.
  2. Produce the fuel at a qualified U.S. facility.
  3. Be registered under §4101 as a clean fuel producer at the time of production.
  4. Sell the fuel in a “qualified sale” to an unrelated person, including sales:
    1. For use in producing a fuel mixture,
    2. For use in a trade or business, or
    3. For retail sale into the fuel tank of an end user.

Importantly, the proposed regulations clarify that sales through related intermediaries can still qualify, so long as the fuel ultimately leaves the controlled group and is sold to an unrelated party. This goes beyond the statutory consolidated-group rule and reflects how fuel actually moves through the market.

Transfer and Direct Pay

The proposed regulations explicitly add Section 45Z to the list of credits that do not require facility ownership by the credit claimant. The Credit is considered “determined with respect to” the taxpayer that produces and sells the fuel, even if that taxpayer does not own the facility. This clarification materially impacts deal structuring and aligns Section 45Z transfer under Section 6418 with common financing and operating arrangements.

Timing of Sale

The credit is generated when eligible fuel is produced and sold within the credit period (2025–2029). Fuel produced before 2025 isn’t eligible, and sales after the sunset (December 31, 2029) don’t qualify. This remains as originally enacted. Producers must ensure an actual sale to an unrelated party occurs by the end of 2029, including for fuel produced late in that year.

Feedstock Restrictions

For fuel produced after December 31, 2025, feedstocks must originate from – or be purchased from aggregators located in – the U.S., Canada or Mexico. Taxpayers must be able to demonstrate that Canadian or Mexican feedstocks did not contain other feedstocks or additives that originated outside of such countries. This effectively disqualifies fuels made from imported biomass or waste oils after 2025, a restriction the IRS is enforcing by omitting foreign feedstock pathwaysfrom the official GREET model emissions calculations.

Facility Definition and Scope

The regulations retain a detailed definition of “facility.” A facility is a single, integrated production line that collectively produces the fuel, even if it spans multiple pieces of equipment or locations, so long as they function interdependently to produce the fuel. Upstream feedstock equipment or downstream blending, storage, or power generation are excluded.

Prohibited Foreign Entity Restrictions

No Section 45Z credit is available for taxable years beginning after July 4, 2025, if the taxpayer is a “specified foreign entity” (as defined in Section 7701(a)(51)(B) of the Code). For any table year beginning after July 4, 2027, the credit is also unavailable to “foreign-influenced entities” (as defined in section 7701(a)(51)(D) of the Code, without regard to 7701(a)(51)(D)(i)(II)). These staggered effective dates will require careful ownership and control analysis.

Key Takeaways

  • The IRS resolved longstanding uncertainty around “qualified sales,” explicitly allowing sales to unrelated buyers who resell fuel in their trade or business.
  • Expanded look-through rules for related-party sales accommodate common marketing, distribution and joint venture structures.
  • Facility ownership is NOT required to claim or transfer 45Z, reinforcing that the credit follows the producer, not necessarily the owner of the plant. Transfers under §6418 should align better with how projects are financed and operated.
  • Two safe harbors could meaningfully standardize diligence. A safe harbor to substantiate emissions rates for non-SAF fuel via a certification approach similar to SAF and a safe harbor to substantiate qualified sales using a model purchaser certificate were established.
  • North America feedstock rules require that feedstock must originate from the U.S., Canada, or Mexico for fuel produced after December 31, 2025.
  • Prohibited foreign entity rules apply, with different effective dates for specified foreign entities and foreign-influenced entities.
  • For emissions methodology, 45ZCF-GREET remains the anchor, with modeling concepts that increasingly resemble Section 45V.
  • Emissions rates are year-specific, requiring pricing and underwriting to account for annual variability.
  • Anti-stacking applies to preclude 45Z for a facility in a given year that claims 45V or 45Q. This will drive project-level optimization decisions.
  • Pathways not listed in IRS tables must go through the PER process, which may affect timing for novel fuels.
  • Compliance will require careful attention to §4101 registration, emissions modeling, SAF certifications, and robust recordkeeping.

What This Means for the Market

Overall, these regulations make §45Z credits more bankable and tradable. Developers can structure projects and credit sale agreements with greater certainty around IRS expectations, supporting a more mature and liquid credit market that advances transportation decarbonization.

Notwithstanding the foregoing, translating guidance into successful transactions still requires thoughtful structuring and informed decision-making. Foss & Company has already closed 45Z transactions, giving us practical, first-hand experience navigating how the guidance is being applied in active market deals.

As producers and investors assess the implications of this update, working with a trusted advisor who understands both the regulatory framework and tax equity market expectations can make a meaningful difference. With more than $11 billion in tax credit transactions closed since 1983 and no recapture events, Foss & Company brings a long-standing history in energy tax credit financing and works closely with clients to help them evaluate options, manage risk and align strategy with evolving market conditions.

If you are looking to better understand how the 45Z guidance may impact your project or planning strategy, contact our team today.

We have also published a longer-form analysis that takes a deeper dive into the proposed regulations, practical structuring considerations, and market implications. Read our full Section 45Z guidance overview today.