February 20, 2024

Treasury Department, IRS Correct Section 48 Proposed Regulations on Qualified Biogas Property

Holland & Knight Alert
Amish Shah | Nicole M. Elliott | Brad M. Seltzer | Mary Kate Nicholson | Roger David Aksamit | Bryan Marcelino | Eli Brander | Joshua David Odintz | Kenneth W. Parsons | Daniel Graham Strickland | Rachel T. Provencher


  • The U.S. Department of the Treasury and IRS announced a correction to Internal Revenue Code Section 48 Proposed Regulations dealing with the new investment tax credit for biogas.
  • The correction states how gas upgrading equipment that performs certain key functions would be considered "energy property" if it is integral to overall energy operations as defined in the Proposed Regulations.
  • This Holland & Knight alert helps clarify the Section 48 correction and offers insight on what it means to the renewable natural gas industry.

The U.S. Department of the Treasury and IRS on Feb. 16, 2024, released a correction to Internal Revenue Code Section 48 Proposed Regulations relating to the new investment tax credit (ITC) for biogas. The correction provides that "gas upgrading equipment that is necessary to concentrate the gas from qualified biogas property into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen, would be energy property if it is an integral part of an energy property as defined in proposed §1.48-9(f)(3)."

The Inflation Reduction Act of 2022 (IRA) added "qualified biogas property" to the list of property eligible for a Section 48 ITC. Section 48(c)(7) provides this definition of "qualified biogas property":

(A) In general – The term "qualified biogas property" means property comprising a system which

(i) converts biomass (as defined in section 45K(c)(3), as in effect on the date of enactment of this paragraph) into a gas which (I) consists of not less than 52 percent methane by volume, or (II) is concentrated by such system into a gas which consists of not less than 52 percent methane, and

(ii) captures such gas for sale or productive use, and not for disposal via combustion.

(B) Inclusion of cleaning and conditioning property. The term "qualified biogas property" includes any property which is part of such system which cleans or conditions such gas.

Prior to the correction, the Proposed Regulations provided that "gas upgrading equipment necessary to concentrate the gas into the appropriate mixture for injection into a pipeline through removal of other gases such as carbon dioxide, nitrogen, or oxygen is not included in qualified biogas property." The Treasury Department's prior proposed position contradicted the statutory provision that specifically includes cleaning and conditioning equipment of gas that is at or above the 52 percent threshold and was inconsistent with its position with regard to similar equipment for other ITC-eligible technologies. (See Holland & Knight's previous alerts, "Section 48 Proposed Regulations Detail Treatment of Qualified Biogas Property," (Nov. 20, 2023), and "Breaking Down the Section 48 Investment Tax Credit Proposed Regulations," Nov. 28, 2023.)


Holland & Knight Insight

The correction comes after significant commentary from the renewable natural gas (RNG) industry, a reminder that taxpayers with concerns regarding proposed rules should avail themselves to any open comment period.

Notably, the corrected regulations provide that such gas upgrading equipment is "not a functionally interdependent component (of qualified biogas property)." Instead, the correction takes the position that gas upgrading equipment may be integral property. The Proposed Regulations provide that all property that is an "integral part" of the energy property is considered energy property for purposes of the ITC. Property owned by a taxpayer is an integral part of an energy property owned by the same taxpayer if it is used directly in the intended function of the energy property and is essential to the completeness of the intended function. Multiple energy properties may include shared property that may be considered an integral part of each energy property. In such instances, if owned by a taxpayer at least in part, the cost basis for the shared property should be allocated to each energy property.


Holland & Knight Insight

The correction provided by the Treasury Department and IRS is welcome news for the RNG industry to confirm that gas upgrading equipment, which constitutes a substantial portion of the costs of an RNG facility, is ITC-eligible.

Although the correction treats gas upgrading equipment as an "integral part of energy property," such equipment more properly should be treated as functionally interdependent equipment given the statutory requirement produce a gas with 52 percent or greater methane content, which typically requires the use of gas upgrading equipment.

More broadly, it is critical that the ITC for qualified biogas property allows for separate ownership of different components of equipment. For legal and business reasons, the same person may not be able to own all of the equipment. For landfill gas to RNG projects, the landfill often is owned by a municipality, and the gas upgrading equipment is owned by RNG producers because the municipalities are required to own the landfills. Similarly, in the anaerobic digester to RNG projects, farm owners may have digesters that are necessary for their farming operations and will continue to own those digestors. In those instances, if the ITC is unavailable because different people own different parts of the equipment, the incentive under Section 48 to capture and productively use methane will be lost, and such methane will be released into the atmosphere (as methane or as CO2) without having been productively used. This is inconsistent with the Section 48 statutory incentive for qualified biogas and the greenhouse gas reduction goals sought by the IRA.

Further, the correction does not address concerns raised regarding the 80/20 percent rule. The statute should be interpreted to incentivize adding gas upgrading equipment to an existing landfill or digester. In some instances, the existing equipment may have a value that exceeds 20 percent of what would be the fair market value of the entire system if the 80/20 test were applied to the entire system, including the preexisting equipment. Applying the 80/20 test in a manner that encourages the addition of gas upgrading equipment to existing landfills and digesters is critical to fully achieve the goals of the IRA.

The Holland & Knight Energy Tax Team is available for questions regarding the Section 48 ITC guidance. To receive additional analysis from the team, please subscribe to our alerts.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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