Treasury Department Releases Section 45Q Carbon Capture Sequestration Interim Guidance

The U.S. Department of the Treasury and IRS on December 19, 2025, released Notice 2026-1 with respect to the Internal Revenue Code (Code) Section 45Q credit for carbon oxide sequestration in response to the U.S. Environmental Protection Agency's (EPA) proposed regulations to remove reporting obligations regarding the geologic sequestration of carbon oxide imposed under Subpart RR of 40 C.F.R. Part 98 (Subpart RR).

The notice provides temporary and limited relief if EPA fails to launch its reporting system, under which taxpayers historically submitted their annual reports under Subpart RR to satisfy Treas. Reg. Section 1.45Q-3(b)(1)(ii) or Section 1.45Q-2(h)(5)(iii), as applicable, and Section 1.45Q-3(d).

Background

On January 15, 2021, the Treasury Department and IRS issued final regulations under Section 45Q. Treas. Reg. Section 1.45Q-3(b) provides, in part, that the requirements for secure geologic storage include compliance with Subpart RR:

(b) Requirements for secure geological storage. For purposes of the section 45Q credit, qualified carbon oxide is considered disposed of by the taxpayer in secure geological storage such that the qualified carbon oxide does not escape into the atmosphere if the qualified carbon oxide is— (1) Injected into a well that (i) Complies with applicable Underground Injection Control or other regulations, located onshore or offshore under submerged lands within the territorial jurisdiction of States or federal waters, and (ii) Is not used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, in compliance with applicable requirements under 40 CFR part 98 subpart RR; ….

Section 1.45Q-2(h)(5) provides that, in general, carbon oxide that is injected into an oil reservoir that is not a qualified enhanced oil recovery project under Section 43(c)(2) of the Code due to circumstances such as 1) the first injection of a tertiary injectant occurred before 1991 or 2) because a petroleum engineer's certification was not timely filed, cannot be treated as qualified carbon oxide, disposed of in secure geologic storage or utilized in a manner described in Section 45Q(f)(5).

Section 1.45Q-2(h)(5) does not apply to an oil reservoir if:

(i) the reservoir has permanently ceased oil production; (ii) the operator has obtained an Underground Injection Control Class VI permit; and (iii) the operator complies with subpart RR.

Section 1.45Q-3(d) provides that for qualified enhanced oil or natural gas recovery projects in which the taxpayer reported volumes of carbon oxide to EPA pursuant to 40 C.F.R. Part 98 Subpart RR, the taxpayer may self-certify the volume of qualified carbon oxide claimed for purposes of Section 45Q.

Facilities that are subject to Subpart RR are required to report basic information on carbon oxide received for injection, develop and implement an EPA-approved site-specific monitoring, reporting and verification (MRV) plan, and report the amount of carbon oxide geologically sequestered using a mass balance approach and annual monitoring activities. Those reports under Subpart RR must be prepared on a calendar year basis (Annual Reports). EPA generally requires Annual Reports to be submitted through the agency's electronic Greenhouse Gas Reporting Tool (e-GGRT). Historically, EPA launches the e-GGRT system in mid-February for a given reporting year.

On September 16, 2025, EPA proposed regulations proposing to remove certain program obligations from the greenhouse gas reporting program, including the obligations in Subpart RR, for reporting years after 2024. EPA has proposed that the amendments, if finalized, would become effective within 60 days of publication in the Federal Register.

Safe Harbor

The notice provides a safe harbor to satisfy the requirements of Treas. Reg. Section 1.45Q-3(b)(1)(ii) or 1.45Q-2(h)(5)(iii), as applicable, and Treas. Reg. Section 1.45Q-3(d) for calendar year 2025 for secure geologic storage if EPA does not launch the e-GGRT for reporting year 2025 by June 20, 2026. The safe harbor does not apply if EPA launches the e-GGRT by that date.

Specifically, Notice 2026-1 provides that taxpayers will be considered to have satisfied the Section 45Q Subpart RR requirement if such storage is in compliance with the applicable requirements of Subpart RR as in effect on December 31, 2025, and prepares and submits the Annual Report for reporting year 2025 to an independent engineer or geologist, who, in turn, certifies such Annual Report.

For more information or questions, please contact the authors.

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