IRS Issues Updated Guidance on Section 45Z Clean Fuels Production Tax Credit

Context

The Section 45Z Clean Fuels Production Tax Credit was amended by the Working Families Tax Cuts (WFTC) law, enacted in 2026. These amendments introduced significant changes to the credit's structure and eligibility requirements, necessitating updated guidance from the IRS. Notice 2026-53, issued on September 8, 2026, represents the first comprehensive IRS guidance addressing these changes. The notice is directly relevant to domestic biofuel producers, agricultural stakeholders, and tax compliance professionals who must navigate the credit's updated requirements.

The WFTC amendments introduced two key structural changes to Section 45Z:

1. Exclusion of Indirect Land Use Change (ILUC) Emissions: The emissions rates used to calculate the credit must now exclude ILUC emissions. This change alters the emissions accounting methodology that underpins credit calculations.

2. Restricted Feedstock Eligibility: Eligible feedstocks for transportation fuel must be produced or grown exclusively in the United States, Mexico, or Canada. This restriction narrows the universe of eligible feedstocks and has implications for biofuel producers sourcing materials from outside these regions.

What's Changing

Emissions Rate Tables and Methodology

Notice 2026-53 publishes the 2026 emissions rate tables, which include distinct rates for transportation fuels derived from specific animal manure feedstocks. The current 2026 table includes rates for dairy manure and swine manure, with poultry and beef manure rates anticipated later in 2026. Notably, the WFTC law prohibits negative emissions rates across the board, with animal manure-derived transportation fuel as the sole statutory exception. This carve-out has meaningful credit value implications for producers using these feedstocks.

Regenerative Agricultural Practices

The notice also integrates the USDA's regenerative agricultural practice rules, finalized on June 29, 2026, into the emissions calculation framework. This integration allows producers employing qualifying regenerative practices to reflect those practices in their emissions rate determinations. Producers who adopt these practices may benefit from adjusted emissions rates, potentially enhancing the value of their tax credits.

Regulatory Timeline and Compliance Flexibility

Proposed regulations for Section 45Z were issued on February 4, 2026, and remain under final consideration by the IRS and Treasury as of the briefing date. No final rule has been published, indicating ongoing regulatory development. To provide near-term compliance flexibility, Notice 2026-53 offers safe harbor and transition relief for:

1. 2025 Clean Fuel Production: Producers can rely on the guidance provided in the notice for their 2025 production activities.

2. 2026 Nutrient Budgets: Certain requirements relating to nutrient budgets for 2026 are subject to transition relief, allowing producers additional time to comply while the rulemaking process concludes.

Implications for Biofuel Producers and Agricultural Stakeholders

The updated guidance in Notice 2026-53 has several implications for biofuel producers and agricultural stakeholders:

1. Feedstock Sourcing: Producers must ensure that their feedstocks are sourced exclusively from the U.S., Mexico, or Canada. This restriction may require adjustments to supply chains and sourcing strategies.

2. Emissions Accounting: The exclusion of ILUC emissions and the integration of regenerative agricultural practices into emissions calculations necessitate updates to internal accounting methods. Producers should review their current methodologies and make necessary adjustments to comply with the new requirements.

3. Compliance Flexibility: The safe harbor and transition relief provided in the notice offer temporary compliance flexibility. Producers should take advantage of this period to prepare for final regulations, which are expected to be published in the coming months.

4. Credit Value Optimization: The carve-out for animal manure-derived transportation fuel presents an opportunity for producers using these feedstocks to optimize the value of their tax credits. Producers should assess their current and potential feedstock usage to capitalize on this exception.

Outlook and What to Watch

As the regulatory landscape for Section 45Z continues to evolve, several key developments and considerations are on the horizon:

1. Final Regulations: The IRS and Treasury are expected to publish final regulations for Section 45Z in the coming months. Producers should closely monitor these developments and be prepared to implement any additional changes required by the final rule.

2. Poultry and Beef Manure Rates: The anticipated publication of emissions rates for poultry and beef manure feedstocks later in 2026 will provide further clarity for producers utilizing these materials. Producers should stay informed about the release of these rates and their potential impact on credit calculations.

3. Regenerative Agricultural Practices: As more producers adopt regenerative agricultural practices, the integration of these practices into emissions calculations may become increasingly important. Producers should stay up-to-date on USDA rules and guidance related to regenerative agriculture and assess the potential benefits of these practices for their operations.

4. Industry Engagement: Biofuel producers and agricultural stakeholders should engage with industry associations and other stakeholders to advocate for favorable regulatory outcomes and share best practices related to Section 45Z compliance.