03 June 2020

U.S. Treasury Proposes New Guidance for Tax Deductions

The U.S. Department of the Treasury (Treasury) recently proposed two separate rulemakings implementing updates to the Internal Revenue Code related to 1) the deduction of fines and penalties and 2) tax credits for carbon capture and sequestration.

On May 13, Treasury proposed new regulations implementing updates to Section 162(f) set forth in the 2018 Tax Cuts and Jobs Act (TCJA). The TCJA expanded on the previous disallowance of ordinary and necessary tax deductions for fines or penalties incurred for violations of law, which had been in place since 1969. As proposed, a taxpayer may not deduct any amount paid or incurred (whether by suit, agreement or otherwise) to, or at the direction of, the government in relation to the violation of a law or the investigation or inquiry by the government into a potential violation of law regardless of whether the taxpayer admits guilt or liability. However, a taxpayer may take a deduction for certain amounts specifically identified as restitution, remediation or paid or incurred to come into compliance with the law. Comments on the proposed implementation of section 162(f), as well as associated reporting requirements, are due by July 13.

On May 28, Treasury proposed new regulations outlining how businesses can obtain tax credits for carbon capture and sequestration operations under Section 45Q, which was added under the Energy Improvement and Extension Act of 2008. Section 45Q allows for a credit of up to $50 per metric ton of carbon permanently sequestered in a deep geological repository and up to $35 per metric ton used for Enhanced Oil Recovery purposes. The proposed regulations implement updates to the code enacted by Congress in 2018, which eliminate the previous 75 million metric ton limitation on qualified carbon eligible for the credit and expand eligibility to include any carbon oxide released from an industrial source placed into service on or after February 9, 2018. For sources placed into service before this date, only carbon dioxide emissions are eligible for credit. Building off public comments, the proposed regulations also seek to provide clarity on how carbon capture and sequestration projects can show that the carbon is securely stored in deep geological repositories and how credits can be assigned and transferred to third parties. Once the proposed rules are published in the Federal Register, Treasury will be accepting comments for 60 days.