Biden Administration Releases Sustainable Aviation Fuel Tax Credit Rules
Sustainable Aviation Fuel (SAF) has been discussed at all the farm meetings I attended this winter and was deemed the potential savior of the pricing and carry over issues currently facing the corn market. On Tuesday, the Biden administration released long awaited guidance in IRS Notice 2024-37 on what it takes to qualify SAF for tax credits under Section 40B enacted as part of the Inflation Reduction Act of 2022.
Credits under Section 40B apply through the end of this year. At that point, new credits under Section 45Z take over. The guidance released yesterday is expected to lay the groundwork for the new 45Z credits as well. To qualify for the current credit, the SAF must have a minimum reduction of greenhouse gas emissions of 50% when compared to production of petroleum-based jet fuel. The current SAF credit is worth $1.25 per gallon in a qualified mixture. The credit increases by $.01 for every percentage point increase in greenhouse gas emissions reduction percentage until the credit is maximized at $1.75 per gallon.
Whether the processors will qualify for these credits will depend on the growing practices of the farmer from which they obtain grain. Currently only two crops are being considered for the program – corn and soybeans. To qualify for Climate Smart Agriculture (CSA) practices producers must engage in three activities for corn – no-till, cover crops, and enhanced efficiency nitrogen application. Soybean producers must only utilize no-till and cover crops. Practices are to be applied at the field scale. The definitional requirements are lengthy and specific. For instance, for cover crops the notice includes the following requirements:
- Plant species, seedbed preparation, seeding rates, seeding dates, seeding depths, fertility requirements, and planting methods must be consistent with applicable local criteria and soil/site conditions.
- Select species that are compatible with other components of the cropping system.
- Ensure herbicides used with crops are compatible with cover crop selections and purpose(s).
- Cover crops may be established during the fallow season prior to planting the feedstock crop, or companion planted or relay-planted into production crops.
- Must not burn cover crop residue.
- Determine the method and timing of termination to meet the grower’s objective and the current NRCS Cover Crop Termination Guidelines.
- When a cover crop will be grazed or hayed, ensure the planned management will not compromise the soil health and organic matter content.
- Do not harvest cover crops for seed.
- If the specific rhizobium bacteria for the selected legume are not present in the soil, treat the seed with the appropriate inoculum at the time of planting.
Farmers must also maintain specific records for each CSA practice and attest to compliance in certification documents. In the recordkeeping requirements, there does not appear to be anything outside the norm of information the farmer would normally have, but it must be documented and available for audit/review.
We have seen local processors and cooperatives start down the road of incentivizing sustainability. The ethanol processors who work with local elevators routinely require the elevator obtain records from growers to support their practices in a form of an “audit” in preparation for these credits and other incentives. Other elevators have formed sustainability departments in order to provide patronage incentives to producers engaged in certain practices that allow the cooperative to receive incentives from third party stakeholders. The documentation requirements will be a nuisance, but providing a new market, with incentivized pricing, for our abundance of corn production will likely make it worth the efforts.
Unfortunately, the credit will not be universal and available to all producers. Those producers in the north have shorter growing seasons where cover crops may not be viable. The Executive Director of the Iowa Renewable Fuels Association, Monte Shaw, was quoted as saying “the approved bundle of farm practices won’t work for many Iowa farmers, let alone farmers throughout the Midwest. Given the range of climates and soil types, farmers do not want one-size-fits-all bundles mandated from DC”.
This is a major step in the trend towards financially incentivizing additional sustainability practices in agriculture. The airline industry has committed to using 3 billion gallons of SAF annually by 2030, or 10% of their projected fuel needs. Expect more to come as the 45Z credits roll on in 2025.
Kelly Jackson Hardy is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers, privately-held elevators and supply dealers, and cooperatives. Kelly is a principal with CliftonLarsonAllen in Princeton, Illinois, as well as a regular speaker at tax and estate planning seminars. Kelly was raised on a hog, row crop and cattle farm in central Illinois and has been involved in the ag industry her entire life. Kelly, her husband, and two sons are active in 4-H and operate a small feeder calf operation and pumpkin business.