Deciphering potential tax credits

April 4, 2024 | Jeff Hutton

There’s a great deal of excitement about the prospect that soybean producers and others could receive significant tax credits if they’re able to reduce greenhouse gas emissions for what happens on the farm and throughout the supply chain in the production of biofuels.

But despite the buzz surrounding these tax credits, officials caution that there’s a lot of uncertainty that remains as to how farmers and others might be able to cash in as well as the steps that need to be taken if they should choose to participate.

Matt Herman, the Iowa Soybean Association’s (ISA) Chief Officer for Demand and Advocacy, is outlining some of the particulars as many soybean farmers wait for guidance and straight-forward rules from the Internal Revenue Service.

A little history

In August 2022, President Joe Biden signed the Inflation Reduction Act (IRA) into law. The IRA contained two specific tax credits to support the biofuel industry - 45Z (Clean Fuels Production Tax Credit) and 40B (Sustainable Aviation Fuel Production Tax Credit).

The IRA indicates that current and future on-road (ethanol, biodiesel, renewable diesel) and aviation biofuels produced in the United States are eligible to generate these tax credits should they meet all the requirements listed in the statute. To receive the minimum tax credit, Sustainable Aviation Fuel (SAF) supply chains must reduce life cycle greenhouse gas (GHG) emissions by at least 50%, on-road biofuels like ethanol and biodiesel must meet similar reduction thresholds. That means, from the time the seed is planted until the fuel is burned, at least a reduction in 50% GHG emissions must have occurred.

Importantly, Herman says, for every 1% decrease in GHG emissions beyond 50%, the biofuel producer’s tax credit proportionally increases. In short, this novel tax credit structure creates incentives to reduce emission across the entire biofuel value chain, including on the farm, until the supply chain reaches net-zero emissions. 

Herman says because jet fuel is one of the primary causes of GHG, the big emphasis is on SAF. And while there’s been a push by some in government that we should focus on-road electric-powered vehicles, the reality is that airplanes are going to be using liquid fuels for some time. Those in the SAF supply chain, therefore, could benefit from decarbonization efforts. And with significant increases in SAF production and expansion of crush facilities across the country, Herman says there may be greater financial incentives for soybean farmers.

How will these tax credits work?

Herman says both 45Z and 40B create an incentive structure which encourages biofuel producers to reduce the GHG emissions across the entire supply chain, including on the farm.

However, there are still too many questions as the industry waits for final guidance from the IRS.

Herman says this guidance will be essential in providing clarity to industry and farmers.

“Without this guidance,” Herman says, “it is impossible to accurately advise farmers on what practices may qualify to reduce emissions, how the outcomes from those practices will be monitored and verified, and what premium (if any) a farmer may receive.”

Once the guidance is released, he believes the industry will quickly get to work determining what aspects of their supply chain are the most cost effective to decarbonize. This will range from connecting industrial facilities to wind/solar, carbon capture and storage (for ethanol), and climate-smart practices on the farm. Each activity will have its own cost and benefit for the biofuel producer to weigh. 

Based on the law and conversations with regulators, Herman says the ISA expects that the Argonne National Lab GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) Feedstock Carbon Intensity Calculator (FD-CIC) will be used to estimate on-farm emissions.

This tool allows soybean and corn farmers to estimate the carbon intensity of their current production system by providing estimates or measurements of common inputs like fertilizer, herbicides, pesticides and fuel. Crucially, the tool also allows farmers to estimate GHG reductions associated with the adoption of more practices like reduced tillage, cover crops and so-called “energy efficient fertilizers.”

“We have high confidence that these three practices will be credited based on Secretary Tom Vilsack’s comments in early March,” Herman says. “While this seems straight forward, there are several things that are unknown or at the very least highly fluid.”

The Devil in the Details 

Without the final guidance, Herman cautions it is impossible to accurately estimate the value farmers may receive. Below are a few key details that are still being determined: 

• It is unclear if IRS will allow farmers to select individual practices from the menu of approved practices or if farmers will have to bundle multiple practices together to qualify. Bundling two or more practices may be impractical for certain production systems and regions of the country.
• Monitoring, reporting and verification remains a major concern. Herman says unlike other carbon programs which rely on corporations to make the market, the value proposition of this program is specifically created through IRS tax credits. He says this has the potential to create a significant audit liability for biofuel producers, especially if their credit depends on the actions of their suppliers. Currently, it is unknown what the lookback period the IRS may require. For example, it is not uncommon for IRS to have a three-year lookback period for tax audits. However, other major carbon programs have established a 100-year liability for activities which sequester carbon. In short, while providing lower-carbon soybeans or corn will create a tax benefit to the biofuel producer, it may also introduce a major audit liability, one which biofuel producers don’t have control over. For these reasons, farmers may not be compensated to the level they expect until the audit period has passed.
• It is unclear if the IRS will require farms to conduct soil sampling to verify any modeled change in soil carbon. Physical measurements introduce multiple challenges, including increasing the cost of implementation, likely reducing farmer revenue. It also increases the above-mentioned liability to biofuel producers if measured data from soil samples shows years down the road that farmers did not sequester as much carbon as the models estimated. “Who is on the hook for paying back the U.S. Department of the Treasury? The farmer, or the fuel producer?” Herman asks.

Right now, Herman says, the rules governing these efforts are “squishy. There is guidance from the ISO, but it only give you guidance on what to do what, but it doesn’t tell you how to do it.”

What can you do to position your farm?

While the soy checkoff views it as unwise to give hard direction to farmers without final guidance from the U.S. Department of the Treasury or IRS, Herman says ISA believes there are several things a farmer can do now for this growing season.  

1. Ask questions. If you are being made an offer based on the economics of these new programs ensure that the claims being made are consistent with the full guidance, not based on speculations of what the guidance may say. If the offer seems too good to be true, it probably is.
2. Enroll in an existing program, such as through Soil and Water Outcomes Fund (SWOF). Not only will this allow you to start getting compensated for these very same practices, but it will help you understand what may work in your system and what won’t. “Significantly, nothing in the law or in the initial guidance suggests that these tax credits will require additionality; enrolling in a non-biofuel program this year will not limit you from participating in these markets in the future,” Herman says. “A bird in the hand is worth two in the bush.”
3. Stay in contact and monitor press releases from your checkoff and your biofuel trade association. Groups like the ISA, American Soybean Association, and Clean Fuels Alliance America are advocating for a system that is farmer friendly.  “We are laser-focused on this,” Herman says.
4. If you are inclined, download the GREET calculator (FD-CIC) and run the numbers for one (or more) of your fields. See how you compare the current baseline estimate in the GREET calculator. 

In the meantime

As we wait for more concrete information from the IRS, Herman says farmers are encouraged to contact him at mherman@iasoybeans.com for more information.

For more insight, click here.

“Hopefully soon, we will have answers and have members out in the field to discuss what they need to know,” Herman says. “We want to be the voice of reason in determining what the benefits can be for farmers.”

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