By Nathan T. Smithson, Ali Abazari, and Travis Wussow
On December 19, 2025, the IRS issued Notice 2026-1, providing a safe harbor for taxpayers seeking to claim the federal income tax credit for qualified carbon oxide sequestration under section 45Q of the Internal Revenue Code of 1986, as amended (the “Code”). The Notice addresses a compliance gap created by the Environmental Protection Agency’s (“EPA”) proposed repeal of greenhouse gas reporting requirements that are currently necessary to claim the credit.
Who This Affects
The safe harbor applies to taxpayers that have disposed of qualified carbon oxides in using the following methods of secure geological storage during calendar year 2025:
- Carbon capture facilities using Class VI injection wells
- Oil reservoirs that have permanently ceased production and obtained Class VI permits
The safe harbor is triggered only if EPA does not launch its electronic Greenhouse Gas Reporting Tool (e-GGRT) for 2025 reporting by June 10, 2026.
The Compliance Gap
To claim the 45Q credit for the disposition of qualified carbon oxides in secure geological storage, taxpayers must demonstrate compliance with EPA’s subpart RR requirements under 40 CFR Part 98, which impose monitoring and verification obligations on facilities injecting carbon dioxide for long-term geological storage.
On September 16, 2025, EPA proposed removing subpart RR reporting obligations for years beginning after 2024 (90 F.R. 44591). If finalized and e-GGRT is not available, taxpayers would have no mechanism to submit the subpart RR reports that IRS regulations require—hence the need for this safe harbor.
The safe harbor permits taxpayers to satisfy the subpart RR requirement through independent certification instead of EPA reporting, preserving credit eligibility while EPA’s regulatory changes take effect.
The safe harbor is not applicable to qualified carbon oxides (i) used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project or (ii) utilized in a manner described in section 45Q(f)(5), as those methods have alternatives to reliance on EPA’s subpart RR requirements.
What You Need to Do
Continue compliance activities. Even though EPA may eliminate subpart RR reporting, maintain your Monitoring, Reporting, and Verification Plan and continue monitoring activities under subpart RR as in effect on December 31, 2025.
Prepare an Annual Report. Compile all information that would have been required under subpart RR, including mass balance calculations and containment assurance documentation.
Engage an independent certification party. A qualified independent engineer or geologist must certify that your capture and disposal complies with subpart RR and that your Annual Report is accurate and complete. The certification party must be state-registered, independent from your organization (and any other credit claimants), and must certify the requisite information under penalties of perjury.
Complete documentation by tax filing deadlines. All documentation and certifications must be finalized by the time you file your tax return, including extensions.
File Form 8933. The safe harbor does not change the requirement to file Form 8933, Carbon Oxide Sequestration Credit, with your timely filed federal income tax return.
Looking Ahead
Notice 2026-1 is interim guidance. Treasury and IRS have indicated they will issue proposed regulations with updated 45Q requirements for carbon sequestration after calendar year 2025, likely establishing a new compliance framework that does not rely on EPA subpart RR reporting.
For assistance navigating the 45Q credit requirements and safe harbor procedures, please contact Nathan Smithson, Ali Abazari, or Travis Wussow
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information, please contact a member of the Tax or Environment & Natural Resources practice.
