45Z Tax Credit: Farm Windfall or Bust?

RIVERSIDE, Iowa (DTN) -- The word "massive" came up often when officials with Continuum Ag spoke about the potential for biofuels producers and farmers to cash in on the upcoming 45Z tax credit, at the company's annual topsoil summit in Riverside, Iowa, on Monday.

The question of how -- or if -- agriculture will see a payout from the $1 per-gallon Clean Fuel Production Credit, however, puts many producers in a position they're familiar with: cautious optimism.

Last week the IRS released guidance for biofuels producers on how to register for 45Z, which takes effect on Jan. 1, 2025. The IRS said it continued to work on additional guidance to include an updated Greenhouse Gases, Regulated Emissions, and Energy Use in Transportation, or GREET, model.

In the meantime, a growing number of farmers are calculating their individual carbon-intensity scores and making on-farm adjustments to lower those scores -- with hope their efforts will pay off.

Others are considering it.

THE DEVIL IS IN THE DETAILS

Southeast Iowa farmer Ryan Oberman said during a farmers panel at the event attended by hundreds of farmers and biofuels producers for his 1,200-acre corn and soybean farm he saw the need to improve soil health when he started delving into regenerative ag a few years ago.

If someday farmers are paid for their conservation practices, Oberman said that too would be beneficial.

"You know, I think it's still up in the air," he said when asked about the potential of the 45Z credit.

"We started doing this for the soil health side of things. So, I was going to do it either way. And if we can get paid for it, great. And if it doesn't turn anything, we're still gonna have better soil."

Giltner, Nebraska, farmer Brandon Hunnicutt is on the board of directors for Field to Market: The Alliance for Sustainable Agriculture. The group is a collaboration of farmers, researchers and others who explore ways of improving sustainable practices.

The idea of adapting farm practices to reduce carbon emissions on the farm, to improve soil health, with the idea of farmers eventually cashing in on those efforts, has been met with skepticism in some circles.

The release of the 40B tax credit guidance that included a list of just three farm practices that qualify, for example, brought attention to a need to include a wide variety of practices to suit farmers' needs across the country -- essentially pitting farmers against farmers.

"Really, I don't think it does (pit farmers against farmers) and it just changes the way we have to think about farming," Hunnicutt said.

"You know, a lot of us don't want to change it. We've always done something the same way and there's always a way to do it better. I think what this will do is just speed up that process. It's that incremental change, whether it's no-till, whether it's strip till, cover crops. But I think if this is what the industry wants and this is what the industry is asking for, we have to make the changes necessary to get to what they want."

REAPING THE REWARDS

Although the IRS has yet to release guidance on 45Z, a tax expert said during a panel discussion of the credit she gets a lot of questions about how farmers could reap a financial benefit.

Dana Jackson, a partner at RSM US LLP in Sioux Falls, South Dakota, outlined possible tax implications to biofuels producers and farmers as it relates to 45Z credits.

"So, the ethanol producer, let's say they generate a $30 million, 45Z credit and they're an organized LLC," Jackson said.

"The one option is they can pass that $30 million out to their members as a tax credit. Let's say there's a farmer member, that farmer has to have enough taxable income to utilize that credit. It's not a refundable credit. They can carry it forward, but they would have to have enough taxable income. So that's one option and I will tell you that's not the ideal option and most of our ethanol producer clients are not going to do that."

Jackson said another option is for ethanol producers to sell 45Z credits for cash. So, if they receive the hypothetical $30 million in cash for a sale, she said, ethanol producers can then distribute the money to farmer members.

"That is a non-taxable event and the farmer now has cash versus a tax credit that they may not be able to use," Jackson said.

Ethanol producers also have asked Jackson about whether they should pay farmers premiums for corn produced using climate-smart practices and delivered to plants.

"If that is the case and that's how they want to monetize the 45Z credits to their farmers via premium on the corn," she said, "that is going to be taxable to a farmer. So, if they're getting paid an increased amount for their corn that they're delivering that will be taxable."

To receive a 45Z tax credit, a biofuel plant must show its fuels have a CI score at least 50% lower than petroleum. Beyond that, every point of CI reduction is worth 2 cents a gallon. A 60% reduction compared to petroleum is worth 20 cents a gallon.

STARTING COVER CROPS

The widespread adoption of cover crops has been slowed in many instances by farmers' hesitancy about whether they can make them work.

Oberman said producers interested in starting cover crops should start slow.

"For us, just start small, start on 40 or 80 acres," he said.

"There's a ton of information out there on how to implement it. I'd also go to NRCS (Natural Resources Conservation Service) and see what they can do. Cover crops come with a cost. Once you get into it you can produce some of your own seed if you want to.

There are also 92 projects under the USDA Partnership for Climate-Smart Commodities that provide funding support for producers to grow cover crops. DTN, for instance, is working with one of the grant awards, Farmers for Soil Health.

One of the concerns about using cover crops is the potential for yield drag in corn.

Western Iowa farmer Kelly Garrett said farmers have a wide range of plant species available for cover crops, meaning there are options for farms of all shapes and sizes.

"I think when everybody talks about cover crops immediately, they think the cereal rye," he said.

"I think that turns a lot of people off. We'll use oats, we'll use kale. My cover crop this fall is probably going to be durum wheat, kale and probably some camelina. I'm excited about the camelina just for the cattle feed in the spring and the fall. I've had some bad experiences with the cereal rye and so we're going to go away from that. There's 1,000 different species of plants in the can and the more species of plants that we have, the greater the water-holding capacity of the soil."

FLEXIBILITY NEEDED IN 45Z

Monte Shaw, executive director of the Iowa Renewable Fuels Association, told farmers Monday he's concerned 45Z guidance will be as limited as the requirements for the 40B tax credit were for the sustainable aviation fuel industry.

So, for corn ethanol-to-jet fuel 40B provides a greenhouse gas reduction credit only if the combination of no-till, cover crops and enhanced-efficiency fertilizer practices are adopted by farmers who provide feedstocks to plants.

If the 40B experience is any indication of where the IRS will go with 45Z, Shaw said, then many farmers will be left out.

So even if farmers are calculating their carbon-intensity scores based on the GREET model now, Shaw said it doesn't mean it will be the score used for 45Z purposes.

"So, if anyone out there is telling you this is your carbon score, it might be your carbon score in the GREET model but that may have nothing to do with what it's worth under the federal tax credit under the 45Z," he said.

The practices credited in the 45Z credit, Shaw said, need to be enough to allow biofuels producers and farmers across the country to benefit.

"So, we do need to figure out what the rules are, so we are pushing for more flexibility," he said.

"There's dozens of other things you can do to lower the carbon intensity of your crops. So, we're pushing for recognition of way more practices, way more flexibility for farmers and to actually give farmers the carbon reduction that those practices deserve."

The three practices prescribed in the 40B credit, Shaw said, together give farmers a negative 10 carbon-intensity score. In reality, he said, farmers are capable of even lower scores by using more practices.

The 45Z credit is in effect only through Jan. 1, 2028. The timespan, Shaw said, probably isn't enough for biofuels producers and farmers to acquire loans for various projects centered on the credit.

"No bank or institutional investor is going to invest in a billion-dollar SAF plan for a three-year tax credit," he said.

"We need to see an eight- or 10-year extension of that to get real money off the ground or off the sidelines to really make this industry grow. So, I think we have to be realistic about the growth opportunities and what it will take."

Shaw said U.S. agriculture has moved into a new period of overproduction in corn with a growing scarcity of new markets.

Carbon markets sparked by 45Z represent "literally the largest potential new market" in the history of American agriculture, he said.

"What I do know is in the history of agriculture, we've never added another agent of value to a bushel of corn and the farmer got none of it," Shaw said.

"The real value I want to plant the seed with you here -- pun intended -- the real value is going to be in the demand it creates to crush that bean and to grind up that corn."

Farmers for Soil Health https://farmersforsoilhealth.com/…

Also see, "45Z Tax Credit Offers a Market for Ag and Carbon Scores, Demands Data and Trust," https://www.dtnpf.com/…

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on social platform X @DTNeeley

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