Introduction
Texas C corporations involved in carbon capture projects can benefit from federal tax credits, but understanding their interaction with Texas franchise tax is crucial to maximize savings and ensure compliance. Inexperienced advisors may overlook how these credits influence franchise-tax calculations or fail to leverage them for offsets, leading to missed opportunities or overpayments.
Are you utilizing carbon capture credits to offset your Texas franchise tax liability as a C-Corp in 2025? At Kewal Krishan & Co, our expert tax advisors help Texas clients save an average of $50,000 annually, potentially totaling $775,000 over a decade through strategic tax credit planning. This blog explores carbon capture credits under Internal Revenue Code (IRC) § 45Q, focusing on franchise-tax offsets for Texas C-Corps under Texas Tax Code § 171, with detailed examples and compliance steps for 2025.
With Texas’s no-state-income-tax environment and the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, increasing § 45Q rates, these credits offer substantial federal relief that indirectly aids state tax planning. Begin optimizing your carbon capture strategy today with insights from Our Tax Planning Services.
Understanding Carbon Capture Credits for Texas C-Corps
The carbon capture credit under IRC § 45Q provides a federal tax credit for each metric ton of qualified carbon oxide captured and sequestered, used, or utilized at qualified facilities. For 2025, OBBBA enhances rates to $85 per ton for sequestration ($180 for direct air capture), previously limited but now permanent with expanded eligibility for industrial sources (IRC § 45Q).
For Texas C-Corps, the credit reduces federal tax liability on Form 1120, but Texas franchise tax (margin tax) is separate, at 0.75% on taxable margin (Texas Tax Code § 171.002). While federal credits don’t directly offset franchise tax, qualified carbon capture investments may qualify for Texas R&D franchise tax credits (Texas Tax Code § 171.651, enhanced to 8.722% by SB 2206 in 2025), providing indirect offsets by reducing taxable margin.
Key Considerations for 2025
- Federal § 45Q Credit: Eligible for C-Corps with capture equipment ownership; credit transferable (IRC § 45Q(f)(3)), non-taxable income (IRC § 45Q(g)).
- Texas Franchise Tax Offset: R&D credit for carbon capture technology development offsets up to 50% of franchise tax (Texas Tax Code § 171.655), carryforward 20 years.
- Classification: Investments in capture facilities may be deducted as business expenses (IRC § 162), reducing federal taxable income and potentially Texas margin via COGS or compensation methods (TAC § 3.587).
- OBBBA Impact: Increases § 45Q rates and extends to 2032, encouraging Texas energy sector participation.
Report § 45Q on Form 8933 attached to Form 1120; Texas R&D credit on Form 05-163 or Form 05-169. For details, see IRS Form 8933 Instructions and Texas Comptroller’s R&D Credit Rule.
Detailed Example: Using Carbon Capture Credits for Tax Savings
Consider a Texas C-Corp energy firm investing $5 million in carbon capture equipment in 2025, capturing 100,000 tons sequestered.
- Federal § 45Q Credit: $85/ton × 100,000 = $8.5 million credit, reducing federal tax liability on Form 1120 (IRC § 45Q).
- Texas Franchise Tax: Revenue $10 million, margin $7 million (70%), tax $52,500 (0.75%). R&D credit for $500,000 qualified expenses: 8.722% = $43,610, offsetting 50% tax ($26,250), net $26,250.
- Total Savings: Federal credit $8.5 million (assuming sufficient liability); Texas offset $26,250. Investments deducted as depreciation (IRC § 168), reducing future margin.
- Net Impact: If credit exceeds liability, carryforward (IRC § 38); Texas credit carryforward 20 years (Texas Tax Code § 171.655).
Alternative Scenario
For direct air capture (DAC): $180/ton × 100,000 = $18 million credit, amplifying savings for innovative Texas projects.
Step-by-Step Guide for Taxpayer Compliance
To claim carbon capture credits and offset franchise tax for Texas C-Corps in 2025, follow these steps:
- Verify Eligibility: Confirm qualified facility and capture (IRC § 45Q(d)); for Texas R&D, document expenses (Texas Tax Code § 171.652).
- Install Equipment: Place in service by December 31, 2025, for full credit; retain engineering certifications (IRC § 45Q(f)(1)).
- Calculate Federal Credit: Use tons captured/sequestered; report on Form 8933 attached to Form 1120.
- Apply Texas R&D Credit: Submit Form 05-175 to TWC for certification, then claim on franchise tax report (Texas Tax Code § 171.653).
- Compute Franchise Tax: Deduct R&D expenses in margin (TAC § 3.589); offset up to 50% liability.
- File Returns: Form 1120 by March 15, 2026 (or extend); franchise tax Form 05-163/05-169 by May 15, 2026.
- Carry Forward Excess: Federal credit 20 years (IRC § 39); Texas 20 years (Texas Tax Code § 171.655).
- Retain Records: Keep capture logs, certifications, and expense documents for three years (IRC § 6001, Texas Tax Code § 171.211).
For carbon projects, explore Our Business Tax Services.
Common Pitfalls to Avoid
- Ineligible Facilities: Claim without ownership or sequestration verification, disallowing credit (IRC § 45Q(e)).
- R&D Expense Errors: Non-qualified costs reduce Texas credit (Texas Tax Code § 171.652).
- Carryforward Oversight: Fail to track excess, losing future offsets (IRC § 39).
- Underreporting Margin: Exclude deductions, inflating tax (Texas Tax Code § 171.101).
Why Work with a Tax Expert?
Carbon capture credits for Texas C-Corps require coordinating IRC § 45Q with Texas R&D offsets under Texas Tax Code § 171, where errors can forfeit credits or trigger audits. Generic advisors may miss eligibility or OBBBA enhancements, costing thousands. Kewal Krishan & Co specializes in Texas energy tax strategies, ensuring accurate claims and maximum offsets. Our expertise mitigates risks, as demonstrated in Our Tax Litigation Services.
Conclusion
Carbon capture credits under IRC § 45Q offer Texas C-Corps significant federal savings in 2025, with Texas R&D credits providing franchise-tax offsets under Texas Tax Code § 171. With OBBBA’s increased rates and Texas’s supportive energy policies, these incentives encourage investment—act now to claim credits and optimize your tax position.
Call to Action
Schedule a consultation with Anshul Goyal, CPA EA FCA, a licensed U.S. CPA and Enrolled Agent, admitted to practice before the IRS, specializing in tax litigation and cross-border tax for U.S. businesses and Indians in the U.S. Contact us at Kewal Krishan & Co to leverage carbon capture credits.
About Our CPA
Anshul Goyal, CPA EA FCA, is a licensed U.S. CPA and Enrolled Agent, representing clients in IRS tax litigation and assisting with cross-border tax compliance for U.S. businesses and Indians in the U.S. His expertise ensures tailored strategies that maximize savings and ensure compliance.
Disclaimer
This blog provides general information for educational purposes only and does not constitute tax, legal, or financial advice. Tax laws change frequently, and individual circumstances vary. Consult a qualified tax professional before making decisions. The author and firm disclaim liability for actions taken based on this content.
FAQs
1. What is the § 45Q credit?
$85/ton for sequestration, $180 for DAC in 2025 (IRC § 45Q).
2. How does Texas R&D credit work?
8.722% on qualified expenses, offsetting 50% franchise tax (Texas Tax Code § 171.651).
3. Can credits be carried forward?
Federal 20 years (IRC § 39); Texas 20 years (Texas Tax Code § 171.655).
4. What form for federal credit?
Form 8933 attached to Form 1120.
5. When is franchise tax due?
May 15, 2026, for 2025 reports.