As California moves aggressively toward net-zero emissions, it’s offering new carbon capture tax credits to incentivize innovation in climate tech, AI-powered emission tracking, and carbon removal.
These credits are modeled partly after IRC §45Q (Federal Carbon Capture Credit), but offer additional state-level tax relief for companies based in California.
If you’re involved in carbon sequestration, Direct Air Capture (DAC), biochar, CO₂ measurement or utilization, this is a major opportunity to reduce both federal and California income tax liabilities.
What Are California Carbon Capture Credits?
Effective January 1, 2025, under California Revenue & Taxation Code §23613.7, the state allows a nonrefundable tax credit of up to $50 per metric ton of CO₂ permanently sequestered by a qualifying facility.
Credits apply to:
- Direct air capture (DAC)
- Industrial CO₂ capture and storage
- Permanent carbon utilization (e.g., concrete, biochar)
- Measurement, reporting, and verification (MRV) firms
Federal vs California Credit Comparison
| Feature | IRC §45Q (Federal) | CA CCS Credit (2025) |
|---|---|---|
| Rate | $60–$180/ton | Up to $50/ton |
| Type | Income Tax Credit | CA Franchise or PIT Credit |
| Refundable | No | No |
| Carryforward | 20 years | 7 years |
| Forms | IRS Form 8933 | CA Form 3521 (expected) |
Example: Tech Startup Claiming Both Credits
GreenLoop Carbon Inc., a San Jose-based DAC startup, sequesters 3,000 metric tons of CO₂ .
- Federal Credit: $150,000 (under §45Q, assuming $50/ton)
- CA Credit: $150,000 (at $50/ton)
If GreenLoop owes $160,000 in CA Franchise Tax, the full $150,000 credit can be used to reduce that bill, and the balance carried forward.
Activities That Qualify
Eligible:
- Direct air capture
- Capture from industrial emitters
- Carbon mineralization or concrete infusion
- Biochar with >50-year permanence
- Certified MRV services in CA
Not Eligible:
- Temporary removal (e.g., tree planting without permanence)
- Offsets not meeting CARB protocols
- Non-CA projects without state-source income
How to Claim the CA Carbon Capture Credit
- CARB Certification
Register the project with California Air Resources Board (CARB) under its CCS protocol. - Use Approved MRV Providers
Work with a CARB-approved third-party verifier to confirm CO₂ volumes. - File CA Form 3521
Include this with your 2025 CA Franchise or Personal Income Tax return. - Maintain Records
Hold verification logs, tonnage records, CARB registration, and engineering specs for 7 years.
For LLCs, S-Corps, and Partnerships
- Credit is passed through on CA Schedule K-1 to members/shareholders.
- Owners can use credit on Form 540 or Form 540NR.
- Can offset regular PIT or Franchise Tax, not AMT.
- Credit not refundable but carryforward allowed for 7 years.
Strategic Tips
- Structure carbon-related revenue in a separate entity to clearly trace credits.
- Coordinate credit timing with federal §45Q filings to avoid disputes.
- Investors increasingly seek ESG-aligned startups with verified carbon metrics.
Conclusion
California’s new 2025 carbon capture credit opens the door to major state tax savings for startups working in emissions reduction and climate monitoring. Whether you’re deploying DAC units, building CO₂ sensors, or turning emissions into products, these credits can offset significant tax liability.
Call to Action
To take full advantage of California’s carbon capture credits and navigate both federal and state-level tax compliance, work with a CPA who understands the nuances of climate tech, ESG, and credit structuring.
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the United States, an Enrolled Agent authorized to represent clients before the IRS, and a cross-border tax expert helping AI founders, startups, and tech businesses with high-value IRS and FTB filings.
Book a consultation with Anshul Goyal
Disclaimer
This blog is for educational purposes only and should not be considered legal or tax advice. Always consult a qualified professional before taking tax positions. All information is accurate as of the 2025 tax year.
FAQs
- Can I claim California carbon credits and federal §45Q credits together?
Yes, but you must avoid double-counting the same CO₂ tonnage across both returns. - What type of verification is required?
Projects must use a CARB-approved third-party MRV provider. - Can pass-through entities use the credit?
Yes. It passes to individual members or shareholders on Schedule K-1. - Are biochar and concrete infusion methods eligible?
Yes, as long as they result in permanent sequestration and comply with CARB standards. - Is the credit refundable?
No. It’s nonrefundable but can be carried forward for 7 years.
About Our CPA
Anshul Goyal, CPA EA FCA is an expert in federal and California tax strategies, especially for AI, SaaS, and climate-tech startups. With over 10 years of experience helping founders across the U.S. and India, he specializes in credit optimization, IRS dispute handling, and complex entity structuring.