December 7, 2022
New guidance explains wage and apprenticeship requirements for increased renewable energy tax credits
In Notice 2022-61 (Notice), issued November 30, 2022, the IRS explains how taxpayers (e.g., builders, developers and owners of clean energy facilities) may receive the increased tax credits or deductions added by the Inflation Reduction Act (IRA) by satisfying certain wage and apprenticeship requirements. The new requirements apply to credits under IRC Sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E and the deduction under IRC Section 179D.
The Notice describes how to (1) determine the prevailing wage and apprenticeship requirements, (2) maintain adequate records and (3) determine the beginning of construction and installation dates.
The new requirements apply to projects beginning construction on or after January 29, 2023 (60 days after the Notice was published). Taxpayers can still receive the increased credits for projects begun before this date but do not have to comply with the new requirements.
The IRS said it anticipates issuing proposed regulations and other guidance at a later date.
Prevailing wage requirements
The new prevailing wage requirements apply to laborers and mechanics that are: (1) employed by the taxpayer and its contractors or subcontractors, and (2) engaged in the construction, alteration or repair of a qualified facility. They also apply for any tax year within the 10-year period beginning on the date the facility is placed in service.
The prevailing wage must be at least the amount paid in that locality for similar services, as most recently determined by the Secretary of Labor. Taxpayers can use www.sam.gov to determine the rate for the geographic area and labor classification. If a comparable rate is not listed, the taxpayer can request a wage determination from the Secretary of Labor.
Qualified apprenticeship requirements
A certain percentage of construction, alteration or repair work must be performed by qualified apprentices (i.e., participants in a registered apprentice program). The applicable percentage is:
Each taxpayer, contractor, or subcontractor who employs four or more individuals to construct, alter or repair a qualified facility or project must employ one or more qualified apprentices to perform that work.
Taxpayers will not be penalized for failing to employ qualified apprentices if they requested a qualified apprentice from a registered apprenticeship program and were denied or did not receive a response in five business days. The penalties are $50 per labor hour that the requirements are not satisfied or $500 per labor hour for intentionally disregarding the requirements. Penalties must be paid to the Treasury Secretary.
Beginning of construction
The new requirements apply to facilities that begin construction on or after January 29, 2023. To establish that date, taxpayers must demonstrate that construction on a qualified facility has begun by either: (1) starting "physical work of a significant nature" (the Physical Work Test) or (2) paying or incurring 5% or more of the total cost of the facility (the 5% Safe Harbor). In addition, taxpayers must demonstrate either continuous construction or continuous efforts (Continuity Requirement), regardless of whether the Physical Work Test or the 5% Safe Harbor was used to establish the beginning of construction (see Tax Alert 2021-1297).
For credits under IRC Section 45 and 48, the Continuity requirement will be satisfied if the qualified facility is placed in service no more than four calendar years after its construction began. For qualified facilities or carbon capture equipment under IRC Section 45Q, placement in service must occur no more than six years after construction began. A 10-year period applies to certain offshore projects and projects built on federal land under IRC Sections 45 and 48.
Under the Notice, taxpayers must maintain and preserve sufficient records to show they have complied with the prevailing wage and apprenticeship requirements. The records must include the applicable wage determination, laborers and mechanics who worked on the facility (including contractors and subcontractors), classifications of work they performed, hours worked in each classification and wage rates paid for the work.
The primary takeaway of this guidance is that it starts the 60-day clock for beginning construction, although supply chain and other matters may impact a company's ability to begin construction on projects before that date. Companies ought to analyze the guidance and investigate how the prevailing wage and apprenticeship rules may impact project viability and economics. Proposed regulations are expected to be forthcoming and provide additional clarity and certainty around many of the still unanswered questions.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor