August 31, 2023
Proposed regulations on prevailing wage and apprenticeship requirements fill in details for obtaining bonus renewable energy tax credits
The IRS and Treasury released a guidance package to help taxpayers engaged in qualified renewable energy projects comply with the prevailing wage and apprenticeship requirements created by the Inflation Reduction Act (IRA). The package includes proposed regulations (REG-100908-23) with details on satisfying the requirements to get up to five times the amount of federal income tax credits for eligible projects, FAQs and Publication 5855, which summarizes the requirements. The proposed regulations also explain how taxpayers can cure their initial failure to comply with the requirements by making correction payments to workers and paying penalties to the IRS.
The new prevailing wage and apprenticeship requirements would apply to the following credits:
Only the new prevailing wage requirements would apply to the following credits:
A public hearing will be held on November 21, 2023, and requests to speak must be received by October 30, 2023.
The IRA allowed for a bonus tax credit or deduction for taxpayers satisfying certain prevailing wage and apprenticeship requirements for the construction, installation, alteration or repair of a qualified facility, qualified property, qualified project or qualified equipment. The bonus credits are also available to certain facilities that meet one of two exceptions to the new requirements: the one-megawatt exception or the beginning-of-construction exception.
One megawatt exception: Facilities with a maximum net output of less than one megawatt (as measured in alternating current) are eligible for the increased credit without meeting the requirements.
Beginning-of-construction exception: Eligible projects that began construction before January 29, 2023, are eligible for the increased credit without meeting the requirements (see Tax Alert 2021-1297). Projects eligible for credits under IRC Section 45L and those receiving an allocation under the IRC Section 48C(e) program must meet the requirements regardless of the date construction began.
The proposed rules build on earlier guidance, including Notice 2022-61, which explains how taxpayers (e.g., builders, developers and owners of clean energy facilities) may receive the increased tax credits or deductions (see Tax Alert 2022-1832).
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. For production tax credits such as IRC Sections 45, 45V and 45Q, this requirement applies for any tax year within the applicable production tax credit period beginning on the date the facility is placed in service. For IRC Section 48 and 48E investment tax credits, this requirement applies for any tax year within the five-year period beginning on the date the project 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, at the time the taxpayer enters into the prime contract for the project. 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 by submitting a request to the Wage and Hour Division of the Department of Labor. According to the proposed regulations, the request should include information about the project, location, which labor classifications are needed and any other pertinent information.
Under the proposed regulations, a redetermination of the applicable wage(s) would only need to be determined if the project's scope changed significantly, or alterations and repairs were needed that were outside the initial contract. Maintenance work that is ordinary and regular in nature would not be included under the proposed regulations.
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:
The IRS previously released beginning-of-construction guidance, which taxpayers can apply in determining these credits (see Tax Alerts 2020-0432, 2021-1297, 2022-1832). Each taxpayer, contractor, or subcontractor employing 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. In addition, the applicable ratio of apprentices to journeyworkers established by the registered apprenticeship program must be met on each day of work.
Taxpayers that do not meet the prevailing wage or apprenticeship requirements during construction would still get the increased credit or deduction if they make correction payments to workers promptly after discovering noncompliance and penalty payments to the IRS at the time they file a tax return to claim the credit. The correction and penalty payments could increase if the failure is found to result from intentional disregard.
Taxpayers that failed to pay the prevailing wage could:
Taxpayers that failed to meet the apprenticeship requirements could:
Taxpayers would not be penalized for failing to employ qualified apprentices if they satisfy the good-faith exception. Under the good-faith exception, taxpayers that requested a qualified apprentice from a registered apprenticeship program and were denied or did not receive a response in five business days are exempt from the requirement. The proposed rules clarify that taxpayers would likely need to contact multiple apprenticeship programs to fill all applicable roles on a specific project and should reach out to the program again after 120 days if they initially received no response or were denied.
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 proposed regulations clarified that these records include payroll records that reflect the hours worked in each classification and the actual wages and fringe benefits paid to each laborer and mechanic performing construction, alteration or repair work on the facility as well as any correction payments. The records also include written requests for apprentices by the taxpayer (or contractor or subcontractor), records reflecting the required ratio of apprentices to journeyworkers prescribed by each registered apprenticeship program from which qualified apprentices are employed and the payroll records for any work performed by apprentices.
The IRS recently issued proposed rules that would allow many renewable energy credits to be transferred (see Tax Alert 2023-1103). Taxpayers that have transferred the credits subject to the prevailing wage and apprenticeship requirements would be liable for any correction payments and penalties. They would also be responsible for keeping the records of complying with the prevailing wage and apprenticeship requirements.
The proposed regulations would apply to facilities, property, projects or equipment placed in service in tax years ending after the regulations are finalized and whose construction or installation begins after the date these regulations are finalized. Taxpayers may rely on the proposed regulations, however, for construction or installation of a facility, property, project or equipment beginning on or after January 29, 2023, if they follow the proposed regulations in their entirety and in a consistent manner.
The proposed rules are well-aligned to the preliminary guidance set forth in Notice 2022-61. While providing important details and points of clarification on several outstanding questions, they do not provide much leeway. As such, taxpayers must pay close attention to the requirements from the time construction begins until the project is completed and the applicable compliance period has lapsed. Additionally, taxpayers should be aware of how to make a showing of good faith in their efforts to meet the applicable requirements. For example, obtaining and reviewing payroll records against the applicable prevailing wage requirements will be important to both meeting the requirements as well as curing any defects in a timely fashion before the project is completed. It is likely that taxpayers will need to assign resources to these compliance efforts to maximize their credit value.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor