The IRS released guidance on the prevailing wage and apprenticeship requirements for increasing the base credit amount of many Inflation Reduction Act (IRA) credits and the deduction under Internal Revenue Code (IRC) Section 179D.
At the May 2023 American Bar Association Tax Section meeting, representatives from the IRS and Treasury announced that additional guidance is anticipated to be issued on the prevailing wage and apprenticeship requirements.
Most IRA energy tax credit rates are conditioned upon the satisfaction of the prevailing wage and apprenticeship requirements.& Taxpayers may receive a credit increased by five times the base credit rate by meeting specified wage and apprenticeship requirements, in addition to meeting all other credit requirements.
The prevailing wage and apprenticeship guidance provided in Notice 2022-61 applies to qualifying facilities, projects, property, or equipment (collectively, qualified facility) for which construction begins on or after January 29, 2023.
Applicable Tax Credits/Deduction
Increased credit amounts are available to taxpayers who satisfy the prevailing wage and apprenticeship requirements under the following IRC Sections (all other credit requirements also must be met):
- Section 30C Alternative Fuel Vehicle Refueling Property Credit
- Section 45 Renewable Electricity Production Tax Credit
- Section 45L New Energy Efficient Home Credit (prevailing wage only)
- Section 45Q Credit for Carbon Oxide Sequestration
- Section 45U Zero-Emission Nuclear Power Production Credit (either prevailing wage with respect to alteration or repair or prevailing wage and apprenticeship depending on date construction began)
- Section 45V Credit for Production of Clean Hydrogen
- Section 45Y Clean Electricity Production Tax Credit
- Section 45Z Clean Fuel Production Credit
- Section 48 Energy Credit
- Section 48C Qualifying Advanced Energy Project Credit
- Section 48E Clean Electricity Investment Tax Credit
An increased deduction amount is available for taxpayers satisfying the prevailing wage and apprenticeship requirements under IRC Section 179D Energy Efficient Commercial Buildings Deduction (all other deduction requirements also must be met).
Prevailing Wage Requirement
To satisfy the prevailing wage requirement for any laborers and mechanics that are employed, directly by the taxpayer or through a contractor or subcontractor, to construct, alter, re-equip, expand, establish and repair the qualified facility, a taxpayer must:
- ensure that no less than prevailing wages are paid; and
- maintain and preserve records that substantiate all laborers and mechanics employed at all phases were paid no less than the prevailing wage. The prevailing wage requirement extends beyond the initial construction including alterations and repairs for the relevant tax credit period (i.e., the 10-year credit period for the production tax credit or the five-year recapture period for the investment tax credit. The “prevailing wage” requirement applies whether the individual performing the services is an employee or an independent contractor.
Prevailing Wage Determinations
The Secretary of Labor determines prevailing wages based on the geographic area of the qualified facility and type of construction performed. Once determined, those wages are published on www.sam.gov.
If a prevailing wage determination for a geographic area and type of construction has not been published, or if a prevailing wage determination for the geographic area and type of construction does not list one or more labor classifications for the work that will be performed, taxpayers can request the Secretary of Labor make such determinations. Taxpayers make this request by contacting the Department of Labor, Wage and Hour Division, at IRAprevailingwage@dol.gov and provide the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications.
For the IRC Section 179D deduction, the prevailing wage is determined with respect to the prevailing wage rate for construction, alteration, or repair of a similar character in the locality in which the property is located.
Correction and Penalty Related to Failure to Satisfy Prevailing Wage Requirements
Taxpayers that fail to satisfy the prevailing wage requirement, for any laborer or mechanic employed by the taxpayer or by any contractor or subcontractor, with respect to any qualified facility in any year during the relevant credit period or recapture period, shall be deemed to satisfy the prevailing wage requirement if the taxpayer:
- Makes a payment to any such laborer or mechanic, regardless of whether the taxpayer, contractor or subcontractor employed them, equal to the sum of the difference in what was paid, and the amount required to be paid, plus interest at the underpayment rate in IRC Section 6621 (substituting 6 percentage points for 3 percentage points); AND
- Makes a penalty payment in the amount of $5,000 multiplied by the total number of laborers or mechanics who were paid wages less than the prevailing wage rate for any period during such year.
If a taxpayer’s failure to meet the prevailing wage requirement is due to intentional disregard, the taxpayer must pay three times the sum determined in 1 above and the penalty amount in 2 above increases to $10,000.
Taxpayers must maintain adequate records that are sufficient to establish that they and all of their contractors and subcontractors paid not less than prevailing wage rates. At a minimum, records should include: documents identifying the applicable wage determination; the laborers and mechanics who performed construction, repair and alteration work on the qualified facility; the classifications of the work performed; hours the laborer worked in each classification; and the wage rates paid for the work. Taxpayers should maintain records on any additional prevailing wage rates provided by the Department of Labor if they have requested a wage determination for the type of construction, geographic area, or classification of laborer or mechanic.
To satisfy the apprenticeship requirements taxpayers must:
- satisfy the apprenticeship labor hour requirements subject to the apprenticeship applicable ratio;
- satisfy the apprenticeship participation requirements; and
- maintain and preserve records that substantiate that the taxpayer and all contractors and subcontractors satisfied (i) the apprenticeship labor hour requirement, such as records of all labor hours worked on the qualified facility, (ii) the applicable apprenticeship ratio for the year in which construction begins as applied to all labor hours, and (iii) the apprenticeship participation requirement.
For purposes of the applying these provisions, a qualified apprentice is an individual employed by the taxpayer, or by any contractor or subcontractor, and who is participating in a registered apprenticeship program. IRC Section 3131(e)(3)(B) defines a registered apprenticeship program as an apprenticeship registered under the National Apprenticeship Act that meets the standards of subpart A of part 29 and part 30 of title 29 of the Code of Federal Regulations.
Apprenticeship Labor Hour Requirement and Apprenticeship Applicable Ratio
In constructing the qualified facility, taxpayers must ensure that qualified apprentices work at least a set percentage of the total labor hours worked on the qualified facility. In determining total labor hours worked, a taxpayer includes all construction, alteration or repair work on the qualified facility performed by the taxpayer and any contractors and subcontractors. Total labor hours exclude any hours worked by foremen, superintendents, owners, or persons employed in a bona fide executive, administrative, or professional capacity (within the meaning of those terms in part 541 of title 29, Code of Federal Regulations).
Once the total labor hours are determined, those labor hours are multiplied by the applicable percentage based on the date that construction begins on the qualified facility. If construction begins on a qualified facility (i) before January 1, 2023, the applicable percentage is 10%, (ii) after December 31, 2022, and before January 1, 2024, the applicable percentage is 12.5% and (iii) after December 31, 2023, the applicable percentage is 15%.
For example, if the total labor hours on a qualified facility that began construction on March 5, 2023, and completed in 2023 are 10,000, the applicable percentage is 12.5% resulting in a least 1,250 labor hours to be performed by one or more qualified apprentices. In meeting the apprenticeship labor hour requirement, a taxpayer may consider the labor hours worked by qualified apprentices employed by contractors and subcontractors.
The apprenticeship labor hour requirement detailed above is subject to any applicable Department of Labor or State Apprenticeship Agency apprentice-to-journeywork ratios. Notice 2022-61 refers to 29 Code of Federal Regulation 29.2 for the definitions of “journeyworker” and 29 Code of Federal Regulation 29.5 for the definition of “apprentice-to-journeyworker ratio.”
Apprenticeship Participation Requirement
Each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work for the construction of a qualified facility must employ at least one qualified apprentice to perform the work.
If a taxpayer fails to satisfy the “Good Faith Effort” exception (described below), taxpayers may still be treated as if they met the apprenticeship labor hours requirement and the apprenticeship participation requirement by making a penalty payment in the amount of $50 multiplied by the total labor hours not satisfied.
The general exception is modified if it is determined that the taxpayer’s failure to meet the apprenticeship labor hours and apprenticeship participation requirements was due to intentional disregard of those requirements, resulting in the taxpayer paying a penalty of $500 multiplied by the total labor hours for which the requirement was not satisfied.
Good Faith Effort Exception
Taxpayers are treated as not failing the apprenticeship requirements if they meet the “good faith effort exception” under IRC Section 45(b)(8)(D)(ii). Under this exception, a taxpayer is deemed to have satisfied the apprenticeship requirements with respect to a qualified facility if the taxpayer requested qualified apprentices from a registered apprenticeship program and (i) the request was denied (so long as the denial was not the result of taxpayer, contractor or subcontractors’ refusal comply with the established standards and requirements of the registered apprenticeship program) or (ii) the registered apprenticeship program fails to respond to a request within five business days after the request was received by the registered apprenticeship program.
Taxpayers must maintain adequate records that are sufficient to establish that it and all of its contractors and subcontractors meet the apprenticeship requirements. At a minimum, records should include: documentation of all labor hours worked on the qualified facility; documents identifying the taxpayer’s efforts in requesting a qualified apprentice; labor hours apprentices worked for contractors and subcontractors; documentation that the apprentice meets the requirements of a qualified apprentice; the applicable apprenticeship ratio for the year in which construction begins as applied to all labor hours; and the information that apprenticeship participation requirements were met.
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Weaver is here to help with all aspects of your clean energy projects from reviewing your process flow diagrams to determine qualified facilities, to assisting you navigate complex IRA credit requirements and evolving regulations, to construction and operations phase wage rate and apprenticeship compliance audits.