The Inflation Reduction Act’s prevailing wage and apprenticeship requirements

Editors: Brian Hagene, CPA, CGMA, and Mark G. Cook, CPA, CGMA

As part of the United States’ Paris Agreement climate commitment, President Joe Biden’s administration introduced initiatives in 2021 to mitigate historical climate and environmental imbalances. The Justice40 Initiative will provide the federal funding and investment (including that enacted by the Inflation Reduction Act of 2022, P. L. 117-169, and the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) of 2022, P.L. 117-167) and other federal efforts directed toward climate, clean energy, energy efficiency, clean transportation, and affordable housing.

The Department of Energy (DOE) estimates that the Inflation Reduction Act, enacted on Aug. 16, 2022, (combined with other government measures) will reduce U.S. greenhouse gas emissions 40% below 2005 levels by 2030 (“The Inflation Reduction Act Drives Significant Emissions Reductions and Positions America to Reach Our Climate Goals,” DOE, DOE/OP-0018, August 2022). The act’s objective is to improve the climate and to address environmental equity across the country by reducing pollution and providing communities with clean and reliable energy. As part of the environmental-justice focus, the act will invest in clean air and water, clean-energy jobs, building renovations, and corrective action in “pollution hot spots” prevalent in disadvantaged communities across the country.

Clean-energy incentives and the prevailing wage and apprenticeship requirements 

The provisions of the Inflation Reduction Act offer taxpayers a wide variety of clean-energy tax incentives. These include:

• Sec. 30C, alternative fuel vehicle refueling property credit;
• Sec. 45, renewable electricity production credit;
• Sec. 45Q, credit for carbon oxide sequestration;
• Sec. 45V, credit for production of clean hydrogen;
• Sec. 45Y, clean electricity production credit;
• Sec. 45Z, clean fuel production credit;
• Sec. 48, energy credit;
• Sec. 48C, qualifying advanced energy project credit;
• Sec. 48E, clean electricity investment credit; and
• Sec. 179D, energy-efficient commercial building deduction.

For all of these incentives, taxpayers can increase the base amount of the incentives they are entitled to by meeting the prevailing wage and apprenticeship (PWA) requirements of the Inflation Reduction Act in Secs. 45(b) (7) and (8).

Prevailing wage requirements

To meet the prevailing wage requirements, taxpayers must ensure that all laborers and mechanics they (or any contractor or subcontractor) employ on the construction, alteration, or repair of a qualified facility (or qualified property, project, or equipment, depending on the incentive) are paid wages at rates that are not less than the prevailing rates determined by the Department of Labor (DOL) in accordance with Subchapter IV of Chapter 31 of Title 40 of the U.S. Code (the Davis-Bacon Act) for the type of work performed in the geographic area of the facility.

Laborers, mechanics, and apprentices are individuals whose duties are manual or physical in nature (including individuals who use tools or who are performing the work of a trade). Laborers and mechanics include apprentices and helpers but do not include individuals whose duties are primarily administrative, executive, or clerical rather than manual.

The term “construction, alteration, or repair” generally means those activities that are considered “construction, prosecution, completion, or repair” as defined by the Davis-Bacon Act and DOL guidance and that are performed with respect to a facility.

Repair work normally includes any activities that improve the facility. Construction, alteration, or repair work does not include maintenance work after a facility is placed in service. Generally, work that improves the current condition or function of a facility is considered an alteration or repair and not maintenance work.

The prevailing wage rate (which includes both the basic hourly rate and any fringe benefits rate) is the applicable general wage determination published by the DOL. The applicable general wage determination is based on the type of construction; the geographic area where it is performed; and the time the contract for the construction, alteration, or repair is executed (or, if there is no date of contract or the contract date cannot be reasonably determined, the date when the construction, alteration, or repair starts (Regs. Sec. 1.45-7(b)(2)(i)).

If an applicable general wage determination is not available or an applicable general wage determination is missing a labor classification, a supplemental wage determination or an additional classification and wage rate may be requested from the DOL.

To support the IRS’s efforts in ensuring taxpayer compliance with the PWA requirements, currently, the DOL and the IRS are working together on a memorandum of understanding, due by the end of 2024, to facilitate the drafting of the PWA-related tax forms (IRS News Release IR-2024-168).

Corrective payments and penalties for failing to satisfy prevailing wage requirements

If the prevailing wage requirements are not met, taxpayers may be able to claim the increased credit and deduction amounts by making corrective payments to laborers or mechanics who were not paid the prevailing wage and paying a penalty to the IRS under Sec. 45(b)(7)(B).

The amount of the corrective payment to a laborer or mechanic who was not paid the prevailing wage is the sum of: (1) the difference between the amount of wages paid to the laborer or mechanic during the period and the amount of wages required to be paid to the laborer or mechanic during that period in order to meet the prevailing wage requirements; and (2) interest on the amount under (1) at the underpayment rate under Sec. 6621 (determined by substituting “6 percentage points” for “3 percentage points” in Sec. 6621(a)(2)) for the applicable period (Sec. 45(b)(7)(B)(i)(I)).

The amount of the penalty payable to the IRS is $5,000 multiplied by the total number of laborers and mechanics who were paid wages at a rate below the prevailing wage rate described in Sec. 45(b)(7)(A) for any period during the year (Sec. 45(b)(7)(B)(i) (II)). Deficiency procedures do not apply with respect to the assessment or collection of the penalty.

Under Sec. 45(b)(7)(B)(iii), if the IRS determines that the failure to satisfy the prevailing wage requirements is due to “intentional disregard” of those requirements, then the correction payment to the laborer or mechanic is three times the amount that would otherwise be determined under Sec. 45(b)(7)(B)(i)(I), and $10,000 is substituted for $5,000 in calculating the penalty under Sec. 45(b)(7)(B)(i)(II).

Once the IRS makes a final determination that a taxpayer has failed to satisfy the prevailing wage requirements, the taxpayer must make the correction and penalty payments within 180 days after the final determination to be eligible for the increased credit amount (Sec. 45(b)(7)(B)(iv)). If the taxpayer does not make the required correction and penalty payments and therefore is not allowed the increased credit amount, no penalty is assessed under Sec. 45(b)(7)(B).

Apprenticeship requirements

The apprenticeship requirements under Sec. 45(b)(8) require the taxpayer to employ one or more qualified apprentices for a minimum percentage of labor hours. Taxpayers must satisfy the labor-hours requirement of Sec. 45(b)(8)(A)(i); the ratio of apprentice to journeyworker requirements of Sec. 45(b) (8)(B); and the participation requirements of Sec. 45(b)(8)(C) to meet the apprenticeship requirements.

Labor-hours requirement: Sec. 45(b)(8)(A)(i) provides, “Taxpayers shall ensure that, with respect to the construction of any qualified facility, not less than the applicable percentage of the total labor hours of the construction, alteration, or repair work (including such work performed by any contractor or subcontractor) with respect to such facility shall, subject to [Sec. 45(b)(8)(B)], be performed by qualified apprentices.”

For purposes of this requirement, Sec. 45(b)(8)(A)(ii) provides that the applicable percentage is: (1) in the case of a qualified facility the construction of which began before Jan. 1, 2023, 10%; (2) in the case of a qualified facility the construction of which began after Dec. 31, 2022, and before Jan. 1, 2024, 12.5%; and (3) in the case of a qualified facility the construction of which begins after Dec. 31, 2023, 15%.

Sec. 45(b)(8)(E)(i) defines “labor hours” as “the total number of hours devoted to the performance of construction, alteration, or repair work by any individual employed by the taxpayer or by any contractor or subcontractor,” excluding 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 29 C.F.R., Subtitle B, Chapter V, Subchapter A, Part 541).

Sec. 45(b)(8)(E)(ii) defines “qualified apprentice” as “an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program, as defined in section 3131(e)(3)(B).” Sec. 3131(e)(3)(B) defines a “registered apprenticeship program” as an apprenticeship program registered under the National Apprenticeship Act of 1937 that meets the standards of Subpart A of Part 29 and Part 30 of Title 29 of the Code of Federal Regulations. The DOL Office of Apprenticeship administers provisions under the National Apprenticeship Act related to registered apprenticeship programs.

Ratio requirement: Under Sec. 45(b)(8)(B), the labor-hours requirement is “subject to any applicable requirements for apprentice-to-journeyworker ratios of the [DOL] or the applicable State apprenticeship agency.”

Participation requirement: Under Sec. 45(b) (8)(C), each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work.

The IRS provides taxpayers with a “good faith effort” exemption in Sec. 45(b)(8)(D)(ii), under which a taxpayer is deemed to satisfy the apprenticeship requirements with respect to a qualified facility if:

[T]he taxpayer has requested qualified apprentices from a registered apprenticeship program, and (i) such request has been denied, provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors engaged in the performance of construction, alteration, or repair work with respect to such qualified facility to comply with the established standards and requirements of the registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to such request within 5 business days after the date on which such registered apprenticeship program received such request. [Preamble to T.D. 9998; 89 Fed. Reg. 53184 (June 25, 2024)]

Curing a failure to meet apprenticeship requirements: To cure a failure to meet the apprenticeship requirements, a taxpayer must pay a penalty of $50 multiplied by the total labor hours for which the apprenticeship requirements were not met. If the failure was due to intentional disregard, the penalty amount is increased to $500 per labor hour. The penalty for failures concerning apprenticeship requirements may not apply if the taxpayer satisfies the good-faith-effort exception in Sec. 45(b)(8)(D)(ii), described above.

Bookkeeping requirements

Taxpayers that meet the PWA requirements to claim an increased tax credit or deduction amounts are subject to specific recordkeeping requirements that are designed to demonstrate the taxpayer’s compliance with the applicable PWA requirements. Examples of records required to be kept include lists of “each laborer or mechanic’s hourly rates, hours worked, labor classification, deductions from wages, and actual wages paid” (IRS Publication 5855, Prevailing Wage & Registered Apprenticeship Overview, p. 1 (June 2024)).

According to informal IRS guidance (News Release IR-2024-168), it is recommended that taxpayers that intend to claim an increased credit or deduction amount through the PWA requirements take the following steps to ensure their project and work meets the PWA requirements:

• Regularly review payroll records;
• Ensure all contractors’ and subcontractors’ contracts adhere to the requirements;
• Regularly review classifications of laborers and mechanics, prevailing wage rates, and percentage of labor hours to be performed by qualified apprentices;
• Prominently post information or otherwise provide written notice about prevailing wage rates to laborers and mechanics during construction, alteration, and repair work;
• Establish procedures for individuals to report suspected failures to comply with the PWA requirements without fear of retaliation or adverse action;
• Investigate suspected failures to comply with the PWA requirements; and
• If needed, contact the DOL Office of Apprenticeship or the relevant state agency for help locating registered apprenticeship programs.

The Inflation Reduction Act provides an initiative to promote clean energy and infrastructure with investments to generate jobs, reduce greenhouse gas emissions, and stimulate economic growth in the United States. For taxpayers that meet the PWA requirements and qualify for the increased clean-energy tax credit or deduction, it will provide both the taxpayer and its employees opportunities within the clean-energy job industry.

Editor Notes

Brian Hagene, CPA, CGMA, is partner/owner at Mathieson, Moyski, Austin & Co. LLP in Lisle, Ill., with CPAmerica. Mark G. Cook, CPA, CGMA, MBA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact thetaxadviser@aicpa.org.

Contributors are members of or associated with CPAmerica or SingerLewak LLP.