Energy credit prevailing wage and apprenticeship rules

Editor: Susan Minasian Grais, CPA, J.D., LL.M.

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, P.L. 117-169. 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; frequently asked questions; and Publication 5855, Prevailing Wage & Registered Apprenticeship Overview, 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 and deduction:

• Sec. 30C credit for alternative fuel vehicle refueling property;
• Sec. 45 production tax credit (PTC) for electricity from renewable resources;
• Sec. 45Q credit for carbon oxide sequestration;
• Sec. 45V clean hydrogen PTC;
• Sec. 45Y technology-neutral PTC for production of clean electricity;
• Sec. 45Z credit for clean fuel production;
• Sec. 48 energy investment tax credit (ITC);
• Sec. 48C qualifying advanced energy project credit;
• Sec. 48E technology-neutral clean electricity ITC; and
• Sec. 179D deduction for energy-efficient commercial buildings. Only the prevailing wage requirements would apply to the following credits:
• Sec. 45L credit for new energy-efficient homes; and
• Sec. 45U credit for zero-emission nuclear power production.

General requirements

The Inflation Reduction Act allowed an increased 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 increased credits are also available to certain facilities that meet either 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 prevailing wage or apprenticeship requirements.

Beginning-of-construction exception: If a taxpayer that is otherwise eligible for a credit began construction before Jan. 29, 2023, the taxpayer is eligible for the increased credit without meeting the prevailing wage or apprenticeship requirements. Projects eligible for credits under Sec. 45L and those receiving a credit allocation under the Sec. 48C(e) additional allocation 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.

Prevailing wage requirements

The prevailing wage requirements apply to laborers and mechanics who (1) are employed by the taxpayer and its contractors or subcontractors and (2) are engaged in the construction, alteration, or repair of a qualified facility. The requirements apply to the initial construction of the eligible facility and continue for a specified period after the eligible property or facility is placed in service. For PTCs such as those under Secs. 45, 45V, and 45Q, these requirements apply for any tax year within the applicable PTC period beginning on the date the facility is placed in service. For Sec. 48 and 48E ITCs, these requirements apply 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 services of a similar character, 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 sam.gov to determine the rate for the geographic area and labor classification (under “Wage Determinations”). 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 be needed only if the project’s scope changed significantly or alterations and repairs were needed that were outside the initial contract, or to require work to be performed for an additional period not originally obligated, including where an option to extend the term of a contract for the construction, alteration, or repair is exercised. A redetermination would also be needed with respect to any alteration or repair of a facility that begins after the facility has been placed in service.

Ordinary maintenance that occurs after the facility is placed in service would not be included under the proposed regulations. Maintenance is defined as work that is ordinary and regular and designed to maintain a facility’s existing functionality, as opposed to an isolated or infrequent repair to restore specific functionality or adapt it for a different or improved use.

Qualified apprenticeship requirements

Three requirements must be met related to apprentices: (1) the labor hours requirement; (2) the ratio requirement; and (3) the participation requirement. For the labor hours requirement, 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 percentages are:

• 10% for qualified facilities for which construction began before Jan. 1, 2023 (although projects for which construction began before this date are deemed to have met the requirements regardless);
• 12.5% for qualified facilities for which construction began after Dec. 31, 2022, and before Jan. 1, 2024; and
• 15% for qualified facilities for which construction begins after Dec. 31, 2023.

The IRS previously released beginning-of-construction guidance (see Notices 2016-31, 2018-59, and 2022-61 defining “beginning of construction”), which taxpayers can apply in determining the date on which construction commenced. For the ratio requirement, 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, to meet the participation requirement, the applicable ratio of apprentices to journeyworkers established by the registered apprenticeship program must be met on each day of work. On days when this requirement is not met, apprentices in excess of the ratio must be paid prevailing wages, and their hours would not be counted toward the labor hours requirement.

Curing noncompliance

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 when 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 must:

• Pay the workers the difference between what they were paid and what they were supposed to be paid (three times the difference if the failure is found to result from intentional disregard), plus interest (at the federal short-term rate plus 6 percentage points); and
• Pay the IRS a penalty of $5,000 for each worker who was not paid at the prevailing wage rate in the year ($10,000 if the failure is due to intentional disregard); the penalty might be waived if the taxpayer (1) makes a correction payment on the earlier of 30 days after becoming aware of the error or the date on which the credit is claimed and certain other requirements are met, or (2) has a qualifying project labor agreement in place.

Under the proposed regulations, the penalty payment would be waived if the taxpayer makes the required correction payment, including back wages and interest, by the earlier of (1) 30 days after the taxpayer became aware of the error or (2) the date the tax return claiming the increased credit is filed. The taxpayer is eligible for a waiver of the penalty payment only if either (1) the laborer or mechanic was paid below the applicable prevailing wage for 10% or less of their labor hours, or (2) the difference between the amount the laborer or mechanic was paid for the calendar year (or portion thereof) during which the work was completed and the amount they were required to be paid is less than 2.5% of the required prevailing wage amount. Additionally, in certain cases, the penalty payment would not apply to laborers or mechanics (1) if they are employed under project labor agreements meeting certain requirements, and (2) correction payments are made on or before the date on which the return is filed claiming the increased credit amount.

Taxpayers that failed to meet the apprenticeship requirements could pay a $50 penalty multiplied by the total labor hours for which the apprenticeship requirements were not met ($500 per labor hour if the failure is found to result from intentional disregard).

Taxpayers would not be penalized for failing to employ qualified apprentices if they satisfy the good-faith exception. Under this 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 must submit an additional request to the program again after 120 days if they initially received no response or were denied.

Recordkeeping

Taxpayers must maintain and preserve sufficient records to show they have complied with the prevailing wage and apprenticeship requirements. For the prevailing wage requirements, the records must include the applicable wage determination for laborers and mechanics who worked on the facility (including those employed by contractors and subcontractors), the classifications of work those laborers and mechanics performed, the hours worked in each classification, and the wages paid to the laborers and mechanics for the work.

The proposed regulations clarify 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 proposed regulations also make clear that certified payrolls, which are required for purposes of Davis-Bacon Act compliance, are not required for prevailing wage purposes.

For the apprenticeship requirements, the records must 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, records reflecting the daily ratio of apprentices to journeyworkers, and the payroll records for any work performed by apprentices.

Transferring credits

The IRS recently issued proposed rules that would allow many renewable energy credits to be transferred (REG-101610-23). Taxpayers that have transferred the credits subject to the prevailing wage and apprenticeship requirements would remain 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.

Effective date

The prevailing wage and apprenticeship proposed regulations would apply to facilities, property, projects, or equipment placed in service in tax years ending after the regulations are finalized and construction or installation of which begins after the date the 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 Jan. 29, 2023, if they follow the proposed regulations in their entirety and consistently.

Implications

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 meeting the requirements as well as curing any defects in a timely fashion before the project is completed. Taxpayers will likely need to assign resources to these compliance efforts to maximize their credit value.

Editor Notes

Susan Minasian Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact Grais at susan.grais@ey.com.

Contributors are members of or associated with Ernst & Young LLP.