Treasury and the IRS recently released proposed regulations with respect to the increased credit amounts available to taxpayers who satisfy the prevailing wage and apprenticeship (PWA) requirements. The new guidance provides information to taxpayers intending to increase clean energy incentives through satisfaction of the PWA requirements. Additional information on recordkeeping and penalty procedures was also included.
The Inflation Reduction Act (IRA) introduced the concept of the PWA requirements to the calculation of several clean energy credits and the section 179D deduction. Where applicable, if a taxpayer meets both requirements, the incentives may be increased by a multiple of 5 (the enhanced credit). For example, the section 48 energy credit (a component of the investment credit, or ITC) may be increased from 6% to 30% if PWA requirements are met. Some of these clean energy incentives have one or two exceptions out of these PWA requirements. One exception is available for certain small projects under one megawatt. The other exception is available for projects the construction of which begins before Jan. 29, 2023. Initial guidance on the PWA requirements came in the form of Notice 2022-61. The proposed regulations build on the guidance included in Notice 2022-61.
New guidance released on clean energy credit labor requirements
Framework of the proposed regulations
Following the framework of the statute, the regulations, which are 129 pages, set forth the substantive PWA rules under section 45, which is the clean energy production tax credit (PTC):
- 1.45-7 (Prevailing wage requirements)
- 1.45-8 (Apprenticeship requirements)
- 1.45-12 (Recordkeeping and reporting)
Further, for each provision where the PWA rules apply, the regulations set forth specific implementing rules:
- 1.30C-3 (Alternative fuel vehicle refueling property credit)
- 1.45-6 (PTC)
- 1.45L-3 (Qualified new energy efficient homes credit)
- 1.45U-3 (Qualified nuclear power plant facility credit)
- 1.45V-3 (Clean hydrogen credit)
- 1.45Y-3 (Clean electricity PTC – beginning Jan. 1, 2025)
- 1.45Z-3 (Clean fuels PTC)
- 1.48-13 (Energy investment tax credit)
- 1.48C-3 (Qualified advanced energy project credit)
- 1.48E-3 (Clean energy ITC – beginning Jan. 1, 2025)
- 1.179D-3 (Energy efficient commercial building deduction)
The proposed applicability date of the regulations is after the date final regulations are published in the Federal Register. However, taxpayers may rely on the proposed regulations with respect to construction or installation of a facility, property, project, or equipment beginning on or after Jan. 29, 2023, and on or before Aug. 30, 2023, provided that beginning after Oct. 29, 2023, taxpayers follow the proposed regulations in their entirety and in a consistent manner.
New developments in the proposed regulations
The proposed regulations address several aspects of the PWA requirements. Some developments are taxpayer-friendly and many require careful consideration of a project’s facts and circumstances. Of significant importance is the statement that the taxpayer is solely responsible for ensuring laborers and mechanics are paid wages not less than the prevailing wage, whether employed directly or through a contractor or subcontractor, as well as being solely responsible for apprenticeship and recordkeeping requirements.
Additional pertinent developments are discussed below.
I. Prevailing Wage Requirements
The prevailing wage requirements provide that taxpayers must pay any laborers or mechanics involved in the construction and, in some cases, the alteration or repair of the project at no less than the prevailing wage for the locality where the project is located, as determined by the Department of Labor. The prevailing wage determination for the geographic area and type of construction (including all labor classifications) are published on www.sam.gov.
Incorporation of Davis-Bacon Act
The David-Bacon Act (DBA) requires payment of minimum prevailing wages determined by the Department of Labor (DOL) to laborers and mechanics working on contracts entered into by the Federal agencies that are in excess of $2,000 and are for the construction, alteration or repair of public buildings and public works. The proposed regulations seek to strike the appropriate balance in determining when the DBA requirements are relevant for purposes of the PWA requirements and when they are not. For example, the proposed regulations largely adopt the DBA guidance related to wage determinations and definitional terms; however they do not adopt DBA rules that are not in furtherance of sound tax administration of IRA policies, such as requiring certified payroll reporting to be provided to the government. Additionally, the proposed regulations do not exempt Tribal governments of the Tennessee Valley Authority from the PWA requirements.
Under the proposed regulations prevailing wage rates would be determined by the DOL in accordance with DBA. Consistent with the DBA, laborers and mechanics are considered employed by the taxpayer for purposes of the PW requirements, even if employed by a contractor or subcontractor and regardless of whether the employee is classified as an independent contractor for other Federal tax purposes; thus the PW rules are broader than certain tax rules.
The proposed regulations add clarity to initial guidance on wage determinations in Notice 2022-61. One new development is clarification that the wage determinations in effect at the time construction, alteration, or repair of an energy project or facility begins is generally the wage determination in effect for the duration of the construction, alteration, or repair work. However, work performed after this date as a result of a change to the scope of work of the original project may require use of a new wage determination.
Secondary work sites
The prevailing wage requirements could have been broadly interpreted to include any construction, alteration or repair work performed by laborers or mechanics, regardless of whether that work is performed at the site of the energy project or facility. The proposed regulations would take a narrower approach and provide that generally work only at the facility site is subject to the rules and the prevailing wage rate is that at the location of the facility. However, exceptions exist where significant portion of construction occurs at a secondary site, provided the secondary site was established specifically for or dedicated exclusively for a specific period of time, to the construction of the facility.
Cure provisions and penalties
The proposed regulations address the application of correction and penalty payments. Rules and examples are provided to illustrate the amounts and timing of such payments. Penalty payment requirements may be waived if correction payments are made and other requirements are met. Additionally, penalties may not be imposed if a pre-hire ”Qualified Project Labor Agreement” meeting certain requirements is in place.
II. Apprenticeship Requirements
Satisfaction of three tests
The apprenticeship requirements are satisfied as a result of meeting the following sub-requirements during the construction of an energy project or facility:
- Labor Hours Requirement: A certain percentage of total labor hours must be performed by qualified apprentices participating in a registered apprenticeship program.
- Ratio Requirement: The applicable percentage of labor hours performed by qualified apprentices is subject to any applicable requirements for apprentice-to-journeyworker ratios of the Department of Labor or the applicable State apprenticeship agency.
- Participation Requirement: Each taxpayer, contractor or subcontractor who employs 4 or more individuals to perform construction, alteration or repair work on qualified energy project must employ at least one qualified apprentice to perform such work.
Cure provision and penalties
If a taxpayer fails to meet the apprenticeship requirements, this failure may be cured by either paying a penalty or by meeting the Good Faith Effort Exception. The proposed regulations address specific requirements taxpayers must take to adequately meet the good faith effort exception to satisfying the apprenticeship requirements. One such requirement is that the request for apprentices is not a one-time action; requests for apprentices must be made every 120 days. Additional requirements apply to good faith efforts.
III. Documentation Requirements
The taxpayer claiming a clean energy credit at the enhanced credit rate is responsible for maintaining sufficient books and records to substantiate eligibility for the enhanced credit rate. In other words, it is the taxpayer taking the enhanced credit that must maintain records to support that the workers were paid at least the prevailing wages and the project complied with the apprenticeship requirements. The taxpayer’s responsibility for recordkeeping extends to laborers or mechanics that were employed by their contractors or subcontractors.
Recordkeeping and reporting
The preamble to the proposed regulations stress that documentation of PWA is ultimately the taxpayer’s burden, not that of their contractor or subcontractor. The proposed regulations provide details on the records that taxpayers must maintain in connection with satisfaction of the PWA requirements. The IRA references concepts and requirements in the DBA as it implements the prevailing wage requirements into the context of clean energy credits. The DBA generally requires taxpayers subject to its requirements to submit weekly certified payroll records to the contracting government agency. The proposed regulations clarify that this weekly requirement would not be adopted by Treasury. However, the proposed regulations detail the other records that must be maintained by taxpayers claiming increased credit rates.
With respect to prevailing wage, the regulations provide certain expectations for taxpayers with respect to information to be both reported for the credit claim and to be maintained to support an IRS examination. Taxpayers are expected to report the following at the time of filing a return claiming an increased credit:
- The location and type of qualified facility;
- The applicable wage determinations for the type and location of the facility;
- The wages paid (including any correction payments) and hours worked for each of the laborer or mechanic classifications engaged in the construction, alteration or repair of the facility;
- The number of workers who received correction payments;
- The wages paid and hours worked by qualified apprentices for each of the laborer or mechanic classifications engaged in the construction, alteration or repair of the facility;
- The total labor hours of the construction, alteration or repair of the facility by any laborer or mechanic employed by the taxpayer or any contractor or subcontractor; and
- The total credit claimed.
Further, taxpayers would be expected to maintain and preserve sufficient records to establish compliance with the requirements. This would include payroll records that reflect the hours worked in each classification and the wages paid to each laborer and mechanic performing construction, alteration or repair work on the facility (including any correction payments made to each laborer or mechanic).
They also set forth records taxpayers should maintain and preserve to establish failure to meet the prevailing wage requirements were not subject to an intentional disregard of the rules.
With respect to the apprenticeship requirements, the proposed regulations required taxpayers maintain sufficient records to establish compliance with each of the three tests. This includes:
- Copies of any written requests for apprentices by the taxpayer, contractor or subcontractor;
- Any agreement entered by the taxpayer, contractor or subcontractor with a registered apprenticeship program;
- Documents reflecting any registered apprenticeship program sponsored by the taxpayer, contractor or subcontractor;
- Documents verifying participation in a registered apprenticeship program by each apprentice;
- 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.
Washington National Tax takeaways
The PWA requirements will have a significant impact on the financing available for clean energy projects due to the fivefold increase in credits at stake. Most clean energy projects are modeled with an expected rate of return incorporating tax credits at a rate that assumes the PWA requirements are met.
However, if finalized, the regulations require significant documentation to be maintained to fully comply with the rules and to substantiate the credit claimed in the event of an IRS examination.
The proposed rules for satisfying the PWA requirements are complex. While the rules may change somewhat from what is proposed, it is important to note that under the proposed applicability and reliance section, if taxpayers follow the proposed regulations in their entirety and in a consistent manner, reliance on these proposed regulations is permissible.
Additionally, the importance of determining an energy project or facility’s construction commencement date and original scope of work is now even more important. Interested parties should also note that the Department of Labor recently published a final rule that, among other things, amends the methodology for determining prevailing wage rates.
Taxpayers who plan to claim clean energy credits at the enhanced credit rates should consult their tax advisors to ensure that they have met the PWA requirements and maintained the necessary records in order to avoid correction and penalty payments or forfeiture of the enhanced credit.