12 minute read | September.15.2023
The Department of the Treasury and Internal Revenue Service (IRS) published proposed regulations (the “Proposed Regulations”) providing further guidance on the prevailing wage and apprenticeship requirements for clean energy projects under the Inflation Reduction Act of 2022 (IRA) following Notice 2022-61. The new guidance described below is found in the Proposed Regulations 1.45-6, -7, -8, and -12, which are cross-referenced by regulations issued under other relevant sections of the Internal Revenue Code of 1986 (the “Code”).
Coming after final regulations for the Davis-Bacon Act, the Proposed Regulations provide much-needed clarity for taxpayers seeking to claim the increased credit by meeting the prevailing wage and apprenticeship requirements.
The proposed regulations provide guidance on:
Relevance: The IRA introduced a two-tier “base” rate and “increased” rate structure for renewable energy tax credits.
The “increased” rate is worth five times the value of the base rate. It is available if a project meets or is grandfathered from the prevailing wage and apprenticeship requirements described below.
Prevailing Wage Requirement: The taxpayer must ensure that any laborers and mechanics they or a contractor or subcontractor employs are paid “prevailing wages” during construction and also for any repairs or alterations during the applicable tax credit period. The term “prevailing wages” refers to wages at rates for similar work in the location of the project site as determined by the U.S. Secretary of Labor.
Apprenticeship Requirement: The taxpayer must ensure that a percentage of the total labor hours spent to construct the project are performed by “qualified apprentices” who participate in a registered apprenticeship program that complies with federal requirements. The percentage of labor hours is 12.5% for projects beginning construction in 2023 and 15% if construction begins in 2024 or later (Apprenticeship Labor Hour Requirements). The Apprenticeship Labor Hour Requirements are subject to applicable requirements for apprentice-to-journeyworker ratios of the Department of Labor (DOL) or the applicable state apprenticeship agency (Apprenticeship Ratio Requirements). Further, each taxpayer, contractor, or subcontractor with four or more employees on a project must employ one or more qualified apprentices (Apprenticeship Participation Requirements).
Grandfathered Projects: Projects (i) that began construction prior to January 29, 2023 or (ii) that have a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy automatically qualify for the “increased” rate without regard to the prevailing wage and apprenticeship requirements.
The Proposed Regulations:
Takeaway: Taxpayers have asked which work on an operating facility is subject to the prevailing wage requirement. The clarification that maintenance work is not subject to the prevailing wage requirements and how to distinguish maintenance from repair will help alleviate concerns with respect to what tasks during the operating period are subject to the prevailing wage requirements.
Determining the prevailing wage rate
Takeaway: This is an important clarification with respect to the timing of determining the prevailing wage. Taxpayers and contractors were uncertain how to account for the risk of prevailing wages changing over the duration of a construction contract. The Proposed Regulations “freeze” the prevailing wage rates to when the time construction, alteration, or repair begins until there is a change that would require using updated prevailing wages.
A continuing concern is the risk that wage determinations could change during a “lag period” between the execution date of a construction contract and the date work begins.
Payment of wages
The Proposed Regulations:
Takeaway: The guidance does not address to what extent inconsistencies in regular payroll practices give rise to potential penalty payments. A minor delay in payment could theoretically result in a failure to comply with prevailing wage requirements and a subsequent penalty.
Correction and penalty provisions
The Proposed Regulations provide that the prevailing wage requirement becomes binding upon the earlier of
Upon a final determination of the IRS that a taxpayer failed to meet prevailing wage requirements, the taxpayer has 180 days to make correction and penalty payments. The taxpayer must pay both the correction amount and the penalty amount determined as shown below:
|Correction Amount||=||The difference between wages paid to laborers or mechanics and the amount required by the prevailing wage requirements||+||(Interest on the difference at the federal short-term rate + 6 percentage points)|
|Penalty Amount||=||$5,000||x||Total number of laborers or mechanics paid at the rate below the prevailing wage|
If the IRS determines a failure to meet prevailing wage requirements is due to the taxpayer’s intentional disregard (as discussed further below), the correction amount is tripled and the penalty amount is doubled.
The Proposed Regulations also provide that a taxpayer may make correction and penalty payments before the IRS issues a final determination. This is one of the factors in the analysis of whether failure to meet prevailing wage requirements was due to intentional disregard.
The correction and penalty payments do not need to be paid until the prevailing wage requirement becomes binding (i.e., when the increased credit amount is claimed on a tax return).
Apprenticeship Ratio Requirements
Takeaway: The Apprenticeship Labor Hour Requirement cannot always be met by having more apprentices work on the project site. A taxpayer’s ability to cure a deficiency in the Apprenticeship Labor Hour Requirement may be limited if construction is far enough along and the apprentice labor hour percentage is low enough such that it is not possible to bring up the percentage to the minimum level while also not exceeding the maximum apprentice-to-journeyworker ratio.
Apprenticeship Participation Requirements
The Proposed Regulations:
Takeaway: This guidance provides important relief with respect to curing deficiencies in the Apprenticeship Participation Requirement. The cure payment mechanism provided for in the Code is based on missing apprenticeship hours ($50 per missing hour). So, it was clear how to cure a deficiency in the minimum apprentice labor hours needed to meet the Apprenticeship Labor Hour Requirements. Yet, a question remained as to whether cure payments could fix a deficiency in the Apprenticeship Participation Requirement (since, in that case, there is a missing apprentice rather than missing apprentice labor hours). The Proposed Regulations allow for a cure payment based on the average hours worked by the non-apprentice laborers.
Good-Faith Effort Exception
A taxpayer is deemed to have satisfied the apprenticeship requirements if the “good-faith effort exception” applies. The exception does not cover all good-faith efforts. It requires that specific steps have been taken. The Proposed Regulations detail requirements to meet such exception as compared to the “usual and customary business practices” standard used in Notice 2022-61:
Takeaway: Taxpayers, contractors, and subcontractors will need to anticipate the number of apprentices a project will require and likely apply to multiple apprenticeship programs to staff the necessary number of apprentices or qualify for the good-faith effort exception. The Proposed Regulations make it more difficult to be excused from hiring apprentices by imposing a 120-day renewal obligation to rely on the good-faith effort exception.
Project Labor Agreements
The Proposed Regulations carve out an exception for project labor agreements.
Penalties for the prevailing wage requirements and the apprenticeship requirements are excused if the work was done pursuant to a qualifying project labor agreement (and, in the case of the prevailing wage requirements, the corrective payment to the laborer is made prior to the taxpayer filing the tax return claiming the increased credit).
Qualifying project labor agreements must:
Takeaway: Taxpayers had questioned whether, for projects where union labor is used, a taxpayer could rely on the presence of a project labor agreement to mean that the prevailing wage requirements and apprenticeship requirements would be deemed to be satisfied. The Proposed Regulations provide a significant advantage to projects for which a qualifying project labor agreement is in place.
As described above, penalties are increased for prevailing wage requirements and the apprenticeship requirements in the case of intentional disregard. The Proposed Regulations provide how the application of “intentional disregard” penalties are evaluated. First, a taxpayer has the benefit of a rebuttable presumption against intentional disregard if the penalty payment is made prior to the IRS providing a notice of an examination to the taxpayer. Otherwise, intentional disregard is a facts-and-circumstances test to determine if the disregard was knowing or willful, including:
The Proposed Regulations detail the records a taxpayer must be prepared to submit when they submit their tax return to demonstrate that the prevailing wage and apprenticeship requirements were met (including retaining records consistent with the Davis-Bacon Act) and, if necessary, to show there was no intentional disregard or to qualify for penalty waivers.Takeaway: The detailed recordkeeping guidance will comfort taxpayers and provide certainty as to the documentation they require from contractors or subcontractors.
 The Proposed Regulations would apply to facilities, property, projects, or equipment (i) placed in service in taxable years ending after the final regulations are published in the Federal Register or (ii) the construction or installation of which begins after the final regulations are published in the Federal Register. However, taxpayers may rely on the Proposed Regulations for the construction or installation of a facility, property, project, or equipment beginning on or after January 29, 2023, and on or before the date the Proposed Regulations are published as final. Comments in response to the Proposed Regulations are requested by October 30, 2023, with a public hearing scheduled for November 21, 2023.
 The prevailing wage and apprenticeship requirement applies to tax credits under Code Sections 30C (alternative fuel vehicle refueling property credit), 45 (production tax credit), 45L (energy efficiency home credit), 45Q (carbon sequestration tax credit), 45U (nuclear power production tax credit), 45V (hydrogen tax credit), 45Y (clean energy production tax credit), 45Z (clean fuel production tax credit), 48 (investment tax credit), 48C (advanced energy project tax credit), 48E (clean electricity investment tax credit), and the energy efficient commercial buildings deduction under Code Section 179D.