On August 30, 2023, the Internal Revenue Service (the "IRS") and the Department of the Treasury ("Treasury") released proposed regulations on the prevailing wage and apprenticeship requirements (the "PWA requirements") established by the Inflation Reduction Act of 2022 (the "IRA") with respect to clean energy tax incentives. In addition to the proposed regulations, the IRS and Treasury released FAQs and Publication 5855, which each provide an overview of the PWA requirements.
The PWA requirements apply to most clean energy tax credits, including the credits under Sections 48 (energy), 45 (renewable electricity production), 45Q (carbon capture), 45V (clean hydrogen production), 45Z (clean fuel production), and 48C (advanced energy projects).
Compliance with the PWA requirements is generally a condition of receiving a 5x multiplier to the base amount of the applicable clean energy tax credit. For example, the base investment tax credit rate of 6% would be multiplied by five to produce a credit rate of 30%. Because the IRA sets the base amount of each applicable clean energy tax credit at an amount equal to 20% of the historical amount of each such credit, taxpayers now must meet the PWA requirements to generate the same credit amount they have been accustomed to receiving previously for projects of the same type. The PWA requirements generally do not apply to facilities, property, projects, or equipment (referred to herein as "facilities") that began construction before January 29, 2023 or electricity-generating facilities that have a maximum net output of less than one megawatt.
The proposed regulations generally track the statutory requirements and prior guidance under Notice 2022-61 (discussed by us here). As discussed further below, the proposed regulations also provide important additional rules with respect to: (i) penalty waivers, in instances when the taxpayer timely corrects its failure to satisfy the PWA requirements; (ii) eligibility for the "good faith effort" exception to the apprenticeship requirements; (iii) recordkeeping requirements; and (iv) prevailing wage determinations. Note that the proposed regulations do not offer any means of avoiding loss (recapture) of a previously claimed credit if the taxpayer is unable to cure its failure to satisfy the PWA requirements.
The proposed regulations are generally proposed to be effective for facilities that begin construction after the date final regulations are published in the Federal Register, although taxpayers may rely on them prior to such time provided the taxpayers follow the proposed regulations in their entirety and in a consistent manner.
Comments on the proposed regulations are due by October 29, 2023, and a public hearing on the proposed regulations is scheduled for November 21, 2023.
Penalty Waivers
Under the IRA, a taxpayer who fails to satisfy the prevailing wage requirements or certain of the apprenticeship requirements may still receive the 5x multiplier to the credit amount, provided the taxpayer makes certain correction and/or penalty payments.
To cure a failure to satisfy the prevailing wage requirements, the taxpayer must:
- pay any underpaid laborers or mechanics the difference between what they were paid and the amount they were required to have been paid, plus interest at the federal short-term rate plus 6 percentage points (the "correction payment"), and
- pay a penalty to the IRS of $5,000 for each laborer or mechanic who was not paid at the prevailing wage rate in the year (the "prevailing wage penalty payment").
In the case of intentional disregard, the correction payment amount is tripled and the prevailing wage penalty amount is doubled.
The proposed regulations waive the prevailing wage penalty payment if:
- the underpayment is limited in amount or duration (as specified in the proposed regulations), and the taxpayer makes the correction payment by the earlier of (a) 30 days after the taxpayer becomes aware of the underpayment or (b) the date on which the tax return claiming the increased credit amount is filed; or
- in the case of an underpaid laborer or mechanic who is employed under a specified pre-hire collective bargaining agreement with a labor organization (referred to as a "Qualifying Project Labor Agreement"), the taxpayer makes the correction payment before the date on which the tax return claiming the increased credit amount is filed.
To cure a failure to satisfy the labor hour requirement or the participation requirement (components of the apprenticeship requirements), the taxpayer must in each case pay a penalty of $50 multiplied by the total labor hours for which the requirement was not met (the "apprenticeship penalty payment"). The amount of the apprenticeship penalty payment is increased tenfold (from $50/labor hour to $500/labor hour) in the case of intentional disregard. The proposed regulations waive the apprenticeship penalty payment if the work is done pursuant to a Qualifying Project Labor Agreement.
In addition, the proposed regulations provide that (i) intentional disregard is determined on a facts and circumstances basis; and (ii) if the taxpayer makes the applicable correction and/or penalty payments before receiving a notice of examination with respect to the increased credit amount, the taxpayer will be presumed not to have acted with intentional disregard. In addition, the intentional disregard multiplier for the correction payment and prevailing wage penalty payment generally does not apply if the taxpayer can demonstrate that it followed certain best practices in complying with the prevailing wage requirements (for example, that the taxpayer regularly reviewed payroll practices, included requirements to pay prevailing wages in contracts with contractors, and posted prevailing wage rates in a prominent place on the job site).
The "Good Faith Effort" Exception to the Apprenticeship Requirements
The IRA provides a "good faith effort" exception to the apprenticeship requirements, pursuant to which a taxpayer is deemed to satisfy the apprenticeship requirements if the taxpayer requests apprentices from a registered apprenticeship program and (i) such request is denied, and the denial is not the result of the taxpayer's refusal to comply with the established standards and requirements of the registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to the taxpayer's request.
The proposed regulations provide that the request must be in writing and satisfy certain specified content requirements. In addition, if the request is denied or not responded to, the taxpayer must submit an additional request(s) after 120 days to continue to satisfy the "good faith effort" exception.
Recordkeeping Requirements
The IRA authorizes the Secretary of the Treasury or her delegate to issue recordkeeping requirements for the PWA requirements. To this end, the proposed regulations establish robust recordkeeping requirements for establishing satisfaction of the PWA requirements. In particular, taxpayers must maintain and preserve records related to the employment of laborers, mechanics, and apprentices, including the records of any contractor or subcontractor. Such records must include, for example, each laborer or mechanic's hourly rate, hours worked, deductions from wages, and actual wages paid. The recordkeeping requirements set out in the proposed regulations are significantly more robust than for most other tax rules enforced by the IRS.
Prevailing Wage Determinations
Under the IRA, prevailing wages must be paid to all laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) in the construction, alteration, or repair of a facility. Prevailing wages are wages at rates that are not less than the prevailing rates determined by the Department of Labor in accordance with the Davis-Bacon Act.
Consistent with Notice 2022-61, the proposed regulations provide special procedures for requesting a supplement wage determination in the limited circumstances in which a general wage determination does not provide an applicable wage rate for the work to be performed on the facility.
In addition, the proposed regulations clarify that an individual is "employed" if that individual performs the duties of a laborer or mechanic for the taxpayer, contractor, or subcontractor, as applicable, regardless of whether the individual would be characterized as an employee or an independent contractor for other federal tax purposes. Thus, even if a worker is an independent contractor for other federal tax purposes (such as employment related taxes or withholding), the worker can be "employed" for purposes of the prevailing wage requirements.
The proposed regulations come after the Department of Labor's recent issuance of a new rule with respect to prevailing wages under the Davis-Bacon Act. The new rule expands the Davis-Bacon Act's applicability specifically to include projects under the IRA such as those relating to solar panels and wind turbines. In addition, the new rule changes the process for determining prevailing wages (including fringe benefits), which will likely result in higher prevailing wages. Previously, if there was a single wage rate paid to more than 50% of workers in a classification, that would be the prevailing wage. Alternatively, the Department of Labor would rely on a weighted average of all wage rates in the classification. When the new rule goes into effect on October 23, 2023, the process will include another alternative, that a prevailing wage can be established if there is a wage rate paid to the greatest number of workers in a classification, which is at least 30% of workers in that classification. Fringe benefit amounts will be determined in a similar process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
