On November 30, 2022, the Internal Revenue Service (the
"IRS") and the Department of the Treasury
("Treasury") published Notice 2022-61, Prevailing Wage and Apprenticeship
Initial Guidance under Section 45(b)(6)(B)(ii) and Other
Substantially Similar Provisions (the "Notice"). The
Notice provides initial guidance on the prevailing wage and
apprenticeship requirements that taxpayers must meet in order to
qualify for the higher amount of certain clean energy tax credits
as established by the Inflation Reduction Act of 2022 (the
"Inflation Reduction Act"). Most notably, the Notice
starts the 60-day clock for beginning construction of qualified
facilities, property, projects or equipment (referred to in the
Notice and herein as "facilities") in order to obtain the
higher credit amount without satisfying the prevailing wage and
apprenticeship requirements.
This alert summarizes the highlights of the Notice. For additional
information on the Inflation Reduction Act, please see our prior
alerts found here (focused on clean energy tax provisions),
here (focused on tax controversy) and here (focused on the changes made to the
Inflation Reduction Act as introduced and as passed by the
Senate).
Background on the Inflation Reduction Act
The Inflation Reduction Act structures various clean energy tax
credits in two tiers: a base rate and, if certain requirements are
satisfied, a higher rate that is five times the base rate. The
higher rate generally applies only to those facilities that meet
the prevailing wage and apprenticeship requirements or satisfy
certain exceptions to such requirements. Facilities that are
exempted from the prevailing wage and apprenticeship requirements,
and thus also qualify for the higher rate, generally include (1)
where applicable, facilities with a maximum net output of less than
one megawatt (as measured in alternating current) and (2)
facilities that begin construction prior to the 60th day after
Treasury issues guidance regarding the prevailing wage and
apprenticeship requirements (the "60-Day Period").
In connection with the publication of the Notice in the
Federal Register, the IRS and Treasury interpreted the latter rule
to mean that facilities that begin construction prior to January
30, 2023 are excepted from the prevailing wage and apprenticeship
requirements.
Prevailing Wage Requirements
Under the Inflation Reduction Act, the prevailing wage requirements
are satisfied with respect to a facility if the taxpayer ensures
that laborers and mechanics employed by the taxpayer or any
contractor or subcontractor in (i) the construction of the facility
and (ii) its alteration or repair for the applicable period after
placement in service of the facility (e.g., the 10-year period for
facilities under Section 45 or the 5-year window for energy
projects under Section 48), are paid wages at rates not less than
the "prevailing rates" for construction, alteration, or
repair of similar character in the locality in which such facility
is located as determined by the Secretary of Labor.
Regarding "prevailing rates," the Notice provides that,
if the Secretary of Labor has published a prevailing wage
determination for the geographic area and type or types of
construction applicable to the facility, including all labor
classifications for the construction, alteration, or repair work
that will be done on the facility by laborers or mechanics on www.sam.gov, such determination will be the
"prevailing rates" for purposes of satisfying the
prevailing wage requirements. If the rates listed on www.sam.gov
are not applicable to any particular construction, alteration, or
repair work on the facility, the taxpayer can request a wage
determination or wage rate with respect to such work via email to
the Department of Labor, Wage and Hour Division at IRAprevailingwage@dol.gov with the information
required under the Notice.
The Notice cites section 5.2 of title 29 of the Code of Federal
Regulations for definitions of several terms in the prevailing wage
requirements (including "wages," "laborers and
mechanics," and "construction, alteration, or
repair"). Importantly, the definition of "construction,
alteration, or repair" is limited to work performed at the
"site of the work" within the meaning of 29 CFR §
5.2(l) and therefore generally would not include, for example,
off-site work in manufacturing and assembling equipment for the
facility. The Notice also clarifies that a laborer or mechanic is
"employed" if he or she provides services in exchange for
remuneration, regardless of whether he or she is characterized as
an employee or an independent contractor for other federal tax
purposes.
In addition, the Notice requires taxpayers to maintain and preserve
sufficient records, including books of account or records for work
performed by contractors or subcontractors of the taxpayer, to
establish that such laborers and mechanics were paid wages at rates
not less than the applicable prevailing rates. Such records
include, but are not limited to, identifying (i) the applicable
prevailing wage rates, (ii) the laborers and mechanics who
performed construction, alteration, or repair work on the facility,
(iii) the classifications of work they performed (for example,
electrician, carpenter, laborer), (iv) their hours worked in each
classification, and (v) the wage rates paid for the work.
The Department of Labor also posted Frequently Asked Questions
(FAQs) on its website here, including how to find prevailing wage
rates, the definition of a wage determination, what to do if more
than one wage determination applies to a facility, how to handle
independent contractor pay, and some additional details on what
happens when a taxpayer requests a wage determination from the Wage
and Hour Division.
Apprenticeship Requirements
Under the Inflation Reduction Act, the apprenticeship requirements
are satisfied if, with respect to the construction of a facility,
(i) the taxpayer ensures that no less than the "applicable
percentage" (12.5% for facilities that begin construction on
or after January 30, 2023 and before January 1, 2024, and 15%
thereafter) of total labor hours of the construction, alteration or
repair work is performed by qualified apprentices (generally,
individuals participating in a registered apprenticeship program)
(the "Apprenticeship Labor Hour Requirement"); and (ii)
if the taxpayer or any contractor or subcontractor employs four or
more individuals to perform construction, alteration, or repair
work, then one or more qualified apprentices is employed to perform
such work (the "Apprenticeship Participation
Requirement"). The Apprenticeship Labor Hour Requirement is
subject to applicable apprentice-to-journeyworker ratios. The
Inflation Reduction Act provides a "good faith effort"
exception to the apprenticeship requirements, under which the
taxpayer is deemed to satisfy the apprenticeship requirements if it
requests qualified apprentices from a registered apprenticeship
program and such request is denied (other than as a result of the
refusal of the taxpayer, including any contractor or subcontractor,
to comply with established standards and requirements of the
registered apprenticeship program) or the program fails to respond
within five business days.
The Notice provides little additional clarity on the satisfaction
of the apprenticeship requirements other than to restate the
statutory rule and the "good faith effort" exception. The
Notice does provide that the taxpayer will be considered to have
made a good faith effort in requesting qualified apprentices if the
taxpayer requests qualified apprentices from a registered
apprenticeship program in accordance with "usual and customary
business practices for registered apprenticeship programs in a
particular industry," with a footnote referring to the www.apprenticeship.gov website for locating
such programs.
In addition, the Notice requires taxpayers to maintain books of
account or records for contractors or subcontractors of the
taxpayer, as applicable, in sufficient form to establish that the
Apprenticeship Labor Hour Requirements and the Apprenticeship
Participation Requirements have been satisfied. Similarly, if the
taxpayer intends to rely on the "good faith effort"
exception, the taxpayer must maintain records of its request to the
applicable registered apprenticeship programs and the denial of
such request or non-response to such request, as applicable. The
Notice does not provide any specific examples of the types of
records that would be sufficient for these purposes.
DOL Provides Some Background Information and Resources to
Taxpayers
At the same time the Notice was issued, the Department of Labor
posted a list of FAQs here. The FAQs are intended to be for
background information purposes only, but gives taxpayers some
assistance. For example, one of the FAQs asks what records would be
sufficient to show a good faith effort, and the response is that
taxpayers should keep records showing the requests for apprentices
and the response, if any, from a Registered Apprenticeship Program.
The FAQs further provide a link to a "Partner Finder" that
allows taxpayers to search registered apprenticeship programs by
industry and occupation and instructions on how to start such a
program. The FAQs also address the wage rate that is to be paid to
apprentices and what may be included in an apprenticeship
agreement.
Notice's Guidance Regarding Commencement of Construction
For purposes of determining whether a facility has commenced
construction prior to the end of the 60-Day Period, the IRS and
Treasury have adopted long-standing begun construction guidance
developed for purposes of determining the phase-out percentages
under Sections 45, 45Q and 48 of the Internal Revenue Code of 1986,
as amended (the "Code"), prior to amendment by the
Inflation Reduction Act. The Notice provides that, consistent with
such prior guidance, a taxpayer may establish that construction of
a facility has begun prior to the end of the 60-Day Period by (i)
starting physical work of a significant nature (the "Physical
Work Test"), or (ii) paying or incurring five percent or more
of the total cost of the facility ("Five Percent Safe
Harbor"), in each case subject to the additional requirement
that the taxpayer make continuous progress toward completion of the
facility once construction begins (the "Continuity
Requirement"). Our prior alert on the begun construction
guidance in the context of investment tax credits under Section 48
can be found here.
Physical Work Test
Under the Physical Work Test, construction of a facility begins
when physical work of a significant nature begins. The Notice
summarizes the requirements under prior guidance for satisfying the
Physical Work Test, including look-through rules on binding written
contracts and rules on ignoring work with respect to items held in
inventory. The Notice adopts such requirements (without
modification) in relying on the Physical Work Test for purposes of
establishing the beginning of construction prior to the end of the
60-Day Period under Code Sections 45, 45Q, and 48.
Five Percent Safe Harbor
Under the Five Percent Safe Harbor, construction of a facility will
be considered as having begun if a taxpayer pays or incurs five
percent or more of the total cost of the facility. The Notice
briefly summarizes the requirements under prior guidance for
satisfying the Five Percent Safe Harbor, particularly the
look-through rule on binding written contracts, and adopts such
requirements (without modification) in relying on the Five Percent
Safe Harbor for purposes of establishing the beginning of
construction prior to the end of the 60-Day Period under Code
Sections 45, 45Q, and 48.
Continuity Requirement and Continuity Safe Harbor
Both the Physical Work Test and the Five Percent Safe Harbor
require satisfaction of the Continuity Requirement to establish
that construction of the facility has begun. As with prior
guidance, the Notice provides that the Continuity Requirement is a
facts and circumstances inquiry and that the IRS will "closely
scrutinize" a facility if the Continuity Requirement is not
met to determine whether construction has begun.
The Notice also adopts the continuity safe harbor developed under
prior guidance for purposes of satisfying the Continuity
Requirement (the "Continuity Safe Harbor"). Under the
Continuity Safe Harbor, a taxpayer is deemed to satisfy the
Continuity Requirement if the facility is placed in service no more
than a certain number of calendar years (generally four calendar
years under Code Sections 45 and 48 and six calendar years under
Section 45Q) after the calendar year during which construction
began. The Notice does not extend or otherwise modify the
Continuity Safe Harbor set out in prior guidance.
Similar rules will apply to determine when construction begins for
purposes of Code Sections 30C (alternative fuel vehicle refueling
property), 45V (clean hydrogen), 45Y (clean electricity production
credit) and 48E (clean electricity investment credit).
While the Notice provides welcome guidance confirming that
historical begun construction guidance is applicable for purposes
of establishing the beginning of construction for the 60-Day
Period, it provides very little additional detail regarding how
taxpayers satisfy the prevailing wage and apprenticeship
requirements. Nevertheless, the release of the Notice has started
the 60-day clock so that facilities beginning construction on or
after January 30, 2023 must comply with the prevailing wage and
apprenticeship requirements in order to obtain higher tax credit
amounts.
The government is expected to continue to issue more detailed
guidance on these provisions. We will continue to monitor the
Inflation Reduction Act guidance initiatives from the IRS and
Treasury and will provide further updates as guidance is released.
In the meantime, Baker Botts would be pleased to assist you in your
analysis of the Inflation Reduction Act and other clean energy tax
incentive matters.
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.