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
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.
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.