On Aug. 29, 2023, the U.S. Department of the Treasury and the IRS released comprehensive proposed regulations adding clarity to the prevailing wage and apprenticeship (PWA) prerequisites associated with eligibility for full-value clean energy tax credits under the Inflation Reduction Act (IRA). In addition, the IRS released summary guidance on these rules as a set of FAQs and in new Publication 5855. This guidance provides more certainty and greater flexibility in applying the PWA rules, building on the Notice 2022-61 PWA guidance released in November 2022.
Code Sections Affected
The listed Code sections all have a PWA requirement:
Section 30C – Alternative Fuel/EV Charger Credit
Section 45V – Clean Hydrogen Production Credit
Section 45/45Y – Production Tax Credit
Section 45Z – Clean Fuel Production Credit
|Section 45L – New Energy Efficient Homes Credit||
Section 48/48E – Investment Tax Credit
|Section 45Q – Tax Credit for Carbon Sequestration||
Section 48C – Advanced Manufacturing Tax Credit
|Section 45U – Nuclear Power Production Credit||
Section 179D - Energy Efficient Commercial Buildings Deduction
Each of these credits is cut by 80% of its value if PWA requirements are not met.
Greater Flexibility to Cure PWA Failures
Under the various IRA statutes, if a taxpayer fails to comply with PWA requirements, it will lose its ability to claim the full value of its energy credits unless it makes correction payments (back pay and interest) to workers and pays penalties to the IRS, as outlined in the statutory rules. The proposed regulations' guidelines offer significant flexibility in how and when taxpayers may address and rectify any noncompliance issues with PWA requirements.
According to the rules, wage-related penalties can be waived in two circumstances. First, a de minimis exception will apply (1) if the correction payment is made within 30 days after the taxpayer becomes aware of the error or before the date on which the full-value credit or deduction is claimed on a tax return, whichever is earlier; and (2) the worker underpayment was for no more than 10% of all pay periods or the difference between the amount paid and the prevailing wage amount is no more than 2.5%. Second, penalties may be waived if the work is done under a "qualifying project labor agreement" that establishes the terms and conditions of employment for a specific construction project and the correction payment is made before the increased credit or deduction is claimed on a tax return. However, taxpayers who deliberately ignore prevailing wage requirements and attempt to seek higher incentive amounts will face more severe penalties. These project labor agreements can help taxpayers comply with the PWA prevailing wage requirements and avoid potential penalties for noncompliance. However, the agreement must amount to a collective bargaining agreement with the local labor organization, which could have other repercussions for contractors and other vendors at the project site.
To meet apprenticeship requirements, qualified apprentices must be employed to complete 12.5% of the overall labor hours for projects beginning construction in 2023, and 15% for 2024 and each year beyond. Additionally, a proportional guideline must be followed: For every four individuals hired to engage in construction, alteration or repair tasks on a project, one qualified apprentice must be employed. Penalties related to these apprenticeship hours will not apply if the taxpayer meets the good-faith effort exception, which occurs due to inability to hire any apprentices from a registered program if (i) the request was denied for reasons other than the taxpayer, contractor or subcontractor's refusal to comply with the program's standards and requirements; or (ii) the program failed to respond within five business days of receiving a request. A denial or nonresponse exemption lasts for only 120 days, after which a refreshed request must be sent to continue to be eligible for the good-faith effort exception.
Limited Conformity to Davis-Bacon Act Rules
As alluded to, the PWA standards in the IRA require renewable energy projects to (i) pay "laborers and mechanics" a prevailing wage, and (ii) ensure the employment of an adequate number of apprentices from registered apprenticeship programs. These are standards largely reflective of the Davis-Bacon Act of 1931 for contracting with the federal government, leaving taxpayers questioning what level of conformity Treasury and the IRS would adopt to that law.
According to the proposed regulations, companies are effectively obligated to conform only with Davis-Bacon Act guidance that is relevant for determining wage rates and defining the relevant types of work and workers to which those rates apply. Companies do not need to provide certified payroll records as mandated by the Davis-Bacon Act; instead, it is the sole responsibility of taxpayers to ensure that the appropriate prevailing wages are paid, that the required apprenticeship ratios are met, and that sufficient records documenting those efforts are kept.
Projects that extend across multiple geographical areas and involve multiple prevailing wages must pay the higher rate to all laborers and mechanics on the project. In the case of offshore projects, companies are allowed to use the general wage determination for the specific construction category that is applicable in the geographic area closest to the location of the qualified facility.
The proposed regulations also stipulated that companies must adhere to prevailing wage rates established at the commencement of the project, but they do not need to subsequently update wage rates during the course of construction unless the applicable contract or project is materially modified.
Exclusion of Maintenance Work From PWA Requirements
The taxpayer, along with any contractors or subcontractors employed, must pay prevailing wages to all laborers and mechanics and employ apprentices engaged in the "construction, alteration, or repair" of an energy project. The proposed regulations clarified that "construction, alteration or repair" generally means all types of work performed at the location of the project, but also includes (i) construction, alteration, remodeling or installation of items fabricated offsite; (ii) painting and decorating; and (iii) manufacturing or furnishing materials, articles, supplies or equipment directly at the facility.
Importantly, the proposed regulations exclude from this definition any maintenance work conducted on the facility. Per this guidance, maintenance refers to routine and recurring tasks aimed at preserving the current functionality of a facility. In contrast, sporadic or occasional repairs undertaken to restore specific functionality or modify the facility for a different or enhanced purpose remain covered by the PWA requirements.
The proposed rules will be open to written public comments until the end of October 2023. A public hearing is scheduled for Nov. 21, 2023. In the meantime, these new rules as they stand are sure to streamline a large number of negotiated points on PWA that have arisen in transactions involving significant energy credits since November 2022.
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.