The Inflation Reduction Act offers once-in-a-generation enhanced tax credits and deductions to encourage clean-energy projects – but there are strings attached.
Among the more vexing is the requirement that many workers on these projects be paid prevailing wages specified by the U.S. Department of Labor (DoL) under a longstanding statutory program for federal construction contracts.
Taxpayers, construction and installation companies, and tax-credit investors may perceive risk and uncertainty in these requirements, as their application in a tax context is both untested and underdefined. Some uncertainty will remain until the IRS, Treasury, or DoL take action to define the process and timelines for resolving disputes over wage qualification requirements.
Other uncertainties and risks can be managed now with targeted due diligence. For some projects, compliance is less burdensome because the contractors already have experience with the prevailing-wage statute, the Davis-Bacon Act. Other projects may need close and consistent attention to achieve compliance.
Before starting or investing in a project that could qualify for these benefits, it is critical to assess how much compliance risk a given project may have—and how to negotiate pricing and other terms accordingly.
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Understand the scope of work
You don't need to understand a project down to each schematic and bolt, but you should consider how the wage requirements might apply based on the type of work being performed. DoL publishes Davis-Bacon prevailing wages for four general categories of construction projects: Building, Residential, Highway, and a catch-all Heavy. Many clean energy projects may fit under the Heavy category, but that guidance might not apply to every project.
DoL has also advised that it doesn't set a catch-all wage for workers on these projects. Understanding the various types of work—electrical, steel work, and so on—will be important to ensuring all workers receive the right wages for their labor categories.
Confirm where the work will be performed
DoL sets prevailing wages geographically. Over the years, they have expanded the definition of "site of the work" subject to prevailing wages, largely to reflect evolutions in the use of fabrication off-site. This means that a clean-energy project being installed in one location could have multiple additional "sites of the work" across the state or region, each subject to its own wage requirements.
It's not hard to imagine projects with the same labor subject to different wage rates. As an example, the Davis-Bacon pay for ironworkers is appreciably higher in Washington, DC, than across the Potomac River in Arlington, Virginia. It's thus critical to ask where specifically the project is located and how much fabrication will be performed off-site.
Ask about the plan for subcontractors
Many clean-energy projects will depend on labor by subcontractors. But some of them—particularly those without a significant federal business—may be unfamiliar with these prevailing wage requirements. Stakeholders face the risk that tax credits and benefits may be held up by questions about wages paid to subcontractors' employees (who may have been working on-site for only a brief duration). Unlike ordinary Davis-Bacon covered projects, here the IRA leaves responsibility for addressing shortfalls in prevailing wages as the responsibility of the taxpayer.
Some stakeholders might have a direct line to subcontract negotiations or the project management office to check on plans for managing subcontractors. For other stakeholders, due diligence could involve requesting the proposed subcontract terms that will impose wage requirements. A review should confirm whether terms for subcontractors, provisions for recordkeeping, and pay adjustments are set out clearly.
Confirm the plan for recordkeeping
The IRS and DoL have emphasized that showing prevailing wage compliance is a responsibility of the taxpayer, who in many cases may be contracting out the covered construction work. The IRA text and initial implementing guidance suggest flexibility in how the records are kept, but during an audit or similar compliance assessment, enforcement personnel might default to the more familiar, and burdensome, requirements for work covered by the Davis-Bacon Act.
Before the project begins, you should understand how workers' time and payment will be recorded, along with where those records will be kept during and after the project. Risk models for IRA tax benefits for particular projects may be adjusted based on whether records will be collected in real-time, at the end of the project, or only if there is a request from the IRS or another agency.
Plan for ongoing maintenance and repair
Once a project is completed and started up, there's a temptation to assume the IRA compliance work is done. However, many of the IRA's tax benefits require prevailing wages on maintenance and repair work for a set number of years. These wage rates can require effort to track because DoL's practices for updating rates over time can sometimes seem mercurial.
For risk management, the question is not just what the prevailing wages will be five or ten years in the future, but who will be paying attention to them at that point. Stakeholders should make sure there's a plan for tracking these requirements and applying them to maintenance contractors for the required time periods.
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Ensure compliance with any benefit-specific requirements
IRA guidance imposes few detailed compliance requirements, which both creates uncertainty and (seemingly) affords flexibility. But individual IRA tax benefits might come with their own additional requirements that you have to hunt to find in places like IRS tax publications. Checking for these types of requirements, and that there's a plan for satisfying them, will reduce the risk of an unexpected disallowance.
Review indemnity terms and similar exposure
Imagine a million-dollar tax credit under the IRA held up because three electricians were underpaid a few thousand dollars years ago, and no one can locate the workers to pay them. Who's financially responsible in that case? The government seems to leave questions like that to private contract terms. Whether you're a contractor, subcontractor, taxpayer, tax-credit investor, or another interested party, your agreement for a project could leave you on the hook for shouldering losses in these circumstances.
Stakeholders may be willing to shoulder this type of risk if (and it's a big if) paid enough to take it. As such, diligence should involve checking whether the relevant agreements' pricing and other terms provide adequate compensation for agreeing to an indemnity or similar responsibilities. It's one more example of how diligence upfront, rather than when unexpected compliance issues pop up, can help those responsible for ensuring compliance with the IRA's requirements sleep much easier at night.
Originally published by Renewable Energy World.
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.