On November 30, 2022, the Internal Revenue Service (IRS) published Notice 2022-61 (Notice) in the Federal Register providing further guidance on compliance with newly applicable wage and apprenticeship requirements under the Inflation Reduction Act (IRA), which taxpayers must comply with to receive the fully available tax credits for new renewable energy, energy storage, hydrogen, biogas, carbon capture projects and electric vehicle charging infrastructure projects.
The IRA deferred the application of these new labor requirements until 60 days after the IRS issued applicable guidance. Projects that commenced construction up to 59 days after the Notice is issued may avoid compliance without triggering the penalty. While many developers have already been working to commence construction on projects to avoid the application of these requirements, the publication of the Notice officially set off the race to start construction of new projects before the new wage and apprentice requirements take effect.
While the requirements under certain tax credits can vary slightly, generally once the wage and apprenticeship requirements become applicable, to receive the full tax credit amount of applicable tax credits, taxpayers generally must meet prevailing wage rates requirements and utilize registered apprenticeship programs in order to be eligible for tax credits on facilities that are 1 MW or greater. The prevailing wage requirement would also apply on alterations and repairs during the applicable production tax credit (PTC) period or five-year investment tax credit (ITC) recapture period. If a facility does not meet the wage and apprenticeship requirements, it is only eligible for a credit equal to the "base rate" of 20% of the full credit amount. The additional wage and hour requirements are structured as a bonus credit amount by reducing the base rate of the tax credit to 20% of their previous amount (e.g., from a 30% to a 6% ITC), and allowing an additional 80% as a "bonus" for meeting the wage and hour requirements. So, while it is structured as a bonus amount, ultimately it operates as a significant penalty for not meeting the new labor requirements.
With the publication of the Notice on November 30, 2022, projects must be under construction by January 28, 2023, to be exempted from the new requirements.
Beginning Construction before the Deadline
The concept of beginning construction for purpose of tax credit qualification is not new; these same concepts have been used since 2009 to qualify for tax credits on renewable energy projects. The Notice generally adopts those same requirements to determine whether a project was under construction for purposes of the wage and apprenticeship requirements. To qualify, a developer must either start "physical work of a significant nature" at the project site or off-site on custom-made equipment for the project or "incur" at least 5% of the total project cost before the deadline. Projects must generally be completed within four years after the year in which construction starts to maintain their original start date, with some exceptions allowing for longer periods.
While it was generally expected, the application of existing rules for beginning construction to the wage and apprenticeship requirements is certainly helpful and adds predictability to the analysis. However, it is somewhat more useful for tax credits that already have existing beginning of construction guidance, such as PTCs for renewables under Section 45, PTCs for carbon capture under Section 45Q, or ITCs for renewables under Section 48. For other applicable tax credit, such as the hydrogen tax credit under Section 45Q and electric vehicle charging infrastructure under Section 30C, the general cross-application may leave some lingering questions that will likely not be fully resolved by further IRS guidance until after the deadline to start construction for labor and apprenticeship has already passed. For example, exactly how to determine if multiple electric vehicle chargers at a single location may be considered a single project for purposes of beginning construction. While guidance for wind turbines under Section 45 is certainly analogous in many respects, because charging equipment is not generating equipment, some aspects of the charging equipment analysis might vary somewhat in forthcoming IRS guidance related to charging equipment.
As discussed above, if the requirements are applicable to a project, prevailing wage must be paid during construction of the project. Additionally, for most applicable tax credits, prevailing wage must also be paid for any "alteration or repair" done during the PTC credit period or ITC recapture period (as applicable).
The specific required wages vary both by job type and location. The rates are published on the U.S. Department of Labor website. For job types where rates don't exist for a particular location, taxpayers are instructed to send emails to the Department of Labor, Wage and Hour Division via email requesting wage determinations with the "facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications." After review, the Department of Labor will notify the taxpayer as to the labor classifications and wage rates to be used for the type of work in question in the area in which the facility is located.
As wage rates appear to be currently unavailable for applicable job types in many locations, it appears these sorts of rate requests may be required. As there is no response time indicated in the Notice, it will be interesting to see how quickly these requests are turned around, especially in the first few months of the program where there is likely to be a high volume of requests.
Qualified apprentices must also be used for 12.5% of total labor hours for projects starting construction in 2023 and 15% thereafter. Each taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work. Additionally, each day that a qualified apprentice performed construction work on the facility, the applicable requirements for apprentice-to-journeyworker ratios of the Department of Labor or the applicable state apprenticeship agency must be met.
Projects that are unable to find qualified apprentices can be excused under a "good faith effort exception." Under this exception, the Notice indicates that taxpayer is deemed to have satisfied the apprenticeship requirements with respect to a qualified facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program, and: (i) such request has been denied, provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors to comply with the established standards and requirements of the registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to such request within five business days after the date on which such registered apprenticeship program received such request.
Taxpayers must keep records to prove the required wages were paid and apprentice hours were worked. The Notice incorporates the general record keeping requirements applicable under the Internal Revenue Code pursuant to Section 6001 but does not include any definitive list or safe harbor regarding documentation. In the context of prevailing wage, the Notice does include an example that indicates that records that identify the wage determinations, the mechanics and laborers who performed the work, the classifications of work they performed, their hours worked in each classification and the wage rates paid for the work would be sufficient. For purpose of the apprenticeship requirement, the Notice merely states that that taxpayer must comply with the general recordkeeping requirements under Section 6001 "in sufficient form to establish that the Apprenticeship Labor Hour and the Apprenticeship Participation Requirements have been satisfied."
Applicability to O&M Work
One additional question that remains unanswered is whether the applicability of prevailing wage requirements to post-construction "alteration or repair" is intended to include facility maintenance work. The Notice defines "alteration or repair" as having the same meaning as applicable Department of Labor rules in 29 CFR § 5.2(j), but those rules do not directly address this issue, so further guidance will likely be required.
The Notice provides important clarity to taxpayers attempting to commence construction to avoid the application of the rules. It also provides clarity on some key threshold issues required to comply with the prevailing wage and apprenticeship requirements. There are unresolved questions, however, that may require further clarity as projects attempt to comply with the rules on a go-forward basis.
As there was significant pressure on Treasury and the IRS to release initial guidance to "start the clock" on the applicability of these rules, the initial guidance does not cover every issue. It is expected that there will be further forthcoming guidance to address remaining gaps.
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