IRS Issues Final Prevailing Wage and Apprenticeship Regulations for Clean Energy Tax Credits
In Short
The Background: The Inflation Reduction Act ("IRA") created or enhanced various tax credits for qualifying renewable energy projects. However, a taxpayer loses 80% of otherwise-available IRA credits unless prevailing wage requirements and apprenticeship-usage requirements are satisfied.
The Situation: Final regulations provide detailed requirements for businesses, contractors, and subcontractors who become subject to the IRA's prevailing wage and apprenticeship requirements by claiming applicable clean energy-related tax credits.
Looking Ahead: Businesses seeking to claim clean energy tax credits under the IRA should be prepared to demonstrate compliance with the prevailing wage and apprenticeship requirements, as clarified by the final regulations. In addition to clarifying substantive requirements and defined terms, the final regulations demonstrate that the IRS expects taxpayers to maintain robust records to demonstrate compliance.
The Inflation Reduction Act of 2022 enacted significant tax credits designed to incentivize qualifying clean energy projects. However, taxpayers claiming these credits generally must comply with prevailing wage requirements similar to those applicable to government contractors under the Davis-Bacon Act, as well as apprentice-usage requirements. Noncompliant taxpayers must make timely payments of certain penalties or else they will lose 80% of an otherwise available tax credit.
The new final regulations offer more detail about the records that taxpayers will need to make available in the event of an IRS audit. Taxpayers must maintain payroll records for each laborer and mechanic (including qualified apprentices) employed in construction, alteration, or repair work on a qualified facility by the taxpayer, or by its contractors and subcontractors. Records must include information sufficient to show compliance with the relevant prevailing wage rates for each covered worker and to show the required levels of apprentice usage. The final regulations list the types of records that should be maintained in detail.
The final regulations also offer new guidance on additional topics, such as:
- Defined Terms. The regulations clarify key defined terms, such as "construction, alteration, or repair," "laborer or mechanic," "contractor," and "subcontractor," which can determine which workers are subject to the prevailing wage and apprenticeship rules. Notably, "construction, alteration, or repair" work does not include maintenance work after a facility is placed in service. Maintenance is work that is ordinary and regular in nature and designed to maintain existing functionalities of a facility, such as regular inspections of the facility, regular cleaning and janitorial work, regular replacement of materials with limited lifespans, and the regular calibration of equipment. In contrast, work that improves the current condition or function of a facility is considered an alteration or repair and is not deemed to be maintenance work.
- Wage Determinations. The regulations set ground rules and deadlines for requesting supplemental or additional prevailing wage rates from the Department of Labor prior to the signing of a contract for construction, alteration, or repair work.
- Apprenticeship Programs. The regulations provide details for documenting and submitting requests for apprentices to qualified apprenticeship programs so that the taxpayer can avoid penalties under the "good faith effort" exception to the apprenticeship requirement. They also made clear that the apprenticeship requirements only apply with respect to construction, alteration, or repair of a facility that occurs prior to the facility being placed in service. There are no apprenticeship requirements with respect to alterations or repairs after a facility is placed in service.
- Records. The regulations itemize recordkeeping requirements, notices to workers, and other best practices that taxpayers, contractors, and subcontractors should adopt to avoid heightened "intentional disregard" penalties for noncompliance.
- Corrections. The regulations offer guidance on making correction/penalty payments in the event that underpaid laborers or mechanics cannot be located, which will require the taxpayer to comply with state unclaimed property law, as well as federal and state withholding and information reporting requirements.
The prevailing wage for a location is determined by U.S. Department of Labor and is a combination of an hourly rate plus a dollar amount equal to the value of fringe benefits provided to covered workers. Noncompliance with prevailing wage obligations, in addition to jeopardizing entitlement to IRA tax credits for clean energy projects, can expose construction employers to litigation risk. Recently, an electrical worker filed a class-action lawsuit in Pennsylvania, accusing an employer with project-specific prevailing wage obligations of underpaying the hourly rate by taking an excessive credit for the value of fringe benefits the plaintiff and others received.
The final regulations should help taxpayers focus their compliance efforts as they attempt to manage the detailed prevailing wage and apprenticeship regime, but the required action will be extensive. Proactive planning and close coordination with outside contractors and subcontractors will be essential to ensure compliance, avoid penalties, and preserve the ability to claim the full amount of these valuable credits.
Two Key Takeaways
- Taxpayers claiming IRA tax credits should develop and maintain robust compliance recordkeeping procedures to demonstrate compliance, prepare to respond to potential IRS inquiries, and minimize the need to make corrective penalty payments.
- Affected taxpayers should proactively coordinate with contractors and subcontractors to ensure that all requirements are satisfied and adequate records are maintained for covered workers.
