Proposed IRS Regulations on Tax Credits for Renewable-Energy Investments Include Wage and Apprenticeship Requirements

The Inflation Reduction Act of 2022 ("IRA") provides significant tax incentives for investment in qualifying clean-energy projects. However, the IRA provides that the maximum amount of certain tax incentives on qualifying projects will be reduced by 80% unless the taxpayer meets certain prevailing wage and apprenticeship-usage requirements. The credits that could be reduced for failure to satisfy prevailing-wage and apprenticeship requirements are: the fuel vehicle refueling property credit; the renewable electricity production credit; the credit for carbon oxide sequestration; the credit for production of clean hydrogen; the clean electricity production credit; the clean fuel production credit; the energy credit; the qualifying advanced energy project credit; the clean electricity investment credit; and the energy efficient commercial buildings deduction. The prevailing wage requirements (but not the apprenticeship requirements) also apply to the zero-emission nuclear power production credit and the new energy efficient home credit.

Recently released proposed regulations clarify what the Internal Revenue Service ("IRS") will expect from taxpayers claiming an entitlement to such enhanced credits. As explained further below, in order to be eligible for the full amount of such credits, taxpayers must satisfy the IRA's prevailing-wage requirements and keep detailed payroll records, in line with the requirements of the Davis-Bacon Act ("DBA"). Further, taxpayers must demonstrate that a designated percentage of the total labor hours performed during the project are performed by qualified apprentices from a registered apprenticeship program. Taxpayers also will have an opportunity to cure compliance deficiencies discovered during the course of a covered project before claiming such tax credits.

Prevailing Wage Requirements

The 90-year-old DBA directs the Department of Labor to determine locally prevailing wage rates, which are the minimum rates that contractors and subcontractors performing work on federal or District of Columbia contracts must pay to workers on DBA-covered construction projects. Over the years, Congress has added prevailing wage provisions to approximately 60 other statutes (touching telecommunications, transportation, housing, and air and water-pollution reduction, among others), enacted for the purpose of assisting construction projects through grants, loans, loan guarantees, and insurance. More recent examples of such statutes include the American Recovery and Reinvestment Act of 2009 and the CHIPS Act of 2022. (See our previous Jones Day Commentary, "Prevailing Wages and More: Developer and Contractor Obligations in CHIPS Act-Funded Construction Projects.")

The proposed IRS regulations offer clarity on when the IRA's prevailing wage and apprenticeship rules will follow the corresponding rules in the DBA and when differences may arise. For example: 

• The proposed regulations make clear that the taxpayer claiming an enhanced credit is deemed to be "solely responsible" for ensuring that the relevant workers on covered projects at qualified facilities are paid wages not less than the prevailing rate, whether employed directly by the taxpayer or by a contractor or subcontractor.
• Under the proposed regulations, the taxpayer, at the time a tax return claiming an enhanced credit is filed with the IRS, will be required to disclose: the applicable wage determinations; all wages paid and hours worked for each of the covered job classifications and qualified apprentices; any wage correction payments tendered prior to the filing of the return; total labor hours; and the total amount of credit claimed.
• The preamble to the proposed regulations says that "[t]he DBA recordkeeping regime is consistent with what the IRS would ordinarily expect taxpayers to preserve to be able to substantiate that the prevailing wage requirements have been satisfied." Under the DBA's recordkeeping regime, every employer must complete a "certified payroll" for each weekly payroll, containing each employee's legal name, address, job classification, prevailing-wage rate, daily hours worked, weekly hours worked, and amount of wages paid. Unlike the DBA, the IRS does not want payroll records submitted to it weekly; the records only need be available at the time the return claiming the credit is filed.
• The proposed regulations provide that the applicable prevailing wage rate is generally the rate in effect at the time construction, alteration, or repair work begins. Subsequent updates to wage determinations that may be issued during the course of a project do not apply for purposes of the IRA unless the scope of work is expanded beyond the original project or the time for the project is extended beyond the initially obligated period. In situations where a wage determination had not been published for the type of work or geographic location at issue at the time construction began, then the entity (taxpayer, contractor, or subcontractor) must request a wage determination, and the resulting wage rate would apply retroactively to the work start date.

Apprenticeship Programs

The DBA itself does not require use of apprentices on covered projects, but it permits the use of apprentices participating in apprenticeship programs registered with the United States Department of Labor ("DOL"), the DOL's Employment and Training Administration, or similar state agencies. In many cases, apprentices on traditional DBA projects have been paid a percentage of the prevailing wage rate for a journeyworker of the same type of skill. In contrast, the IRA expressly requires use of apprentices and requires that they be paid at a rate not less than that specified by the registered apprenticeship program for the apprentice's level of progress for the applicable job classification.

Beyond wage rates, the apprenticeship requirements of the IRA include three components: (i) a labor hours requirement; (ii) a ratio requirement; and (iii) a participation requirement. First, under the labor hours requirement, the taxpayer must ensure that 12.5% or 15% of the total labor hours performed during construction (depending on when construction began) are performed by qualified apprentices from a registered apprenticeship program. Second, the ratio requirement obligates the taxpayer to ensure that the applicable ratio of apprentices to journeymen established by the registered apprenticeship program are met for apprentices working on the facility each day. Third, under the participation requirement, any taxpayer (or contractor or subcontractor) that employs four or more laborers or mechanics in construction, alteration, or repair work must also hire at least one qualified apprentice. A good-faith exception to the apprenticeship requirement is available for entities that request qualified apprentices from a registered apprenticeship program, but such apprentices are not provided.

Treasury has signaled in the proposed regulations that the IRS will expect detailed records related to employment of apprentices, including: copies of any written requests by the taxpayer (or contractor or subcontractor) for apprentices; any agreements between taxpayers (or contractors or subcontractors) and a registered apprenticeship program; documents reflecting any registered apprenticeship program sponsored by the taxpayer (or contractor or subcontractor); documents verifying participation in a registered apprenticeship program by each employed apprentice; records reflecting the required ratio of apprentices to journeyworkers prescribed by each registered apprenticeship program from which qualified apprentices are employed; records reflecting the daily ratio of apprentices to journeyworkers; and the payroll records for any work performed by apprentices.

The Ability to Cure Compliance Deficiencies

If an entity discovers compliance shortfalls relating to the IRA's prevailing wage and apprenticeship requirements, it can take remedial steps to preserve its eligibility for enhanced credits while potentially having penalties waived, provided that the underpayment is sufficiently insignificant in amount and duration and the correction payment is made no later than the date the taxpayer filed its return or 30 days after the taxpayer became aware of the error (whichever is earlier). Specifically, an entity will be deemed to satisfy the prevailing wage requirements if it: (i) pays the affected workers the difference between what they were paid and the amount they were required to have been paid, plus interest at the federal short-term rate plus 6 percentage points; and (ii) pays a penalty to the IRS of $5,000 for each worker who was not paid at the prevailing wage rate in the year. Under the proposed regulations, the penalty may be waived if the taxpayer quickly corrects certain limited errors or has a qualifying project labor agreement ("PLA") in place and timely corrects any failures to pay prevailing wages. 

PLAs are pre-hire agreements expressly permitted by Section 8(f) of the National Labor Relations Act between construction companies and trade unions pursuant to which the unions feed needed labor (skilled and unskilled) to a project from local hiring halls. The Department of Labor views PLAs as a vehicle via which taxpayers seeking to claim enhanced credits can foster workforce continuity on covered projects and avoid work stoppages or other project delays tied to labor shortfalls, accelerating a transition to renewable energy. 

To cure a failure to meet the apprenticeship requirements, a taxpayer must pay a penalty of $50 for every labor hour for which the apprenticeship requirements were not met. 

The amount of the penalties noted above can increase if the IRS determines the compliance failure was due to intentional disregard. The proposed regulations make clear that taxpayers can diminish the likelihood of being deemed to have intentionally disregarded prevailing-wage obligations by demonstrating behavior that is generally required of DBA-covered contractors, which includes: prominently posting prevailing-wage rate notices for the duration of the construction project; contractually obligating contractors and their subcontractors to pay prevailing wages; and undertaking reviews, on at least a quarterly basis, to ensure that prevailing wages are being paid.