On Nov. 29, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) published Notice 2022-61, Prevailing Wage and Apprenticeship Initial Guidance under Section 45(b)(6)(B)(ii) and Other Substantially Similar Provisions (Notice). The Notice provides initial guidance on the prevailing wage and apprenticeship requirements taxpayers must satisfy to qualify for increased energy credits or deduction amounts enacted in the Inflation Reduction Act (IRA) (P.L. 117-169).
The prevailing wage and apprenticeship requirements apply to the following tax incentives:
- Advanced Energy Project Credit (§ 48C)
- Alternative Fuel Refueling Property Credit (§ 30C)
- Credit for Carbon Oxide Sequestration (§ 45Q)
- Clean Fuel Production Credit (§ 45Z)
- Credit for Production of Clean Hydrogen (§ 45V)
- Renewable Energy Production Tax Credit (§ 45, § 45Y)
- Renewable Energy Investment Tax Credit (§ 48, § 48E)
- Energy Efficient Commercial Buildings Deduction (§ 179D)
The prevailing wage requirements also apply to the following tax incentives:
- New Energy Efficient Home Credit (§ 45L)
- Zero-Emission Nuclear Power Production Credit (§ 45U)
Under the statute, prevailing wage and apprenticeship requirements apply to qualifying facilities that begin construction 60 days or more after the Treasury and IRS publish guidance. This Notice starts the clock on the statutory 60-day period, meaning the requirements will be in effect for facilities that begin construction on or after Jan. 29, 2023. For facilities the construction of which begins prior to that date, the increased credit amount applies without regard to these labor requirements.
On Dec. 1, the White House Council on Environmental Quality hosted a virtual briefing outlining key provisions of the Notice. The section below highlights significant takeaways.
Key Features of Initial Wage and Apprenticeship Guidance
Prevailing Wage Guidance
The Notice provides that taxpayers can satisfy the IRA’s prevailing wage rate provisions by paying all laborers and mechanics (including contractors and subcontractors) performing construction, alteration or repair at a facility at least the prevailing wage. The Department of Labor (DOL) publishes prevailing wage determinations on www.sam.gov. Wage determinations are calculated by geographic area based on the type of construction and apply specific wage rates for each labor classification. If no prevailing wage determination is posted for a specific geographic area or labor classification, the Notice specifies that taxpayers should contact the DOL Wage and Hour Division at IRAprevailingwage@dol.gov.
The Notice also provides further detail on definitions of key terms, including: “employ,” “wage” and “wages,” “laborer or mechanic,” “construction, alteration, or repair,” “prevailing wage,” and “prevailing wage determination.” The additional definitions are important as some DOL references have different meanings in the tax context.
The Notice provides greater specificity regarding the apprenticeship labor hour, ratio and participation requirements:
- Apprenticeship Labor Hour Requirement: Refers to the applicable percentage of total labor hours for construction, alteration or repair work on a qualified facility, project, property or equipment (including work performed by contractors or subcontractors) that must be performed by qualified apprentices—which begins at 10% of the total labor hours and increases in years after 2022.
- Apprenticeship Ratio Requirement: The above requirement is subject to any applicable requirements for apprentice-to-journey worker ratios of the DOL or the applicable state apprenticeship agency.
- Apprenticeship Participation Requirement: Requires that taxpayers, contractors or subcontractors that employ four or more individuals to perform construction, alteration or repair on a qualified facility must employ one or more qualified apprentices.
The Notice also describes the Good Faith Effort Exception, allowing taxpayers to demonstrate a good faith effort in requesting qualified apprentices if the taxpayer requests workers from a registered apprenticeship program in accordance with usual and customary business practices in a particular industry.
The Notice specifies the recordkeeping requirements with which taxpayers must comply to substantiate that they paid workers a prevailing wage and satisfied the apprenticeship requirements. The IRA allows the Treasury secretary to issue additional requirements with respect to recordkeeping and information reporting.
BEGINNING OF CONSTRUCTION GUIDANCE
The Notice also affirms the use of longstanding standards for establishing the date that construction begins for purposes of claiming relevant IRA incentives. Taxpayers may use either of two methods to establish the date of beginning of construction:
- By starting physical work of a significant nature (Physical Work Test), or
- By having paid or incurred 5% or more of the total cost of the facility (Five Percent Safe Harbor).
The Notice also applies a continuity standard for both tests, requiring taxpayers to demonstrate either continuous construction or continuous efforts for the beginning-of-construction standard to be satisfied. The continuity requirement is intended to ensure IRA incentives are used to support real and progressing construction, rather than benefiting developers that simply start a project and let it lay dormant.
Treasury and the IRS plan to issue additional proposed regulations with respect to the wage and apprenticeship requirements in the coming months.
DOL also plans to hold two public webinars focused on how to comply with the prevailing wage and apprenticeship provisions of the IRA:
- Wednesday, Dec. 14 at 1:00 p.m. EST
- Thursday, Dec. 15 at 1:00 p.m. EST
More information on these webinars can be found here.
If you are interested in more information, please contact Russ Sullivan of the Brownstein Tax Policy Group.
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