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President Joe Biden signed into law the Inflation Reduction Act of 2022 (“HR 5376”) (the “IRA” or the “Act”), on August 16, 2022.

There are numerous tax credits in the legislation that intend to facilitate access to clean energy. For the most part, these credits are available to energy producers or to support the construction or alteration of facilities to include energy efficient components. For example, the Act substantially changes and expands existing federal income tax benefits for renewable energy, including the existing Section 45 of the Internal Revenue Code production tax credit (“PTC”) and Section 48 of the Internal Revenue Code investment tax credit (“ITC”). Specifically, the Act replaced the renewable energy credit regime with a two-tiered system that would provide a “base” credit equal to 20% of the maximum credit and an “increased” credit equal to an additional 80% of the maximum credit that would be available only if certain prevailing wage and apprenticeship requirements are satisfied in connection with the relevant project.

Prevailing wage requirements have long accompanied federal funding of construction projects. For example, many transportation and water infrastructure projects often benefit from federal support via contracts and grant programs. A primary source of federal support for clean energy infrastructure projects, however, is through the tax code. That assistance—primarily in the form of production and investment tax credits—has historically not required recipients of these credits to abide by the Davis-Bacon Act and thus pay prevailing wages. This created a perceived loophole for clean energy construction, which the Inflation Reduction Act has effectively closed for federally supported clean energy construction projects by conditioning the majority of the tax credit value on payment of prevailing wages.

While many of the Act’s programs contain prevailing wage and apprenticeship requirements in order to receive the full amount of available support, we focus here on two of the programs that have historically had the most widespread use.

Section 45: Production Tax Credit

The PTC provides an ongoing tax credit for the first ten years of a project based on the amount of renewable energy produced and sold in each year. The Act extends the current PTC for qualified facilities that begin construction prior to January 1, 2025, but (as with the ITC discussed below) implements a new structure with a “base” credit amount and “increased” credit amount. The PTC is available for the following specific types of projects, each of which have their own definition under the Code: wind, closed and open-loop biomass, geothermal or solar energy, small irrigation power, landfill gas, trash, refined coal production, qualified hydropower, Indian coal production, and marine and hydrokinetic.

With the changes from the Act, a company is eligible for a 0.3 cents per kilowatt hours of electricity (“kWh”) production tax credit. But if the company meets the prevailing wage and apprenticeship requirements, the amount of credit is multiplied by 5 for a total credit of 1.5 cents per kWh. 

Section 48: Investment Tax Credit

While the PTCs are ongoing credits based on the amount of energy produced, the ITC is a one-time tax credit based on a percentage of the qualifying costs of a project. As with the PTC, the Act extends the current framework for the ITC for energy projects that begin construction prior to January 1, 2025, and implements a similar base credit and increased credit structure. These energy projects include the following types of energy, each of which have their own definitions and requirements under the Code: solar, fiber-optic solar, geothermal, fuel cell or microturbine, combined heat and power system, small wind energy, thermal energy, waste energy recovery, energy storage (e.g., batteries), biogas, and microgrid controllers.

The base credit provided under Section 48 is 6% of the basis of each energy property placed in service during the taxable year. However, if the company meets the prevailing wage and apprenticeship requirements, the bonus credit increases in value fivefold for a total credit of 30% of the basis. 

While some renewable energy projects may qualify for both the ITC and PTC, an entity is only permitted to take one of these credits for any particular project.

Prevailing Wage and Apprenticeship Requirements

Many of the Act’s new and restructured programs provide either a base credit or an increased rate if: (i) the contractors and laborers are paid prevailing wages; and (ii) registered apprentices represent a percentage of labor hours. For those employers who meet the prevailing wage and apprenticeship requirements, the “increased” credit is generally five times the base credit rate. 

Prevailing Wage Requirement

To satisfy the prevailing wage requirement, laborers, mechanics, contractors, and subcontractors must be paid wages at least at prevailing rates in the locality in which the facility or project is located as determined by the Secretary of Labor, during the construction, alteration, and repair of the “qualified facility” (for a ten-year period) under Section 45 (PTC) or the “energy project” (for a 5-year period) under Section 48 (ITC). The terms qualified facility under Section 45 and energy project under Section 48 both refer to the construction of a facility that produces or stores a certain type of energy specified in the respective statutes.

Correction and Penalty

Failure to satisfy the prevailing wage requirement can be corrected by (1) paying the worker, who was not paid the prevailing wage, the difference between the prevailing wage and the amount the worker was paid plus the interest; and (2) paying a penalty of $5,000 per affected worker to the Secretary of Treasury. The penalty increases if the prevailing wage requirements are intentionally disregarded. In particular, part (1) increases to three times the amount and part (2)—the penalty paid to the Secretary of Treasury—increases to $10,000 per worker, in the case of intentional disregard. To qualify for this relief, pursuant to the rules the IRS will issue, payments of the required amounts generally must be made within 180 days after the date on which the IRS determines that the wage requirement has not been satisfied.

Apprenticeship Requirement

To satisfy the apprenticeship requirement, the following percentage of total labor hours for construction, alteration, or repair work on the qualified facility or energy project must be performed by qualified apprentices:

Construction BeginsBefore 1/1/2023During 2023After 12/31/2023
Required Percentage10%12.5%15%

Each contractor and subcontractor who employs four or more individuals to perform construction with respect to a qualified facility or an applicable project must employ at least one qualified apprentice. Furthermore, this requirement is subject to the apprentice-to-journey worker ratios of the Department of Labor or the applicable state apprenticeship agency.

Correction, Penalty, and Exception

The apprenticeship requirement will still be satisfied if the taxpayer pays a penalty to the Secretary of Treasury equal to $50 ($500 in the case of intentional disregard of the apprenticeship requirement) multiplied by the total labor hours for which the apprenticeship requirement was not satisfied. In addition, the Act includes a “good faith effort” exception, which provides that a taxpayer shall be deemed to have satisfied this requirement if the taxpayer has requested qualified apprentices from a registered apprenticeship program and either (i) the request is denied for reasons other than a refusal to comply with the program’s standards and requirements; or (ii) the registered apprenticeship program fails to respond to the request within five business days after the date the registered apprenticeship program received the request.

Limited Transition Relief from Prevailing Wage and Apprenticeship Requirements

Projects that begin construction before the date that is 60 days after the official guidance is published by the Treasury Department regarding prevailing wage and apprenticeship requirements, are exempt from such requirements and will automatically qualify for the increased (5x) credit rates mentioned above. Likewise, qualified energy projects under Section 45 and 48 with a maximum output of less than one megawatt are exempt altogether from the prevailing wage and apprenticeship requirements. 26 U.S.C. § 45(b)(6)(B)(i); 26 U.S.C. § 48(a)(9)(B)(i).

Request for Comments on the Implementation of the Inflation Reduction Act

On October 5, 2022, the Treasury Department and the IRS issued six notices asking for comments on different aspects of the energy tax benefits in the IRA, including the provision relating to prevailing wage and apprenticeship requirements under the Act. The IRS anticipates that constructive comments from interested parties will aid the agency in drafting guidance that is reflective of the needs of taxpayers entitled to claim the benefits.

The specific questions in the notices presumably point out the areas where the IRS and the Treasury Department intend to issue regulations or other guidance and identify where they anticipate potential confusion or ambiguity. In the notice regarding prevailing wage and apprenticeship requirements, the agencies requested comments, inter alia, on the following questions:

  • Is guidance necessary to clarify how the Davis-Bacon prevailing wage requirements apply for purposes of Section 45(b)(7)(A)?
    • Section 45(b)(7)(A) provides that that a taxpayer must ensure that any laborers and mechanics employed by the taxpayer, or any contractor or subcontractor, are paid wages at rates not less than the prevailing wage rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor in accordance with subchapter IV of chapter 31 of title 40, which is commonly known as the Davis-Bacon Act.
  • What should the Treasury Department and the IRS consider in developing rules for taxpayers to correct a deficiency for failure to satisfy prevailing wage requirements?
  • What documentation or substantiation should be required to show compliance with the prevailing wage requirements? 
  • Is guidance for purposes of Section 45(b)(7)(A) needed to clarify the treatment of a qualified facility that has been placed in service but does not undergo alteration or repair during a year in which the prevailing wage requirements apply?
  • What factors should the Treasury Department and the IRS consider regarding the appropriate duration of employment of individuals for construction, alteration, or repair work for purposes of Section 45(b)(8)(C) requirement?
    • Section 45(b)(8)(C) provides that each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to a qualified facility must employ one or more qualified apprentices from a registered apprenticeship program to perform that work.
  • Section 45(b)(8)(D)(ii) provides for a good faith effort exception to the apprenticeship requirement. 
    1. What, if any, clarification is needed regarding the good faith effort exception? 
    2. What factors should be considered in administering and promoting compliance with this good faith effort exception?
    3. Are there existing methods to facilitate reporting requirements, for example, through current Davis-Bacon reporting forms, current performance reporting requirements for contracts or grants, and/or through DOL’s Registered Apprenticeship Partners Information Management Data System (RAPIDS) database or a State Apprenticeship Agency’s database?
  • What documentation or substantiation do taxpayers maintain or could they create to demonstrate compliance with the apprenticeship requirements in Section 45(b)(8)(A), (B), and (C), or the good faith effort exception?

The agencies requested that those interested in providing feedback to the questions in the notices provide their feedback by November 4, 2022, via the Federal eRulemaking Portal (the “Portal”) or by mail. However, the Treasury Department and the IRS will still consider written comments submitted after November 4, 2022, that do not delay the issuance of the guidance. As of November 14, 2022, there are 296 comments posted on the Portal. 

On October 31, 2022, a coalition of 22 construction and energy groups led by the Associated Builders and Contractors (“ABC”)—a national construction industry trade association representing more than 21,000 members—sent a letter to the Treasury Department and the IRS requesting a 60-day extension to the November 4 deadline to provide comments on the implementation of the IRA. A previous request for extension by ABC has received no response.