The IRS has recently released final guidance on the Prevailing Wage and Apprenticeship (PW&A) requirements, effective June 25, 2024. These updates provide more clarity for clean energy developers to navigate the requirements they have to meet to maximize the tax credits available for their projects leveraging the Inflation Reduction Act (IRA). This article provides an in-depth look at PW&A requirements, covering prevailing wage determinations, apprenticeship standards, and the necessary documentation for compliance.
Summary
Since releasing preliminary guidance in November 2023, clean energy projects seeking tax credits under the IRA must satisfy PW&A requirements unless they are under 1 MW or began construction before January 29, 2023, in order to not see eligible tax credits reduced by 5x. The IRS's final guidance details processes for determining prevailing wages, obtaining apprentices, and maintaining compliance documentation. Taxpayers must submit all relevant records, including payroll and apprenticeship requests, when filing returns. Even if contractors handle the work, taxpayers are responsible for ensuring all conditions are met. The IRS rules include penalties for non-compliance, with harsher penalties for intentional violations. Importantly, transferring tax credits does not alter documentation responsibilities.
Key Updates
The 2024 final guidance introduces several significant changes and clarifications from the 2023 guidance, aimed at providing clearer instructions and easing compliance:
- Transition Rule Clarification: The 2024 guidance specifies that any construction, alteration, or repair work performed before January 29, 2023, is not subject to PW&A requirements, ensuring transition to PW&A requirements is not punitive on work completed before guidance was provided.
- Definition of Construction: The guidance clarifies the applicability of PW&A requirements by clarifying construction as “construction, alteration, and repair”. The IRS further explained that any improvement whose cost is capitalized or work to fix a malfunctioning piece of equipment qualify as alterations or repairs that must meet the PW&A requirements.
- Determining Beginning of Construction: The final guidance also distinguishes between the beginning of construction for applicability of the PW&A requirements and for IRS tax purposes. For PW&A, the guidance applies the Davis-Bacon Act (DBA), where activities such as demolition or site clearance trigger the start of construction. Prevailing wage rates will apply for these activities. The IRS, however, uses two tests to determine construction beginning with either (a) the physical work test (i.e., starting significant work, like excavation) or (b) five percent safe harbor (i.e., incurring 5% or more of the total facility cost).
- Apprenticeship Clarifications: New guidance clarifies that apprenticeship requirements apply only during the construction phase and do not have to be used for post-construction alterations or repairs. The guidance also emphasizes the documentation needed to meet the Good Faith Effort Exception, including written requests to registered apprenticeship programs and the content of such requests.
- Recordkeeping Responsibilities: The IRS clarified that the obligation to ensure that PW&A requirements are being met falls on the developer/owner. It is the owner’s responsibility to ensure contractors or subcontractors are in compliance and maintain adequate records to claim the PW&A bonus.
- Cure Payments: Developers are expected to make cure payments if the IRS deems they are not in compliance with the PW&A guidelines in order to preserve the full tax credits. Workers who are paid below the applicable wage should be paid the shortfall plus interest and the Developer will have to pay fees to the IRS as a penalty
- Offshore Facilities: A special rule is introduced for offshore facilities, allowing reliance on the closest applicable wage determination if specific ones are unavailable.
PW&A Overview
Under the IRA, taxpayers must meet prevailing wage and apprenticeship standards to receive the full value of their tax credits, typically five times the base credit. For the Investment Tax Credit (ITC), the base credit is 6%, increasing to 30% when PW&A requirements are satisfied. Exemptions from PW&A include projects with output/capacity below 1 MW and those that began construction before January 29, 2023. PW&A requirements apply to various tax incentives, with apprenticeship requirements excluded for 45U and 45L credits.
The PW&A rules mandate that taxpayers (1) pay laborers and mechanics no less than the applicable prevailing wage rate for construction as well as for work on any alterations or repairs for the next 5 years (in the case of investment tax credits) to 12 years (for the period that production credits are claimed), (2) employ apprentices from registered apprenticeship programs for a specified number of hours, and (3) meet specific recordkeeping and reporting requirements
Prevailing Wages Requirements
The prevailing wage is the combination of the basic hourly wage rate and fringe benefits paid to workers, varying based on a labor classification and location of the project. The US Department of Labor publishes these wages on the System for Award Management. A step-by-step guide to using this portal is available here. If the taxpayer cannot find a wage determination for their requirement, they can request a supplemental wage determination from the DoL (procedure available in the FAQ). Requests for wage determinations should be sent at least 90 days before signing contracts for work or within 180 days of the wage determination if a wage determination was not apparent earlier.
The applicable wage is determined at the start of construction once the contract is signed by both parties. If a project spans multiple areas, multiple prevailing wages may apply and be paid for each location based on where the work is done. The prevailing wage will be locked in for the duration of the contract. However, the wages must be reset to current applicable wage rates if the contract is amended to change the scope of work or extend the contract period. All contractors and subcontractors must apply the same wages as the primary contract dictates in accordance with the prevailing wages published by the Department of Labor.
Should they fail to meet the prevailing wage requirements, taxpayers are expected to make cure payments to avoid losing the tax credits. Taxpayers must pay back wages plus interest at the federal short-term rate plus 6% in addition to a $5,000 penalty per affected worker paid to the IRS. These payments must be made within 180 days after receipt of the final adjustment notice from the IRS for failing to meet the requirements to avoid loss of the tax credits.
The $5,000 penalty to the IRS can be avoided in two situations. First, it can be avoided by paying affected workers by the end of the first month after the calendar quarter in which the wage shortfall happened (e.g., if the wage shortfall occurred in Q2 (Apr-Jun) and was identified in June, the correction must be paid by the end of July). This payment only avoids the penalty if the worker was underpaid in less than 10% of pay periods that they worked on the project and the shortfall is less than 5% of the total amount the worker should have been paid during the year. Second, the penalty can also be avoided if the worker was working under a pre-hire collective bargaining agreement and the corrective payment is completed prior to the project owner filing its annual return.
Notice: For any errors in paying the correct wages due to confusion or misunderstanding of the guidance, taxpayers have until December 22, 2024 to make any corrective payments with interest to affected workers and avoid a penalty.
Apprenticeship Requirements
The final guidance outlines labor hours, ratio, and participation as the three elements to meet apprenticeship requirements. For labor hours, a certain percentage of total labor hours must be performed by qualified apprentices from registered apprenticeship programs. For construction beginning in 2023, 12.5% of hours must be completed by qualified apprentices while 15% of hours must be performed by apprentices for projects beginning in 2024 and onward. For the ratio, projects must meet the applicable ratio of apprentices to journeyworkers. The ratio will be determined by the apprenticeship program and must be met each day. If work is deemed to be completed by “extra” apprentices, the hours will not count toward this requirement and these apprentices must be paid the prevailing wage. For participation, each contractor or subcontractor that employs four or more workers must also employ at least one qualified apprentice.
In order to be qualified apprentices, the guidance clarifies apprentices must come from registered apprenticeship programs, registered either by the Federal Apprenticeship office or by State Agencies. The taxpayer must file a written request with at least one registered apprenticeship program (partner finder) that provides apprentices for the occupation and region the taxpayer requires. The request for an apprentice must be made at least 45 days before the apprentices are needed to work.
The guidance also outlines that developers can meet this requirement through a good faith effort. If the apprenticeship program denies a request or does not respond within 5 business days, the developer is provided a 365 exemption from the original request, after which they must submit additional requests. The requests must be made to a program that both serves the project area as well as provides the types of apprentices needed. The IRS rule and FAQs provide detailed requirements for the content of a request.
Should a taxpayer fail to meet apprenticeship requirements, taxpayer must pay $50 per hour not met under the three requirements. Intentional disregard increases the penalty to $500 per hour.
Recordkeeping
Taxpayers are encouraged to maintain robust recordkeeping to ensure compliance with the prevailing wage and apprenticeship requirements. Taxpayers must maintain (or ensure that a third-party vendor or the contractors do) payroll records showing hours worked and wages paid for each laborer and mechanic, including correction payments. Records must be kept regardless of whether workers are employed by the taxpayer, a contractor, or a subcontractor.
To show non-intentional failure, records must document efforts to prevent, mitigate, or remedy the failure. The wage rates should be prominently posted on the job site or sent in a written notice to all workers. Further, the developer needs to ensure workers have a sufficient method to report suspected failures to pay proper wages or comply with apprentice requirements. Project owners can find recommended steps that should be taken to avoid intentional disregard here as well as in the IRS FAQ.
Helpful Resources and References
- Department of Labor’s Wage and Hour Division: For prevailing wage determinations here
- IRS Website: Overview, Fact Sheet, FAQ, and Final Guidance
- Registered Apprenticeship Programs: For program details and partnerships here
By understanding and complying with PW&A requirements, businesses can maximize their tax benefits while supporting fair wages and apprenticeship opportunities. Ensure meticulous record-keeping and stay updated with the latest guidance to navigate these regulations successfully.
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