Under the Inflation Reduction Act of 2022 (IRA), energy projects that meet certain criteria are eligible to receive enhanced tax credit rates under IRC Sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C and 48E. The potential benefits to a project are significant, as the enhanced rates are five times higher than the standard credit rate. However, to qualify you must pay prevailing wages and offer apprenticeship programs during construction, alteration and repair activities of qualifying projects.
But what are the prevailing wage and apprenticeship rules? The Treasury and the IRS recently released Notice 2022-61 providing initial guidance on what taxpayers must do to meet the requirements and claim the credits from a compliance perspective.
What is the Prevailing Wage Requirement?
Prevailing wage is a concept used mostly by the Department of Labor (DOL) and is the practice of setting benchmarks in pay for specific types of work in specific geographic areas.
To qualify for the enhanced credit rate, the IRA requires taxpayers to:
- Pay prevailing wages to any laborers and mechanics, employed by both the taxpayer and any contractors or subcontractors, for any work associated with the construction, alteration or repair of a qualified facility.
- A Secretary of Labor website, www.sam.gov, gives the prevailing wage for specific labor classifications and geographic areas. Note there is an alternative method for acquiring prevailing wage information when an activity or geographic area is not listed on the website.
- Maintain records for work performed, including by contractors and subcontractors, that show laborers and mechanics were not paid less than prevailing wages. Additionally, the Notice provides definitions for terms such as “wages,” “laborer or mechanic,” and “construction, alteration or repair.”
What is the Apprenticeship Requirement?
To satisfy the apprenticeship requirement, you must ensure that qualified apprentices perform at least an “applicable percentage” of total labor hours with respect to construction, alteration or repair work on the project. Total labor hours include any work performed by contractors or subcontractors, and the applicable percentage is determined based on the date construction began on a qualified facility:
- Before January 1, 2023: 10%
- After December 31, 2022, and before January 1, 2024: 12.5%
- After December 31, 2023: 15%
The applicable percentages in each year are subject to requirements for apprentice-to-journey worker ratios provided by the DOL or applicable state apprenticeship agencies. In addition to meeting the applicable percentage requirement, if you employ four or more individuals to perform construction, alteration or repair work, you must also meet a separate participation requirement and employ one or more qualified apprentices to perform the work.
Similar to the prevailing wage requirements, you must maintain books and records that show you are meeting the apprenticeship requirements for your own business as well as for any contractors and subcontractors you hire for the project. You also may meet the apprenticeship requirement through the Good Faith Effort Exception if you are unable to obtain the proper apprenticeship labor. To meet this exception, you must request qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry. Then document your requests to these programs, as well as the program’s denial or non-response.
Applicability of the Requirements
The publication of the Notice on November 30 started the 60-day window, which requires projects that began construction after January 29, 2023, to comply with the prevailing wage and apprenticeship requirements to obtain the enhanced credit rate. However, the Notice provides two alternatives for determining the beginning of construction:
- A Physical Work Test. A facility meets this test when physical work of a significant nature begins.
- A Five Percent Safe Harbor Test. This test met when you incur five percent or more of the total cost of the facility.
What Are the Penalties for Not Meeting the Requirements?
Various penalties apply if you do not meet prevailing wage and apprenticeship requirements and try to obtain the enhanced credit rates. The type of penalty depends on whether or not you intentionally disregarded the requirements, based on facts and circumstances. Potential payments and penalties for noncompliance include:
|Type of Non-Compliance
||Payment to Laborers or Mechanics
||Interest Paid to Laborers or Mechanics
|Prevailing Wage (unintentional)
||The difference between amounts paid to laborers or mechanics and the prevailing wage
||6% on the catch-up payment required to laborers or mechanics
||$5,000 per laborer or mechanic who was paid at a rate below prevailing wage
|Prevailing Wage (intentional)
||Three times the difference between amounts paid to laborers or mechanics and the prevailing wage
||6% on the catch-up payment required to laborers or mechanics
||$10,000 per laborer or mechanic who was paid at a rate below prevailing wage
||$50 per labor hour for which the apprenticeship requirement was not satisfied
||$500 per labor hour for which the apprenticeship requirement was not satisfied
High Costs, High Rewards
While the cost of paying prevailing wages and employing apprentices may increase the overall cost of your project, the opportunity for this enhanced tax credit is too significant to ignore — and so are the severe penalties for non-compliance with the prevailing wage and apprenticeship rules. Whether you are a developer, investor, financer or other interested party, familiarize yourself with these requirements so you can best optimize your ongoing and future projects.
Contact Justin Gartner at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.