The Internal Revenue Service (IRS) and Treasury this week released a guidance package to help taxpayers engaged in qualified renewable energy projects comply with the prevailing wage and apprenticeship requirements created by the Inflation Reduction Act (IRA).
The package includes comprehensive proposed regulations (REG-100908-23) with details on how the proposed regulations would govern how taxpayers meet prevailing wage and apprenticeship requirements to increase their tax credits or deductions by a factor of five. For instance, a 6% credit becomes 30% when meeting these requirements.
That bonus outstrips significant bonus credits, including provisions granting extra benefit for domestic content, projects associated with federally subsidized housing or energy communities. Unlike the initial guidance provided in Notice 2022-61, the proposed regulations provide detailed substantiation and recordkeeping requirements. The new guideline tightens the “good faith” exception for the apprenticeship rules and specifies who is responsible for any penalties when the underlying credits are transferred.
In addition to the notice, the IRS published a frequently asked questions document on the proposed regulations and offered Publication 5855, which provides an overview of the guidance.
Following are crucial takeaways from the proposed regulations issued by the IRS
Tax Incentives Covered
The IRA provides the five-times-multiplier bonus for taxpayers meeting apprenticeship requirements and prevailing wage for a variety of credits.
The bonus applies for energy property found in Internal Revenue Code (IRC) Section 48. The ITC includes fuel cell, biogas, geothermal, solar, small wind, energy storage, microgrid controllers and combined heat and power system property of the investment tax credit (ITC).
The bonus also covers the IRC Section 45 production tax credit (PTC) for electricity produced from renewables, including landfill, wind, biomass, small irrigation, gas and trash, hydropower, geothermal, hydrokinetic, solar, and marine energy.
IRC Section 48E and IRC Section 45Y will replace both these incentives which expire at the end of this year. These will apply to facilities that begin construction and are placed in service after 2024. Those credits are also eligible for the five-times multiplier for properties that meet apprenticeship requirements and the prevailing wage.
Other credits covered include:
- Advanced energy project credit (IRC Section 48C).
- Carbon oxide sequestration credit (IRC Section 45Q).
- Clean hydrogen production tax credit (IRC Section 45V).
- Energy efficient commercial buildings deduction (IRC Section 179D).
- Zero-emission nuclear power production credit (IRC Section 45U).
- New energy efficient homes credit (IRC Section 45L).
- Alternative fuel vehicle refuelling property credit (IRC Section 30C).
- Clean fuel production credit (IRC Section 45Z, starting in 2025).
The apprenticeship requirements are not applicable to taxpayers who satisfy the prevailing wage requirements for IRC Section 45L and IRC Section 45U.
Exceptions
The five-times multiplier does not require taxpayers to meet apprenticeship requirements and the prevailing wage for certain small facilities that produce clean energy under 1 megawatt, alternating current (1MWac) and for facilities that began construction before Jan. 29, 2023.
Workers Covered by Requirements
The IRS proposed guidance covers mechanics and laborers employed in the construction, alteration or repair of clean energy facilities that qualify for tax incentives and ensures that they are paid no less than the applicable prevailing wage rates.
Apprenticeship Requirements
The proposed guidance requires that any taxpayer (or subcontractor or contractor) who employs four or more workers must employ one or more apprentices to meet the requirements. The guidance sets the minimum percentage of total labor hours of construction, alteration or repair work to be done by qualified apprentices at 12.5% for properties beginning construction in 2023 and at 15% for properties beginning construction in 2024 or later.
Prevailing Wage Rate
The IRS guidance specifies that the prevailing wage is determined by the Department of Labor for each classification of mechanics and laborers for a particular type of construction in a predetermined geographic area. Taxpayers must ensure that the mechanics and laborers employed by them or its contractors or subcontractors are paid the prevailing wage (which includes fringe benefits rate). Those wage rates are found here. In absence of an applicable general wage determination, taxpayers may request the Department of Labor to provide a supplemental wage determination.
Exceptions
An exception to the apprenticeship requirements is allowed if a taxpayer, contractor or subcontractor has requested qualified apprentices from a qualified apprenticeship program and none are available. This can be best factored in while computing for 179D scope of public and private projects.
Recordkeeping
Taxpayers who seek the extra tax incentive amount face specific recordkeeping requirements for mechanics, laborers, and apprentices, including those working for any subcontractor or contractor. The IRS provides examples such as the deduction from wages and actual wages paid, hourly rate, hours worked, deduction from wages and actual wages paid, plus other records.
Corrections and Penalties
Taxpayers are eligible to claim the increased amounts even if they fail to meet the requirements as long as they make correction and penalty payments. Those possibilities include making correction payments for underpaid or missing prevailing-wage income to any laborers and mechanics (plus interest), plus a penalty paid to the IRS. Taxpayers failing to meet the apprenticeship requirements must also make a penalty payment to the IRS under the proposed rules. Penalties do not apply to taxpayers who have a qualifying project labor agreement that meets certain requirements.
