Those seeking to obtain increased federal tax credits for their renewable and/or clean energy projects under the Inflation Reduction Act (“Act”) have until late January 2023 to take the steps necessary for compliance. The Act provides increased tax credits for certain projects that: (i) have a maximum net output of less than one megawatt; (ii) comply with the prevailing wage and apprenticeship requirements; or (iii) that begin construction prior to the date that is 60 days after the release of Internal Revenue Service (IRS) guidance on the prevailing wage and apprenticeship requirements. 

On November 30, 2022, the IRS released Notice 2022-61 (“Notice”) to provide guidance on the prevailing wage and apprenticeship requirements that are necessary to obtain increased tax credits (up to 5X the baseline credits) for certain renewable and clean energy projects under the Act. The Notice triggered the 60-day countdown ending on January 29, 2023, after which taxpayers need to comply with the prevailing wage and apprenticeship requirements to receive the increased credits. This article discusses the prevailing wage and apprenticeship requirements put forth in the Notice, and the impact of the prevailing wage and apprenticeship requirements on the Act’s monetization of applicable tax credits.

The Act modified production and investment tax credits for renewable and clean energy projects that involve alternative fuel vehicle refueling property, renewable electricity production, carbon oxide sequestration, zero-emission nuclear power production, clean hydrogen production, advanced manufacturing, clean electricity production or energy investment. Most credits offer an initial baseline credit amount that can be multiplied by five if the taxpayer meets both the prevailing wage and apprenticeship requirements. For example, the baseline investment tax credit for an advanced energy project can be increased 5X from 6% to 30% of the qualified investment if the taxpayer meets both requirements described below. 

Prevailing Wage Requirement

The taxpayer meets the Prevailing Wage Requirement if the taxpayer, its contractors and subcontractors pay all of the project’s laborers and mechanics the prevailing wage for similar positions within the same geographic area of the project. The requirement applies to individuals that work in the construction, alteration or repair of the project beginning at construction and extending for a period specified for each credit, typically between five to ten years from the date the project is placed in service. 

The U.S. Secretary of Labor currently publishes the required prevailing wages on SAM.gov based on position and geographic area. Taxpayers who cannot determine the required prevailing wage for a position based on the published data can follow the guidance in the Notice and send an email inquiry to IRAprevailingwage@dol.gov to determine the relevant prevailing wage. The prevailing wage for qualified apprentices may be less than the wage paid to journeymen in a similar position.

After claiming the increased tax credit, the penalty for the failure to meet the Prevailing Wage Requirement is two-fold. First, the taxpayer must pay backpay plus 3% interest to underpaid individuals. Second, the taxpayer must pay $5,000 to the IRS for each underpaid individual.  Intentional disregard of the requirement increases the penalty to three times backpay (plus 3%) and $10,000 per individual.

Apprenticeship Requirement

In addition to the Prevailing Wage Requirement, taxpayers must maintain an apprenticeship to journeymen ratio ranging from 10% – 15% based on the beginning date of the project. The Apprenticeship Requirement to claim increased tax credits applies to the total number of labor hours for the construction, alteration, or repair of a facility performed by the taxpayer, its contractors and subcontractors. The definition of “labor hours” excludes work by foremen, superintendents, owners and other individuals that work in a bona fide executive, administrative or professional capacity. In addition, the taxpayer and all contractors or subcontractors that have four or more individuals that work on the project, must have at least one or more qualified apprentices that work on the project.  

After claiming the increased tax credit, taxpayers will not be treated as failing to satisfy the Apprenticeship Requirement under one of two conditions. First, the “good faith effort” exception applies if the taxpayer requested qualified apprentices from a registered apprenticeship program and either: (i) the request was denied, provided the refusal was not due to the taxpayer’s, contractor’s or subcontractor’s refusal to comply with the established standards and requirements of the registered apprenticeship program; or (ii) the registered apprenticeship program fails to respond within five business days after receipt of the request. The second exception applies if the taxpayer pays the IRS an amount equal to $50 multiplied by the total number of labor hours that failed to meet the Apprenticeship Requirement. Intentional disregard increases the per hour amount from $50 to $500.

We expect forthcoming guidance to clarify the Prevailing Wage Requirement and the Apprenticeship Requirement, along with related issues such as record keeping.

Impact on Monetization of Renewable Energy Tax Credits

As discussed in a prior article on August 30, 2022, the Act allows certain taxpayers to sell generated tax credits to third parties or to receive a direct payment of cash from the Department of Treasury equal to the relevant tax credit. Purchasers of tax credits, investors in renewable energy projects, and any others that rely on renewable energy funding models that include increased credits, all need to be comfortable with the project manager’s ability to meet the above requirements. Project managers, in turn, need to ensure service contracts include downstream provisions that require contractors and subcontractors to meet the requirements so the project receives the expected tax credits. 

Tax credit purchase agreements will require a heightened analysis of the price paid for each credit, in addition to representations, warranties and indemnifications to protect credit purchasers who will be treated as the taxpayer that generated those credits for all purposes under the Internal Revenue Code.

Outside counsel can provide guidance concerning the negotiation, sale and purchase of tax credits, along with the guidance necessary to meet the above requirements.