Key Takeaways
- Prevailing Wage Requirements and the Apprenticeship Requirements (both as defined below) apply to any taxpayer, contractor or subcontractor that employs laborers and mechanics who work on the construction, alteration or repair of a facility that intends to qualify for certain tax credits.
- Taxpayers, contractors and subcontractors should anticipate additional compliance costs related to the Prevailing Wage Requirements and the Apprenticeship Requirements.
- The ability to avoid penalties by using organized labor pursuant to prehire collective bargaining agreements is favorable to taxpayers.
- The recordkeeping guidance and the specific types of records required by the regulations seem reasonable, and the guidance generally has been well-received by taxpayers.
Introduction
As covered in our prior alerts, the Inflation Reduction Act[1] modified and reinstated existing renewable energy credits, enacted new renewable energy credits, and included a mechanism for certain tax credits to increase by a multiple of five if the taxpayer or energy project satisfies certain prevailing wage and registered apprenticeship requirements. The IRS and Department of the Treasury (Treasury) issued Notice 2022-61 on Nov. 30, 2022, which included guidance related to the prevailing wage and registered apprenticeship requirements under § 30C, § 45, § 45L, § 45Q, § 45U, § 45V, § 45Y, § 45Z, § 48, § 48C, § 48E and § 179D.[2] The IRS and Treasury followed up on Notice 2022-61 on Aug. 29, 2023, with the issuance of a notice of proposed rulemaking addressing the prevailing wage and registered apprenticeship requirements.[3] The preamble states that comments must be submitted by Oct. 30, 2023, and that a hearing on the proposed regulations is scheduled for Nov. 21, 2023. The rules in the proposed regulations are expected to apply to facilities placed in service in taxable years ending after the date the final rules are published in the Federal Register.
Overview of the Prevailing Wage Requirements and Apprenticeship Requirements
As covered in our prior alert, taxpayers that pay prevailing wages and meet certain apprenticeship requirements qualify for a “bonus” credit amount that increases a base credit by a multiple of five. The prevailing wage requirement is satisfied if laborers and mechanics employed by the taxpayer or a contractor or subcontractor working on the construction of such facility or on repairs or alterations to the facility are paid wages at rates not less than the prevailing rates for construction, alteration or repair of a similar character in the locality in which such work is performed (Prevailing Wage Requirement). What constitutes a prevailing wage is based on statutorily prescribed wage rate requirements and rates published by the Department of Labor (DOL) for the geographic areas and type of job or labor classification. The apprenticeship requirement is satisfied by ensuring that an applicable percentage of total labor hours with respect to the construction, alteration or repair work is performed by qualified apprentices (Labor Hours Requirement) and that each contractor or subcontractor that employs four or more individuals employs one or more qualified apprentices to perform such work (Participation Requirement). In addition, taxpayers must satisfy certain apprentice-to-journeyman ratios as established by the DOL or applicable state apprenticeship agency (Ratio Requirement).[4] A qualified apprentice is defined as an individual who is employed by the taxpayer or any contractor or subcontractor and who is participating in a registered apprenticeship program. The proposed regulations confirm that the Prevailing Wage Requirements and the Apprenticeship Requirements apply to the taxpayer that either claims the increased credit amount or transferred a specified credit portion under § 6418.[5]
Prevailing Wage Requirements – Clarifications Under Proposed Regulations
The proposed regulations clarify that taxpayers may rely on general wage determinations published by the DOL.[6] The applicable general wage determination is the wage determination in effect for the specified type of construction in the geographic area at the time that the construction, alteration or repair of the facility begins.[7] Taxpayers do not, therefore, need to update the applicable prevailing wage rates in the event that the DOL issues a new wage determination after construction begins. However, taxpayers that perform an alteration or repair that was not within the scope of the original project and does not constitute work designed to maintain and preserve the existing facility after it is placed in service must use the applicable wage determination in effect at the time the alteration or repair work begins.[8]
Taxpayers must use a supplemental wage determination or an additional classification and wage rate issued by the DOL if there is no general wage determination for the relevant geographic area or the existing wage determination does not list the applicable labor classification.[9] A taxpayer makes a supplemental request by submitting a request to the DOL by email at IRAprevailingwage@dol.gov.[10] The request must be made no more than 90 days before the beginning of construction, alteration or repair. Taxpayers also may seek reconsideration and review of a general wage determination or a determination issued with respect to a request for a supplemental wage determination or additional classification and wage rate.[11]
Observations
- The carve-out from the definition of construction, alteration or repair for work designed to maintain and preserve the functionality of a facility after it is placed in service is not a surprise, but is still welcoming news for taxpayers.
- The preamble anticipates a limited need to obtain special wage determinations and rates due to the current availability of comprehensive general wage determinations.
- General wage determinations published by the DOL contain no expiration date. Thus, it is possible that a new wage determination will not be needed if the scope of a project changes or there is a repair or alteration that is out of scope.
Apprenticeship Requirements – Clarifications Under Proposed Regulations
Apprentices that are employed pursuant to and individually registered in a bona fide apprenticeship program registered with the DOL or with a state apprenticeship agency recognized by the DOL may be paid less than the predetermined rate for the work they perform.[12] Their wages, however, must not be less than the rate specified by the apprenticeship program. In addition, the Ratio Requirement must be met in order to pay apprentices this reduced wage.[13] If the Ratio Requirement is not met on a given day, the apprentices must be paid a prevailing wage for the day.[14]
The proposed regulations additionally expand the Ratio Requirement by requiring apprentices to be used across the full range of work performed.[15] Thus, a taxpayer cannot comply with the Participation Requirement if there are multiple types of work performed and the type of work performed by apprentices is limited.
Observations
- Clarification regarding what a taxpayer may do in the event the Ratio Requirement is not met is helpful to taxpayers. The requirement that it must be met on a daily basis is likely to impose significant financial, administrative and practical burdens on taxpayers.
- Applying the Participation Requirement across the full range of work performed is a strict interpretation of the statute and will likely cause pain points for taxpayers unable to track it in the aggregate.
Corrections and Penalties Related to Failure to Satisfy the Prevailing Wage Requirements
The proposed regulations further clarify how taxpayers may cure their failure to comply with the Prevailing Wage Requirements. In order to correct their failure and be deemed to satisfy the Prevailing Wage Requirements, a taxpayer must pay any laborer or mechanic who was paid wages at a rate below a prevailing wage (1) an amount equal to the difference between the amount of wages paid to such laborer or mechanic and the amount of prevailing wages required to be paid to such laborer and (2) interest equal to the federal short-term rate plus 6 percent.[16] A taxpayer must also pay a penalty equal to $5,000 multiplied by the total number of laborers or mechanics who were paid wages at a rate below the prevailing wage rate.[17] The correction payment amount increases by a multiple of three and the penalty amounts increase to $10,000 if the failure to satisfy the Prevailing Wage Requirements is intentional. An eligible taxpayer that elects to transfer a specified credit portion under § 6418 remains obligated to make correction and penalty payments pursuant to the proposed regulations.[18]
The obligation to satisfy the Prevailing Wage Requirements becomes binding upon the earlier of (1) the filing of the eligible taxpayer’s return for the taxable year for which the specified credit portion is determined with respect to the eligible credit and (2) the filing of the return of the transferee taxpayer for the year in which the transferred specified credit portion is taken into account.[19] A taxpayer generally has 180 days after a final determination by the IRS to correct their failure to satisfy the Prevailing Wage Requirements.[20]
Penalties are waived if (1) a taxpayer makes a correction payment to the laborer or mechanic within 30 days of when the taxpayer became aware of the error or the date on which the increased credit is claimed and (2) either the laborer or the mechanic is paid wages at rates less than the prevailing wage for less than 10 percent of the pay periods in the calendar year, or the amount t of the shortfall is not greater than 2.5 percent of the amount required to be paid.[21] Penalties are also waived if work is done pursuant to a prehire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project and any correction payment is made on or before the date on which an increased credit is claimed.[22]
Eligible taxpayers that fail to meet the Prevailing Wage Requirements and fail to make correction and penalty payments still may claim the lower base credit amount if they meet the other requirements to claim the credit (e.g.., an eligible taxpayer could claim an investment tax credit equal to 6 percent of the basis of property placed in service if they meet all of the requirements under § 48).
Observations
- The cure provisions are generally beneficial to taxpayers, but the requirement that a taxpayer must track down the former employee and pay them the correct wage could be problematic and difficult to satisfy.
- Taxpayers should consider the impact of the cure provisions on their contracts with contractors and subcontractors, and how they can ensure that their contractors and subcontractors have procedures in place to comply with the cure provisions.
- The general penalty waiver will not likely be beneficial to taxpayers given the requirement that the incorrect wage payment must have occurred infrequently or only resulted in a less than 2.5 percent difference in the amount of wages that should have been paid. The IRS and the Treasury should expand this if they want the potential relief to be meaningful.
- The penalty waivers for prehire collective bargaining agreements demonstrate that, consistent with the overall stance of the Biden administration, the Treasury and the IRS are seeking to incentivize contractors to utilize organized labor.
Corrections and Penalties Related to Failure to Satisfy the Apprenticeship Requirements
The proposed regulations further provide that a taxpayer satisfies the good faith exception to the Apprenticeship Requirements for 120 days if the taxpayer submits a written request for qualified apprentices to at least one registered apprenticeship program that has a geographic area of operation that includes the location of the facility or that can reasonably be expected to provide apprentices to the location of the facility.[23] After the 120 days, a taxpayer has to submit an additional request.[24]
A taxpayer that otherwise fails to satisfy the Labor Hour Requirement and/or Participation Requirement is considered to satisfy both if they pay a penalty equal to $50 multiplied by the total labor hours for which the requirements were not satisfied.[25] The penalty is increased to $500 multiplied by the total labor hours if the failure to satisfy the Labor Hour Requirement and Participation Requirement was intentional.[26] Penalties are waived for failing to meet the Labor Hour Requirement and the Participation Requirement if the work is done pursuant to a prehire collective bargaining agreement. Notwithstanding, the taxpayer would still need to address whether the apprentice is paid a prevailing wage for the days on which the Participation Requirement is not met.
Observations
- The additional requirement to submit a second request to an apprenticeship program is not supported by the statute and is not beneficial to taxpayers.
- The ability to avoid penalties by using organized labor pursuant to prehire collective bargaining agreements is favorable for taxpayers, but will require taxpayers and contractors that traditionally have not used organized labor, including apprentices from a registered program, to evaluate the make-up of their labor force and their labor strategy if they desire to benefit from the proposed regulations’ penalty waivers.
Recordkeeping Requirements – Prevailing Wage Requirements and Apprenticeship Requirements
The requirement to maintain records demonstrating compliance with the Prevailing Wage Requirements and the Apprenticeship Requirements remains with the eligible taxpayer that determines the credit and transferred the credit.[27] At a minimum, those records include payroll records for each laborer and mechanic employed by the taxpayer in the construction, alteration or repair of the qualified facility.[28]
Additional records to demonstrate compliance with the Prevailing Wage Requirements include the following: (1) identifying information, including the name, Social Security or tax identification number, telephone number, and email address of each laborer or mechanic; (2) the location and type of qualified facility; (3) the labor classification that was applied to the laborer or mechanic; (4) the hourly rate of wages paid for each applicable labor classification; (5) records to support fringe benefit payments; (6) the total labor hours worked per pay period; (7) the total wages paid for each pay period; (8) records to support wages paid to any apprentices, including records to support the registration of the apprentices with a registered apprenticeship program and applicable wage rates and apprentice-to-journeyman ratios prescribed by the program; and (9) the amount and timing of any correction payments.[29]
Additional records to demonstrate compliance with the Apprenticeship Requirements include the following: (2) any written requests for the employment of apprentices from registered apprenticeship programs, including any contacts with the DOL or state apprenticeship agency regarding requests for apprentices; (2) any agreements entered into with registered apprenticeship programs with respect to construction, alteration or repair of the facility; (3) documents reflecting the standards and requirements of any registered apprenticeship program, including the Ratio Requirement prescribed by the program; (4) the total labor hours worked by apprentices; and (5) records reflecting the daily Ratio Requirement.[30]
Observations
- Clarifications in the proposed regulations regarding the types of records that a taxpayer should maintain to satisfy the Prevailing Wage Requirements and Apprenticeship Requirements are helpful to taxpayers.
[1] P.L. 117-169.
[2] Unless otherwise stated herein, “§” references are to the Internal Revenue Code of 1986, as amended (Code).
[3] REG-100908-23.
[4] Collectively, the Labor Hours Requirement, Participation Requirement and Ratio Requirement are referred to as the Apprenticeship Requirements.
[5] Prop. Treas. Reg. § 1.45-8(a).
[6] Prop. Treas. Reg. § 1.45-7(b)(2).
[7] Prop. Treas. Reg. § 1.45-7(b)(5).
[8] Prop. Treas. Reg. § 1.45-7(b)(5).
[9] Prop. Treas. Reg. § 1.45-7(b)(3).
[10] Prop. Treas. Reg. § 1.45-7(b)(3)(ii)(A).
[11] Prop. Treas. Reg. § 1.45-7(b)(4).
[12] Prop. Treas. Reg. § 1.45-7(b)(7)(i).
[13] Prop. Treas. Reg. § 1.45-7(b)(7)(iii).
[14] Prop. Treas. Reg. § 1.45-8(c).
[15] Prop. Treas. Reg. § 1.45-8(c)(2).
[16] Prop. Treas. Reg. § 1.45-7(c)(1)(i).
[17] Prop. Treas. Reg. § 1.45-7(c)(1)(ii).
[18] Prop. Treas. Reg. § 1.45-7(c)(1)(iv).
[19] Prop. Treas. Reg. § 1.45-7(c)(1)(iv).
[20] Prop. Treas. Reg. § 1.45-7(c)(4).
[21] Prop. Treas. Reg. § 1.45-7(c)(6).
[22] Prop. Treas. Reg. § 1.45-7(c)(6)(ii).
[23] Prop. Treas. Reg. § 1.45-8(e)(1).
[24] Prop. Treas. Reg. § 1.45-8(e)(1)(i)(A)(2).
[25] Prop. Treas. Reg. § 1.45-8(e)(2).
[26] Prop. Treas. Reg. § 1.45-8(e)(2)(ii).
[27] Prop. Treas. Reg. § 1.45-12(b).
[28] Prop. Treas. Reg. § 1.45-12(b).
[29] Prop. Treas. Reg. § 1.45-12(c)(1)-(8).
[30] Prop. Treas. Reg. § 1.45-12(d)(1)-(5).
[View source.]
