Ten months after the release of initial guidance, the U.S. Department of the Treasury and IRS on Aug. 29, 2023, issued proposed regulations regarding increased credit or deduction amounts available for taxpayers satisfying prevailing wage and registered apprenticeship (collectively, PWA) requirements for energy-related projects established by the Inflation Reduction Act of 2022 (IRA). The proposed regulations follow recent action taken by the U.S. Department of Labor (DOL) to finalize regulations in the Davis-Bacon Act related to seeking "bonus credit" under the IRA. (See Holland & Knight's previous alert, "U.S. Department of Labor Announces Final Rule Revamp of the Davis-Bacon Act," Aug. 10, 2023).

The proposed regulations affect the PWA requirements for the following energy tax incentives: Sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E and 179D. If the PWA requirements are met, taxpayers are entitled to a five times higher value tax incentive. For example: Under Section 48, the investment tax credit goes from a base rate of 6 percent to a 30 percent value if PWA requirements are met. Comments in response to the proposed regulations are requested by Oct. 30, 2023, with a public hearing scheduled for Nov. 21, 2023.

In addition to the proposed regulations, the IRS released a set of frequently asked questions and Publication 5855, which summarizes the PWA requirements.

The Basics

To meet the prevailing wage requirement under the IRA, laborers and mechanics employed by the taxpayer, along with contractors and subcontractors in the construction, alteration and repair of a facility or project, must be paid wages not less than prevailing rates for construction, alteration or repair of a similar character in the relevant locality as most recently published by DOL.

The registered apprenticeship requirement comprises three separate components, all of which must be met (unless certain exceptions apply):

1. Apprenticeship Labor Hour Requirement. A certain percentage of total labor hours of the construction, alteration or repair work (including such work performed by any contractor or subcontractor) must be performed by a qualified apprentice. The total labor hours does not include any hours worked by foremen, superintendents, owners or persons employed in a bona fide executive, administrative or professional capacity. The percentage is 10 percent for construction beginning before 2023, 12.5 percent for construction in 2023 and 15 percent for construction after 2023.
2. Apprenticeship Ratio Requirement. Apprentice-to-journeyworker ratios published by the DOL or applicable state apprenticeship agency must be met.
3. Apprenticeship Participation Requirement. Each taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work must employ one or more qualified apprentices to perform such work.

Highlights of the Proposed Regulations

Among guidance provided by the proposed regulations:

• General wage determinations are published by the Wage and Hour Division of DOL System for Award Management. The proposed regulations also state that prevailing wages must be paid on-site but can also include secondary sites in specific circumstances.
• To request a supplemental wage determination from the Wage and Hour Division of DOL, a taxpayer, contractor and/or subcontractor should contact the Wage and Hour Division by email at iraprevailingwage@dol.gov. The proposed regulations also address the timing of such requests and that determinations can apply retroactively.
• Taxpayers must pay apprentices at least the rate specified by the registered apprenticeship program for the apprentice's level of progress for the apprentice's classification in the applicable wage determination. Apprentices may be paid at less than the prevailing rate for work performed consistent with the occupation of the registered apprenticeship program if they are 1) qualified apprentices from a registered apprenticeship program who perform work with respect to the construction, alteration or repair of a qualified facility or 2) individuals in the first 90 days of probationary employment as an apprentice in a registered apprenticeship program who have been certified by the DOL.
• Taxpayers must pay apprentices bona fide fringe benefits in accordance with the provisions of the registered apprenticeship program. If the registered apprenticeship program does not specify the payment of bona fide fringe benefits, apprentices must be paid the full amount of bona fide fringe benefits listed on the wage determination for the applicable classification in cash or in kind.
• Taxpayers can meet the good faith effort exception for the apprenticeship requirement if 1) the request for apprentices was denied for reasons other than the taxpayer, contractor or subcontractor's refusal to comply with the program's standards and requirements, or 2) the program failed to respond within five business days of receiving a request. Certain other conditions must be satisfied to continue to meet the exception.
• The proposed regulations also discuss the reporting and documentation requirements.

The Holland & Knight Energy Tax Team is reviewing the proposed regulations and will provide additional analysis.