The U.S. Department of the Treasury (Treasury) today released a notice of proposed rulemaking (Proposed Regulations) related to the prevailing wage and apprenticeship (PWA) requirements for increased tax credits established by the Inflation Reduction Act of 2022 (IRA), including the increased investment tax credit under Internal Revenue Code (Code) Section 48 (ITC) and production tax credit under Section 45 (PTC), among others.
The IRA reduced the ITC and PTC to one-fifth of their pre-IRA amounts, but allows for a five-times multiplier with respect to a particular project if (i) construction of the project begins (based on IRS beginning-of-construction guidance) before January 29, 2023, (ii) the project has a maximum nameplate capacity of less than 1 MWAC, or (iii) the project satisfies the PWA requirements. Thus, for a project with a maximum nameplate capacity of 1 MWAC or more the construction of which did not begin before January 29, 2023, to qualify for the five-times multiplier, the project must satisfy the PWA requirements. Treasury previously released Notice 2022-61, which contained initial guidance regarding the PWA requirements. That guidance left many questions unanswered. The Proposed Regulations answer a number of these questions and provide helpful guidance regarding the specific requirements to comply with the PWA requirements. Following is a summary of some of the more noteworthy provisions of the Proposed Regulations. Our alerts regarding the preliminary guidance are available here and here.
Prevailing Wage Requirement
General
To satisfy the prevailing wage requirement, any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction, alteration, or repair of the facility must be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the location of the facility as determined by the U.S. Department of Labor (DOL) in accordance with the Davis-Bacon Act.
The prevailing wage requirement applies to all construction, alteration, or repair work through the 10-year credit period for a qualified facility with respect to which the PTC is claimed, and to all such work through the 5-year recapture period for any energy property with respect to which the ITC is claimed.
The Proposed Regulations make clear that the “taxpayer” responsible for meeting the prevailing wage requirements is any person subject to any internal revenue tax, including a tax-exempt entity described in the new direct pay provision, that will claim the ITC or PTC or make a direct pay election with respect to the credit. If a taxpayer elects to transfer the ITC or PTC to another taxpayer, the taxpayer transferring the credit is responsible for complying with the prevailing wage requirements, including the correction and penalty provisions.
The Proposed Regulations require a taxpayer to use the prevailing wage rates published by the DOL in the general wage determination in effect when construction of the applicable facility begins, or, in the case of work that is undertaken after a facility has been placed in service, the date such work begins. If a contract is changed to include additional substantial construction, alteration, or repair work not within the scope of work in the original contract, or to require work to be performed for an additional time period not originally contemplated, the wage determination must be updated. A taxpayer must request a supplemental wage determination from DOL in certain circumstances, including if no prevailing wage determination has been issued for the geographic area or for the specified type of construction involved. The Proposed Regulations contain a special rule for wages paid under certain collective bargaining agreements.
If construction of a facility spans two or more adjacent geographic areas that have different prevailing wage determinations, a taxpayer may satisfy the prevailing wage requirements by paying laborers and mechanics wages at the highest rate for each classification provided under the general wage determinations, or may request a supplemental wage determination from DOL.
The Proposed Regulations provide that the prevailing wage requirements will apply to construction, alteration, or repair at the location of the facility, and includes any secondary sites where a significant portion of the construction, alteration, or repair of the facility occurs, if the secondary site was either established specifically for, or dedicated exclusively for a specific period of time to, the construction, alteration, or repair of the facility.
Apprentice Wages
Apprentices who are participating in a registered apprenticeship program certified by the DOL Office of Apprenticeship or a state apprenticeship agency, or who are in their first 90 days of probationary employment in such a program but are not yet registered individually in the program, must be paid wages in accordance with DOL apprenticeship regulations. If the apprentice is not part of a registered apprenticeship program, or is employed in excess of the applicable ratios permitted by a registered apprenticeship program, the apprentice must be paid the full prevailing wage rates for laborers or mechanics for the relevant classification and location.
Correction and Penalty Payments
If a taxpayer fails to satisfy the prevailing wage requirement, the taxpayer must make correction payments, plus interest, to workers that were not paid prevailing wages and penalty payments to the IRS, to continue to qualify for the five-times multiplier. Penalties may be waived if the taxpayer promptly pays correction amounts within a designated time period after the failure is discovered and certain additional requirements are satisfied. If the IRS determines that a taxpayer has not complied with the prevailing wage requirement, the taxpayer must make the correction payments and pay the penalty within 180 days of the final determination by the IRS.
Construction, Alteration, or Repair of a Facility
The preliminary guidance, and the Proposed Regulations maintains, that the term “construction, alteration, or repair” is broadly defined to mean all types of work performed at the location of a facility, including constructing, altering, remodeling, installing of items fabricated offsite; painting and decorating; and manufacturing or furnishing of materials, articles, and supplies or equipment at the location of the facility. The Proposed Regulations clarify that “construction, alteration, or repair” does not include maintenance work that occurs after the facility is placed in service, including work that is ordinary and regular in nature and designed to maintain existing functionality of a facility as opposed to an isolated or infrequent repair of a facility to restore specific functionality or adapt it for a different or improved use. The Proposed Regulations clarify that a “laborer or mechanic” means an individual whose duties are manual or physical in nature and does not include individuals whose duties are primarily administrative, executive, or clerical. A working foreperson who devotes more than 20% of their time during a workweek to laborer or mechanic duties is considered laborer or mechanic for the time spent conducting such duties.
Apprenticeship Requirement
General
To satisfy the apprenticeship requirement, the “applicable percentage” (10%, 12.5% or 15%, depending on when construction begins) of total labor hours of the construction, alteration, or repair work for a project must be performed by qualified apprentices (the labor hours requirement), the work must comply with any applicable requirements for apprentice-to-journeyworker ratios of the DOL or the applicable State apprenticeship agency (the ratio requirement), and each taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the project must employ at least one qualified apprentice to perform such work (the participation requirement).
The Proposed Regulations contain specific requirements for the form and content of a request for qualified apprentices. A request submitted by a taxpayer, a contractor or a subcontractor for apprentices must be in writing and sent electronically or by registered mail, and must include (i) the proposed dates of employment; (ii) occupation of apprentices needed; (iii) location of the work to be performed;(iv) number of apprentices needed; (v) expected number of labor hours to be performed by apprentices; (vi) name and contact information of taxpayer, contractor or subcontractor requesting apprentices; and (vii) a statement that the request for apprentices “is made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the requirements and standards of the registered apprenticeship program.”
The Proposed Regulations clarify that if the ratio requirement is not satisfied for any particular day, registered apprentices in excess of the applicable ratio must be paid the full prevailing wage for hours worked, and hours worked will not count toward the labor hours requirement.
Good Faith Effort Exception to Apprenticeship
There is a good faith effort exception to the apprenticeship requirement that applies if a taxpayer makes a written request to at least one registered apprenticeship program in the geographic area of the facility, or that can reasonably be expected to provide apprentices to the location of the facility and satisfies certain additional requirements, and the registered apprenticeship program either denies the request or fails to respond within five business days. The Proposed Regulations provide that the exception does not apply unless the request complies with the applicable requirements. The Proposed regulations also provide that a taxpayer will be deemed to have satisfied the good faith effort exception requirements for 120 days after a request is made. A taxpayer will not be deemed to have exercised a good faith effort beyond 120 days of a previously denied request unless the taxpayer submits an additional request for qualified apprentices. The Proposed Regulations make clear that if a registered apprenticeship program responds affirmatively but does not have enough apprentices and therefore denies the request in part, the good faith exception applies only to the portion of the request that was denied.
Penalty Payment
If a taxpayer does not satisfy the labor hour requirement or the participation requirement, the taxpayer may cure its failure to comply with the apprenticeship requirement by making a penalty payment to the IRS. The amount of the penalty for a failure to satisfy the labor hour requirement is based on the number of additional hours that would be necessary to satisfy the requirement. The amount of the penalty for failure to satisfy the participation requirement is based on average hours worked by each employee of the relevant taxpayer, contractor, or subcontractor that failed to satisfy the participation requirement in construction, alteration, or repair of facility. The amount of the penalty is increased if a taxpayer intentionally disregarded the apprenticeship requirements.
Recordkeeping Requirements
Prevailing Wage Requirement
The Proposed Regulations require a taxpayer to maintain records sufficient to establish compliance with the prevailing wage requirement, including: (i) the location and type of qualified facility; (ii) the applicable wage determinations for the type and location of the facility; (iii) the wages paid (including any correction payments) and hours worked for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (iv) the number of workers who received correction payments; (v) the wages paid and hours worked by qualified apprentices for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (vi) the total labor hours for the construction, alteration, or repair of the facility by any laborer or mechanic employed by the taxpayer or any contractor or subcontractor; and (vii) the total credit claimed. The taxpayer that owns the facility and that claims the ITC or PTC or a direct payment, or that transfers the ITC or PTC to a transferee, is responsible for maintaining relevant records, regardless of whether the laborers or mechanics are employed by the taxpayer, contractor, or subcontractor.
Apprenticeship Requirement
The Proposed Regulations require a taxpayer to maintain records sufficient to establish compliance with the apprenticeship requirement, including: (i) copies of any written requests for apprentices by the taxpayer, contractor, or subcontractor; (ii) any agreement entered by the taxpayer, contractor, or subcontractor with a registered apprenticeship program; (iii) documents reflecting any registered apprenticeship program sponsored by the taxpayer, contractor, or subcontractor; (iv) documents verifying participation in a registered apprenticeship program by each apprentice; (v) records reflecting the required ratio of apprentices to journeyworkers prescribed by each registered apprenticeship program from which qualified apprentices are employed; (vi) records reflecting the daily ratio of apprentices to journeyworkers; and (vii) the payroll records for any work performed by apprentices. The taxpayer that owns the facility is responsible for maintaining payroll records, regardless of whether the laborers or mechanics are employed by the taxpayer, contractor, or subcontractor.
Proposed Applicability Date
The Proposed Regulations apply to facilities, property, projects, or equipment placed in service in taxable years ending after the date the regulations are finalized and the construction of which begins after the date the regulations are finalized. However, the Proposed Regulations provide that a taxpayer may rely on them with respect to construction of a facility, property, project, or equipment beginning on or after January 29, 2023 and on or before the date the regulations are finalized, provided that beginning of the date that is 60 days after August 30, 2023, the taxpayer follows the Proposed Regulations in their entirety and in a consistent manner.
Conclusion
The Proposed Regulations provide welcome clarity regarding a number of compliance, recordkeeping, and reporting issues related to the PWA requirements. There are, however, many unanswered questions. In addition, the Proposed Regulations may change if and when final regulations are issued. In the meantime, developers should be careful to comply as closely as possible with the detailed requirements set forth in the Proposed Regulations, including by properly requesting supplemental wage determinations if necessary, properly requesting apprentices from registered apprenticeship programs, and requiring contractors and subcontractors to provide the information and records specified.
