On November 30, 2022, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) published initial guidance clarifying certain questions surrounding the new prevailing wage and apprenticeship requirements for clean energy projects under the Inflation Reduction Act of 2022 (the “IRA”), and also setting a January 29, 2023, deadline to begin construction in order to be grandfathered from the prevailing wage and apprenticeship requirements. The guidance is IRS Notice 2022-61 (the “Notice”). It is expected to be only the first phase of guidance on the subject, as it notes that Treasury and the IRS also anticipate issuing proposed regulations and other guidance. Among other things, the Notice clarifies:
- how prevailing wage is determined, including in cases where the available data is incomplete;
- how the apprenticeship requirements are met, including through the “good faith” exception;
- general reporting requirements for both prevailing wage and apprenticeship; and
- how to establish the beginning of construction for grandfathering purposes.
Below is a more detailed summary of key provisions as well as our initial observations.
Background on Prevailing Wage and Apprenticeship
- Relevance – The IRA introduced a two-tier “base” rate and “increased” rate structure for renewable energy tax credits.[1] The “increased” rate is worth five times the value of the base rate and is available if a project meets or is grandfathered from the prevailing wage and apprenticeship requirements described below.
- Prevailing Wage Requirement – The project owner must ensure that any laborers and mechanics employed by contractors and subcontractors are paid “prevailing wages” not only during construction, but also for any repairs or alterations that may be needed during the applicable tax credit period. The term “prevailing wages” refers to wages at rates for similar work in the location of the project site as determined by the U.S. Secretary of Labor.
- Apprenticeship Requirement – The project owner must ensure that a percentage of the total labor hours spent to construct the project are performed by “qualified apprentices” who participate in a registered apprenticeship program that complies with certain federal requirements. The percentage of labor hours is 10% for projects beginning construction in 2022, 12.5% for projects beginning construction in 2023, and 15% thereafter (the “Apprenticeship Labor Hour Requirements”).The Apprenticeship Labor Hour Requirements are subject to any applicable requirements for apprentice-to-journeyworker ratios of the Department of Labor (the “DOL”) or the applicable state apprenticeship agency (the “Apprenticeship Ratio Requirements”).Further, each taxpayer, contractor, or subcontractor with four or more employees on a project must employ one or more qualified apprentices (the “Apprenticeship Participation Requirements”).
- Grandfathered Projects – Projects (i) that begin construction prior to the date that is 60 days after guidance is published with respect to the prevailing wage and apprenticeship requirements or (ii) with a maximum net output of less than 1 megawatt of electrical (as measured in alternating current) or thermal energy automatically qualify for the “increased” rate. The Notice serves to start the 60-day clock, setting a January 29, 2023, deadline to begin construction for grandfathering purposes.[2]
Observation: Confirmation of the January 29, 2023, grandfathering deadline is likely to kick off a quick sprint among project developers to begin construction. The ability to successfully execute on such a strategy will be partially dictated by equipment supply and available manufacturing slots.
Prevailing Wage Guidance
- Prevailing Wage Determinations – The crux of prevailing wage compliance is knowing what wages to pay. The guidance explains how taxpayers should view wage data published by the DOL and address a situation where the data is incomplete.
- Full Data – If the DOL has published a wage determination on www.sam.gov (i) for the geographic area and type or types of construction applicable to the facility, and (ii) the determination includes all labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics, then the taxpayer’s compliance obligation is relatively clear.
- Incomplete Data - If the DOL (i) has not published a wage determination on www.sam.gov for the geographic area and type or types of construction applicable to the facility, or (ii) one or more labor classifications for the construction, alteration, or repair work that will be done on the facility by laborers or mechanics is not listed, then the taxpayer is required to contact the Department of Labor, Wage and Hour Division via email at [email protected] and provide the Wage and Hour Division with the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications. The DOL will then review and notify the taxpayer of the wage rates that should apply.
Observation: The “Incomplete Data” scenario described above introduces a novel concept in which taxpayers are effectively required to evaluate the sufficiency of government data and proactively try to get the DOL to close gaps. The DOL cannot possibly anticipate every kind of job in every location, so something needed to be done. Depending on the number of data gaps that exist, the success of the prevailing wage program will depend heavily on the efficacy of the DOL email system.
- Recordkeeping Requirements – The taxpayer must maintain and preserve “sufficient records” to establish that laborers and mechanics were paid prevailing rates. An example illustrates sufficient records as including identifying the applicable wage determination, the laborers and mechanics who performed construction work on the facility, the classifications of work they performed, their hours worked in each classification, and the wage rates paid for the work.
Observation: Recordkeeping requirements were a major area of focus of those responding to the request for comments in IRS Notice 2022-51, with many asking for specific forms of documentation to help ensure compliance. Though a general description of sufficient records is helpful, greater specificity in future guidance would benefit good faith compliance efforts as well general project bankability.
- Definitions – The Notice confirms that certain terms used in regard to the prevailing wage requirements are to be interpreted by reference to existing DOL regulations.
Apprenticeship Guidance
- Apprenticeship Requirements – The guidance confirms that the Apprenticeship Labor Hour Requirements, Apprenticeship Ratio Requirements, and Apprenticeship Participation Requirements must all be met to satisfy the apprenticeship requirement in the IRA.
Observation: The guidance on this specific point is largely confirmatory and does not significantly expand on the statutory language in the IRA.
- Good Faith Effort Exception – A taxpayer is deemed to meet the apprenticeship requirements if the taxpayer has requested qualified apprentices from a registered apprenticeship program and the request has been denied or the registered apprenticeship program does not respond within five business days. The guidance confirms that a taxpayer will be considered to have made a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.
Observation: The good faith effort exception is relatively narrow as it applies only to the specific case where a taxpayer has requested apprentices and been denied or received no response within a short period. Those responding to the request for comments in IRS Notice 2022-51 suggested that Treasury should provide additional relief to taxpayers who attempted to meet the apprenticeship requirements in other ways but were unable to do so. The Notice does not provide any further relief beyond the statutory language in the IRA.
- Recordkeeping Requirements – As with the prevailing wage requirements, the taxpayer must maintain and preserve sufficient records to establish that the Apprenticeship Labor Hour Requirements, Apprenticeship Ratio Requirements, and Apprenticeship Participation Requirements have all been met. Likewise, a taxpayer relying on the good faith effort exception must maintain and preserve sufficient records to show that the good faith effort exception applies.
- Definitions – As with the prevailing wage requirements, the Notice confirms that certain terms used in regard to the apprenticeship requirements are to be interpreted by reference to existing DOL regulations.
Beginning of Construction Guidance
- Tax Credits under Sections 45 (Production Tax Credits), 48 (Investment Tax Credits) and 45Q (Carbon Sequestration Tax Credits) – Existing IRS start of construction guidance applies in full.
Observation: Incorporating the prior IRS Notices by reference provides comfort that tax credit qualification strategies implemented under pre-IRA guidance will continue to apply for purposes of grandfathering a project from the application of the prevailing wage and apprenticeship rules. By referencing all of the relevant Notices, the “continuity safe harbor” rules (which in some cases go beyond four years) should apply.[3] This is an important development for project sponsors who have spent significant capital and effort to qualify projects for tax credits under the pre-IRA rules.
- Other Tax Credits – Rules “similar to” the rules described above apply. However, the cross-references in the Notice appear to hard-wire a four-year “continuity safe harbor” deadline.
Further Guidance
- The Notice states that Treasury and the IRS also anticipate issuing proposed regulations and other guidance with respect to the prevailing wage and apprenticeship requirements.
Observation: Although the Notice provides helpful clarification on some topics relating to the prevailing wage and apprenticeship requirements, those responding to the request for comments in IRS Notice 2022-51 had raised many other questions that are not directly addressed in the notice. Although regulations or further guidance are expected to help clarify those questions, we are not expecting that taxpayers will receive further guidance before the January 29, 2023, grandfathering deadline expires.
[1] The prevailing wage and apprenticeship requirements apply to tax credits under sections 30C (alternative fuel vehicle refueling property credit), 45 (production tax credit), 45L (energy efficiency home credit), 45Q (carbon sequestration tax credit), 45U (nuclear power production tax credit), 45V (hydrogen tax credit), 45Y (clean energy production tax credit), 45Z (clean fuel production tax credit), 48 (investment tax credit), 48C (advanced energy project tax credit), 48E (clean electricity investment tax credit), and the energy efficient commercial buildings deduction under section 179D.
[2] The version of the Notice published in the Federal Register states that January 30, 2023, is the date that is 60 days after the publication of the guidance. We note that this appears at odds with the November 30, 2022, publication date, which would put the 60-day mark on January 29, 2023. If the reference to January 30, 2023, was in error and should have instead been to January 29, 2023, then the January 29, 2023, deadline in this alert would instead be to January 28, 2023.
[3] The start of construction rules require continuous work or continuous efforts to bring a project to completion once construction has begun. Under the “continuity safe harbor,” most projects are deemed to meet this requirement of they are placed in service within four years after the year construction begins. Longer safe harbor periods have developed over the years for projects that began construction in certain years and for specific technologies with long lead times.