The IRS published Notice 2022-61 on November 30, 2022. The notice provides initial guidance related to the administration of the prevailing wage and apprenticeship requirement to receive increased tax credits for certain incentives under the Inflation Reduction Act.
If the prevailing wage and apprenticeship requirements are satisfied, taxpayers may be eligible for increased tax credit amounts under these sections:
- IRC Section 30C, Alternative Fuel Vehicle Refueling Property Credit
- IRC Section 45, Renewable Energy Production Tax Credit
- IRC Section 45L, New Energy Efficient Home Credit
- IRC Section 45Q, Carbon Capture Sequestration Tax Credit
- IRC Section 45U, Zero-emission Nuclear Power Production Credit
- IRC Section 45V, Clean Hydrogen Production Tax Credit
- IRC Section 45Y, Clean Electricity Production Tax Credit
- IRC Section 45Z, Clean Fuel Production Credit
- IRC Section 48, Energy Investment Tax Credit (ITC)
- IRC Section 48C, Qualifying Advanced Energy Project Credit
- IRC Section 48E, Clean Electricity Investment Credit
Similarly, under Internal Revenue Code (IRC) Section 179D, meeting those requirements, allows for an increased energy efficient commercial buildings tax deduction.
The requirements take effect 60 days after publication of Notice 2022-61—January 30, 2023. If a facility begins construction, or installation under 179D, on or before January 28, 2023, it’s deemed to meet the prevailing wage and apprenticeship requirements for the increased credit amount or 179D deduction.
Prevailing Wage Rate Requirements
The prevailing wage rate requirements pertain to laborers and mechanics employed by the taxpayer, a contractor, or a subcontractor to construct, alter, or repair the qualifying facility, property, or equipment.
The requirements would apply to workers classified as employees or independent contractors. The taxpayer is required to maintain records documenting work performed by these laborers and mechanics and wages paid to them.
The Secretary of Labor published a prevailing wage determination for geographic areas and types of construction applicable to the facility, including all labor classifications for construction, alteration, or repair work.
If prevailing wages applicable to certain workers or locations aren’t provided, the taxpayer may request a prevailing wage from the Department of Labor.
Meeting the Prevailing Wage Rate Requirements
The taxpayer must satisfy the prevailing wage rate requirements for any laborer or mechanic employed in the construction, alteration, or repair of a facility, property, project, or equipment to establish that wages weren’t less than prevailing rates, per the general recordkeeping requirements. This includes maintaining sufficient records, including books of account, for work performed by contractors or subcontractors.
The apprenticeship requirements are determined by the Office of Apprenticeship of the Department of Labor. The taxpayer must satisfy already established Apprenticeship Labor Hour Requirements, Apprenticeship Ratio Requirements, and Apprenticeship Participation Requirements.
Apprenticeship Labor Hour Requirements
To meet the apprenticeship requirements taxpayers must ensure that, for the construction of any qualified facility, not less than the applicable percentage of the total labor hours of the construction, alteration, or repair work for a facility is performed by qualified apprentices. This includes work done by a contractor or subcontractor.
The applicable percentage for a qualified facility depends on the date construction begins:
- Before January 1, 2023, 10%,
- After December 31, 2022, and before January 1, 2024, 12.5%
- After December 31, 2023, 15%.
Apprenticeship Ratio Requirements
Registered Apprenticeship programs regulated by 29 Code of Federal Regulations (CFR) 29.5(b)(7) require a numeric ratio of apprentices to journeyworkers consistent with proper supervision, training, safety, continuity of employment, and applicable provisions of collective bargaining agreements, unless prohibited by collective bargaining agreements. The ratio language should be specific and clearly stated in its application to the job site, workforce, department, or plant.
Apprenticeship to journeyworker ratios are established under standards set by the US Department of Labor Office of Apprenticeship or an applicable State Apprenticeship Agency. The ratios are subject to approval by the overseeing agency consistent with 29 CFR 29.5 and any sub-regulatory guidance.
In states where the Office of Apprenticeship registers its apprenticeship programs, the approval of the ratios must follow the guidance in Circular 2021-02.
Apprenticeship Participation Requirements
Each taxpayer, contractor, or subcontractor who employs at least four people for construction, alteration, or repair work for the construction of a qualified facility must employ at least one qualified apprentice to perform the work.
The taxpayer is required to maintain records that document, including but not limited to, work performed by said laborers and mechanics, hours worked by classification, and wages paid to establish the taxpayer has met apprenticeship requirements.
The taxpayer can request apprentices from apprenticeship programs registered with the Department of Labor or a State Apprenticeship Agency. The taxpayer must make a good-faith effort to request qualified apprentices. There is an exception to the apprenticeship requirement if the agency issues a denial or is not responsive in five business days. The taxpayer must retain documents that record their effort to obtain apprentices in good faith.
Documenting, analyzing, and maintaining prevailing wage and apprenticeship requirements is likely to be essential to compliance and increased tax benefits.
It will be important to remain in compliance during construction and through any potential recapture periods to avoid penalties of $5,000 per laborer, or $50 per hour. If a significant amount of work will be performed by contractors or sub-contractors, review contracts for language pertaining to prevailing wages and apprenticeship requirements.
It will also be important to maintain access to contractor and subcontractor records to audit applicable payroll files to determine and document whether the wages paid to laborers and mechanics meet the prevailing wage requirements.
Beginning of Construction
The IRS provides two tests to determine the start of construction: the physical work test and the 5% safe harbor.
Physical Work Test
Construction begins at the start of significant physical work for a continuous period, which does not include preliminary planning and preparatory activities. This may include commission of the production of property. Work may occur on or off site to be considered significant physical work.
To satisfy the continuity requirement, under IRC Sections 45, production tax credits and 48, investment tax credits, the qualified facility needs to be placed in service no later than four calendar years after the calendar year in which construction began.
Under IRC Section 45Q, carbon capture sequestration tax credit, the qualified facility must be placed in service no more than six years after the calendar year during which the construction of a qualified facility or carbon capture equipment began. To show a continuous effort under IRC Sections 45 and 48, certain offshore projects and projects built on federal land should be placed into service no later than ten calendar years after the calendar year the project began.
5% Safe Harbor
Construction begins when the taxpayer pays or incurs at least 5% of the costs of the facility, and thereafter, the taxpayer makes continuous efforts to complete the project. This includes costs incurred by other parties in the process of producing property for the taxpayer under a binding contract.
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To learn more about how prevailing wage and apprenticeship requirements could impact your business, contact your Moss Adams professional.
You can find additional resources at our Tax Credit & Incentives practice.