The IRS has released guidance (Notice 2021-61) on the new prevailing wage and apprenticeship requirements that taxpayers must meet to receive the full credit and deduction amounts available for the energy incentives under the Inflation Reduction Act of 2022 (IRA).
The IRA provided that the new rules would only take effect for projects that begin construction 60 days after guidance is published. Notice 2021-61 was published on Nov. 30, so the requirements will apply to projects that begin construction on or after Jan. 30, 2023.
Grant Thornton Insight
Projects that begin construction before Jan. 30 can generally still qualify for the full credit rates (and full Section 179D deduction) without meeting the requirements. So, taxpayers have some incentive to establish that construction has begun in the next 60 days, as the requirements will add costs and compliance burdens to projects. The notice generally relies on existing guidance for establishing that construction has begun, which can include paying or incurring as little as 5% of the costs, discussed more below.
The prevailing wage and apprenticeship rules generally require a minimum wage for certain workers on a project and a minimum percentage of hours to be performed by qualified apprentices. The rules have long been imposed on infrastructure projects receiving federal funding, but have never before been applied to tax credits. The IRS guidance leans heavily on existing Department of Labor (DOL) rules. Projects that do not meet the requirements will generally only qualify for a credit rate of one-fifth of the full amount available. The maximum $5 per square foot Section 179D deduction is also cut by one-fifth if the rules are not met.
The following incentives must meet both the prevailing wage and apprenticeship requirements in order to receive the full amounts if construction begins on or after Jan. 30, 2023:
- Section 45 – Production tax credit for renewable electricity
- Section 48 – Investment tax credit for renewable energy property
- Section 45Q – Credit for carbon oxide sequestration
- Section 45V – Credit for production of clean hydrogen
- Section 30C – Alternative fuel vehicle refueling property credit
- Section 179D - Energy efficient commercial buildings deduction
- Section 45Y - Clean electricity production credit (replaces Section 45 in 2026)
- Section 48E - Clean electricity investment credit (replaces Section 48 in 2026)
The wage and apprenticeship requirements must be met effective on the date of enactment for the following credits:
- Section 45Z – Clean fuel production credit, which will replace existing fuel credits in 2026
- Section 48C – Advanced energy project, which taxpayers must apply for
The Section 45L new energy-efficient home credit and the Section 45U zero-emission nuclear power credit only require prevailing wages effective as of the date of enactment.
Taxpayers planning energy projects can consider analyzing the beginning construction rules to see if near-term projects can avoid the new requirements. Taxpayers who cannot begin construction before Jan. 30 should begin preparing to meet the requirements, which could affect agreements with contractors and require new recordkeeping processes.
The prevailing wage rules require taxpayers to ensure a minimum prevailing wage is paid to all laborers and contractors employed in the construction, alteration or repair of a facility, property, a project or equipment, either by the taxpayer or a contractor or subcontractor of the taxpayer. The wages must be paid both during the construction of the facility and for any repairs or alterations 10 years after the facility is placed in service.
The IRS guidance provides that the prevailing wage is determined under the DOL rules under Subchapter IV of Chapter 31 of Title 40. DOL publishes a list of prevailing wages based on the geographic area, type of construction, and labor classification on www.sam.gov. If there is no listed labor classification applicable, then taxpayers must rely on DOL rules for requesting a rate. This procedure requires taxpayers to contact the DOL Wage and Hour Division via email at IRAprevailingwage@dol.gov and provide the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications.
To meet the requirements, taxpayers must also “maintain and preserve sufficient records, including books of account or records for work performed by contractors or subcontractors of the taxpayer” in accordance with the general rules and regulations under Section 6001.
Grant Thornton Insight
There is very little guidance in the notice on the documentation requirements besides the cite to Treas. Reg. Sec. 1.6001-1, which provides the general record-keeping requirements for any item on a return. Except for a single example, there is no explicit guidance on the types of records or payroll information that would meet the documentation requirements for these specific rules. The example simply provides that the taxpayer kept “sufficient” records that “include, but are not limited to, 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 other information that will fulfill the documentation requirements.” Taxpayers will likely need to add contractual requirements for paying and documenting prevailing wages in any agreements with contractors and subcontractors.
The apprenticeship rules require the following minimum percentages of total labor hours in the construction, alteration, or repair of a qualified project to be performed by qualified apprentices:
- 10% for projects that begin construction before 2023
- 12.5% for projects that begin construction before 2024
- 15% for projects that begin construction in 2025 or later (apprenticeship labor hour requirements)
The percentages are also subject to any applicable apprentice-to-journey worker ratios of either the DOL or state apprenticeship agencies.
The rules also generally require any taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair to employ at least one qualified apprentice. The word “employ” includes any individual performing services for remuneration, regardless of whether employee or independent contractor.
Taxpayers can alternatively satisfy the general requirements by making a good faith effort or paying a penalty of $50 per labor hour under the required threshold (or $500 for intentional disregard). The good faith exception requires taxpayers to “request qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practice for registered apprenticeship programs in a particular industry.”
IRS generally defines terms related to the apprenticeship requirements in reference to DOL rules. Taxpayers must also comply with the general recordkeeping requirements of Section 6001 to support compliance with the apprenticeship rules.
Grant Thornton Insight
Like the prevailing wage rules, the IRS provides very little explicit guidance on how to apply the rules or document compliance apart from references to existing DOL and IRS regulations. There is no further information on what will qualify as “usual and customary business practice for registered apprenticeship program in a particular industry” under the good faith exception, and there are no examples of the types of documentation that will be sufficient to establish compliance.
The new notice generally relies on existing IRS guidance from a series of notices for taxpayers to establish that construction has begun (Notice 2013-29, Notice 2013-60, Notice 2014-46, Notice 2015-25, Notice 2016-31, Notice 2017-04, Notice 2018-59, 2019-43, Notice 2020-41, Notice 2021-5, and Notice 2021-41). This guidance was created for (and will continue to apply) to the credits under Sections 45, 48, and 45Q. The new guidance provides that “similar principles” to those provided under the notices will apply to other credits.
Under the notices, taxpayers can establish that construction has begun by either satisfying a test showing “physical work of a significant nature” has begun or by incurring 5% or more of the total cost of the facility under a safe harbor. Physical work of a significant nature does not include removing existing towers or turbines, and does not include the following preliminary activities:
- Planning or designing
- Securing financing
- Obtaining permits
- Conducting surveys
- Environmental and engineering studies
- Clearing a site
- Test drilling of a geothermal deposit
- Test drilling to determine soil condition
- Excavation to change the contour of the land (as distinguished from excavation for footings and foundations)
Under the 5% safe harbor, taxpayers must pay or incur 5% or more of the total costs of the facility under the rules of Treas. Reg. Sec. 1.461-1. All costs property included in the depreciable basis must be taken into account, and there is a look-through rule allowing taxpayers to use the costs incurred by a contractor (under the principles of Section 461) that is manufacturing, constructing, or producing property under a binding written contract. Taxpayers may generally count payments for property or services toward the safe harbor if they reasonably expect to receive them within 3.5 months of the payment date.
Taxpayers can also aggregate multiple facilities based on the relevant facts and circumstances, but then disaggregate them for applying the placed-in-service deadline for the continuity safe harbor discussed below. Retrofitted energy property can also qualify if the used property represents less than 20% of the value, but only the new property can be used in the calculation of the 5% safe harbor.
Both the 5% safe harbor and the physical work of a significant nature test require taxpayers to make continual progress toward completion once construction is considered to have begun. There is a continuity safe harbor that deems this requirement met if a facility is placed in service within four calendar years of the calendar year in which construction began (six years for carbon capture equipment under Section 45Q and 10 years for some offshore and federal land projects).
Taxpayers who don’t use the continuity safe harbor must generally use a facts-and-circumstances analysis to determine if construction is continual. The following disruptions are excusable:
- Severe weather conditions
- Natural disasters
- Certain licensing and permitting delays
- Delays at the written request of government for safety, security or similar concerns
- Transmission interconnection issues
- Labor stoppages
- Supply shortages
- Delays in manufacturing custom components
- Inability to obtain specialized equipment
- Financing delays
- The presence of endangered species
Grant Thornton Insight
The beginning construction rules are generally favorable and allow taxpayers some flexibility in how they aggregate projects and incur costs. There are restrictions, however, and any taxpayers considering establishing that construction has begun before Jan. 30, 2023, should carefully analyze their facts against the rules. Depending on the situation, some taxpayers may want to accelerate the start of construction to meet the tests before the 60-day period closes, if possible.
The IRA created unprecedented new opportunities for energy tax incentives that can be leveraged by businesses and tax-exempts across nearly every industry for a variety of activities. The credits can also be monetized in new ways that make them even more accessible. But there are strings attached. The new apprenticeship and wage requirements are critical for receiving the full benefit of the incentives and they will add costs and administrative burdens to projects. Taxpayers should consider adding compliance requirements into contracts and putting processes in place to substantiate their claims. Taxpayers with near-term projects can also consider whether they can establish that construction has begun before Jan. 30.
For more information, contact:
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
Washington DC, Washington DC
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