Treasury and IRS Release Final Regulations on Prevailing Wage and Apprenticeship Requirements

Introduction

On June 18, 2024, the Treasury Department and the Internal Revenue Service (IRS) issued final regulations concerning the prevailing wage and apprenticeship (PWA) requirements.

These requirements have significant implications for clean energy initiatives. Interested parties should review the final regulations and work with legal counsel to ensure their compliance with the PWA requirements to obtain tax credits available for current and future projects.

Time is of the essence. The final regulations were published in the Federal Register on June 25, 2024 and become effective on August 26, 2024. Prior to issuing the final regulations, the Treasury Department and the IRS considered over 340 written comments in response to the proposed regulations. The final regulations affect (i) taxpayers intending to satisfy the PWA requirements in order to be eligible for increased energy tax credits or an increased deduction, as applicable, (ii) taxpayers intending to make elective payment elections for credit amounts under section 6417 of the Internal Revenue Code (Code) and taxpayers intending to transfer increased credit amounts under section 6418 of the Code, (iii) taxpayers intending to satisfy the prevailing wage requirements for tax credits that do not have associated apprenticeship requirements, and (iv) taxpayers who initially fail to satisfy the PWA requirements (or prevailing wage requirements, as applicable) and subsequently comply with the correction and penalty procedures in order to be deemed to satisfy the PWA requirements (or prevailing wage requirements, as applicable).

Significance of PWA Requirements

The Inflation Reduction Act of 2022 (IRA) introduced several provisions aimed at boosting the use of clean energy, creating high paying jobs and otherwise promoting labor standards. Among these provisions are the PWA requirements. Taxpayers that satisfy applicable PWA requirements in connection with constructing, repairing or altering the applicable energy facilities may be eligible to claim a credit equal to five times the base rate. This increased credit amount is available for credits under sections 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, and 48E of the Code, as well as the energy efficient commercial building deduction under section 179D of the Code. Projects for which construction commenced before January 29, 2023 (the date that is 60 days after the Treasury published initial guidance with respect to the PWA requirements) are eligible for the increased credit rate without satisfying the PWA requirements (the BOC Exception). Also, projects with a maximum net output of less than 1 megawatt (MW) of electrical (as measured in alternating current) or thermal energy determined based on the nameplate capacity (One-Megawatt Exception) are eligible for the increased credit rate without satisfying the PWA requirements. Under sections 45L, 45U, 45Z, and 48C of the Code, there is no BOC Exception or One Megawatt Exception, so taxpayers need to satisfy the applicable PWA requirements to claim the increased credit amount regardless of when construction began or how small the facility (or respective underlying creditable activity) may be.

Satisfying PWA Requirements - Generally

By statute, in order to satisfy the PWA requirements relative to a particular facility, taxpayers must (i) ensure that laborers and mechanics are paid wages at rates that are not less than the prevailing rates for construction, alteration or repair of a similar character in the locality where the facility is located, as most recently determined by the Department of Labor (DOL) in accordance with the Davis-Bacon Act (DBA), and (ii) in connection with the construction of such facility, comply with apprenticeship requirements concerning labor hours (Labor Hours Requirement), the apprentice-to-journeyworker ratios of the DOL or applicable state apprenticeship agency (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 construction of a qualified facility must employ one or more qualified apprentices to perform the work (Participation Requirement). In addition, taxpayers must satisfy applicable recordkeeping and reporting requirements.

Exceptions to PWA Requirements

An exception to the apprenticeship requirements is provided for taxpayers who have either satisfied the “Good Faith Exception” by timely submitting a request to a registered apprenticeship program for qualified apprentices and: (i) such request has been denied, provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors engaged in the performance of construction, alteration, or repair work with respect to such qualified facility to comply with the “established standards and requirements” of the registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to such request within five business days after the date on which such registered apprenticeship program received the request. In addition, a taxpayer will be deemed to have satisfied the Labor Hours Requirement and the Participation Requirement by paying a penalty to the IRS, the amount of which is increased if the taxpayer is found to have intentionally disregarded the PWA requirements (the Apprenticeship Cure Provision).

Final Regulations - Key Takeaways

A comprehensive summary of the final regulations is beyond the scope of this Article. However, the following is a summary of some key points:

Generally:

• Scope of PWA Requirements. The final regulations clarify that the PWA requirements apply with respect to a qualified facility within the meaning of Section 45 of the Code and clarify that the PWA requirements apply to the portion of the activity that is creditable or deductible under the Code.
• Taxpayer Cannot Pass the Buck for PWA Compliance. Although the taxpayer must rely upon contractors and subcontractors for compliance with PWA requirements, the final regulations retain the requirements in the proposed regulations that taxpayer is solely responsible for ensuring that the PWA requirements are in fact satisfied, including PWA recordkeeping requirements. Observation: Appropriate representations, warranties, covenants, and indemnities should be included in the controlling agreements with contractors and subcontractors, as applicable.
• Exact Duplication of the DBA is not Required. Consistent with the proposed regulations, the final regulations have incorporated key guidance from the DBA to the extent DBA guidance is relevant, consistent with the intent of the IRA and helpful for tax administration. For example, the DBA concept of “site of the work” is adopted to define the scope of the PWA requirements for work at secondary locations and prevent the application of rules that would make all work on a facility, wherever located and however small, subject to the PWA requirements.  In response to comments suggesting that the final regulations should incorporate additional requirements from the DBA beyond those which are relevant to claiming the increased credits,¹ the IRS observed that the statutory requirement that prevailing wages be determined “in accordance with” the DBA does not require “exact duplication” of DBA rules and pointed out that if Congress intended the same DBA requirements to apply under the IRA, it would have so provided.
• Obligations related to Transferred Credits Remain with Eligible Taxpayer. In the case of transferred credits (including to multiple transferee taxpayers), the final regulations state that certain obligations, including the obligation to make correction and penalty payments, remains with the eligible taxpayer.
• Construction and Maintenance v. Alteration and Repair. The final regulations clarify that the PWA requirements can apply prior to the beginning of construction (BOC), including with respect to preliminary activities such as demolition. In light of the differences between the definition of “construction” for purposes of meeting the BOC exception as set forth in prior IRS Notices and the DBA definition, and the fact that the proposed regulations indicated and the prior IRS Notices could be relied upon for PWA requirements, the final regulations provide transitional relief for taxpayers that relied upon the definitions in prior IRS guidance. In addition, the final regulations provide additional clarification on the distinction between alteration and repair work and maintenance work (i.e., work that is routinely scheduled and continuous or recurring). Needless to say, these rules are fact-based and will continue to create ongoing questions for taxpayer.
• Private Letter Rulings (PLRs) are not currently available. The IRS clarifies issues pertaining to the application of the IRA are currently identified as matters “under study” by the IRS and thus are not currently subject to PLRs. Updates to the no-rule issues are subject to change and outside the scope of the final regulations.
• Project Labor Agreements. Despite several comments to the contrary regarding pre-hire project labor agreements (PLAs), the final regulations, consistent with the proposed regulations, continue to encourage the use of PLAs as a means to document compliance with the PWA requirements. In addition, the final regulations provide additional guidance as to a qualifying PLA.
• Recordkeeping Requirements.  The final regulations clarify that taxpayers are required to maintain and preserve records sufficient to establish compliance with PWA requirements for relevant tax years as provided under Section 6001 of the Code and add the failure to maintain records to the list of intentional disregard factors.

Prevailing Wage Requirements:

• Alterations and Repairs. The final regulations clarify that taxpayers only need to satisfy the prevailing wage requirements for alterations and repairs if such work is performed during the relevant period (e.g., 10 years after placed in service date, per section 45(b)(7)(A)).
• Wage Determinations. The final regulations revise the proposed regulations to align the timing of requests for supplemental wage determinations or rates for additional classification within the contract framework adopted for general wage determinations. Specifically, requests for supplemental wage determinations cannot be made more than 90 days before the date the contract between the taxpayer (or the taxpayer’s designee, assignee, or agent) and a contract for construction, alteration, or repair of the facility is expected to be executed; provided, that any supplemental wage determinations are required to be incorporated into the contract between the taxpayer and contractor within 180 days of issuance. Further, requests for prevailing wage rates for additional classifications can be made any time after a contract for the construction, alteration, or repair of a facility has been executed between the taxpayer and a contractor.

Apprenticeship Requirements:

• Limited application to Alterations and Repairs. The final regulations clarify that apprenticeship requirements apply with respect to the construction of a qualified facility, including alteration and repair work that is performed prior to the facility being placed in service, and not to alteration or repair work occurring after the facility is placed in service.
• Labor Hours Requirement. The final regulations provide additional guidance with respect to the calculation of the total labor hours and the applicable percentage for the “Labor Hours Requirement” and clarify that the Labor Hours Requirement applies to the construction of a facility, not on a contractor-by-contractor or trade-by-trade basis.
• Ratio Requirement. As to the Ratio Requirement, the final regulations adopt the reciprocity rule applicable to prevailing wage requirements as proposed and clarify that if more than one apprentice-to-journeyworker ratio could apply because the construction work is occurring in a geographic area where the registered apprenticeship program is not registered, the taxpayer must comply with the apprentice-to-journeyworker ratio set for the geographic area where the construction occurs. The final regulations confirm that the Ratio Requirement applies each day.
• Participation Requirement. The final regulations clarify that the Participation Requirement applies if the taxpayer, contractor, or subcontractor employ four individuals in the construction of the qualified facility at any time during the construction, regardless of whether they are employed at the same location or at the same time.
• Good Faith Exception. The final regulations provide additional guidance regarding the Good Faith Exception and modify the proposed rules in response to comments received. The regulations address a request for qualified apprentices, including content and scope, timing and format of the request and modify the proposed rules to provide that taxpayers must submit additional requests 365 days (366 days in case of a leap year) after the denial of a previous request (up from 120 days in the proposed regulations) to continue to satisfy the Good Faith Effort Exception. As to the denial of a request, the final regulations provide additional guidance regarding the meaning of “established standards and requirements” of a registered apprenticeship program for purposes of section 45(b)(8)(D)(ii) of the Code. Specifically, “established standards” refers to the DOL Apprenticeship Standards  referenced by section 3131(e)(3)(B) of the Code and contained in 29 CFR parts 29 and 30, and “requirements” refers to those additional requirements that are established by the registered apprenticeship program for the placement of apprentices, applicable to all employers participating in the registered apprenticeship program, and not found by the DOL Office of Apprenticeship or a state apprenticeship agency to be contrary to the DOL guidance regarding the administration of registered apprenticeship programs.
• Apprenticeship Cure Provision. The final regulations clarify that there is no specific deadline for payment of the penalty required by the Apprenticeship Cure Provision, but the IRS points out that if a taxpayer makes the necessary penalty payments before the taxpayer receives notice of an examination from the IRS with respect to a claim for the increased credit amount, the taxpayer will be presumed not to have intentionally disregarded the apprenticeship requirements.

Application of PWA Requirements to Credits and Deduction under Other Code Sections

The final regulations provide additional guidance as to the application of the PWA requirements relative to energy credits under specific Code Sections other than Sections 45 and 48, including the following:

• 30C Alternative Fuel Vehicle Refueling Property Credit. The final regulations clarify that the prevailing wage requirements do not apply after a section 30C project is placed in service and that the apprenticeship requirements only apply during construction, including alterations and repairs that occur during construction.
• 45L New Energy-Efficient Home Credit. The final regulations clarify that the Prevailing Wage Requirements under section 45L do not apply after construction of a qualified residence ends.
• 45U Zero-Emission Nuclear Power Production Credit. The final regulations clarify that the prevailing wage requirements only apply to alterations or repairs of a qualified nuclear power facility occurring in taxable years beginning after December 31, 2023.
• 45Z Clean Fuel Production Credit. The final regulations modify the proposed regulations in several respects. For example, the final regulations remove the clause requiring construction on or after January 29, 2023, such that taxpayers can satisfy the requirements for the increased credit amount regardless of whether construction began before or after January 29, 2023. The final regulations also confirm that with respect to all facilities placed in service before January 1, 2025 (regardless of when construction began), the prevailing wage requirements do not apply with respect to construction, but taxpayers must satisfy the Prevailing Wage Requirements with respect to any alteration or repair of the facility for taxable years beginning after December 31, 2024, for which the credit is allowed. Finally, to address confusion created by the proposed regulations,² the final regulations provide additional transition relief for taxpayers who relied on the proposed regulations with respect to the apprenticeship requirements for facilities placed in service before January 1, 2025. Specifically, the final regulations provide that taxpayers may rely on the proposed regulations for an additional 90 days from June 25, 2024, the date these regulations were published in the Federal Register.
• 179D Energy Efficient Commercial Buildings Deduction. The final regulations amend the proposed regulations to confirm that the PWA requirements under section 179D apply only during the installation of the 179D qualified property and not with respect to any alteration or repair after the 179D qualified property is placed in service. They also clarify that the deduction amounts are increased for inflation.

The final regulations provide extensive guidance on a number of issues. However, taxpayers will no doubt continue to have a number of questions regarding the application of the PWA requirements to specific scenarios. The DOL recently launched an interactive map that estimates the number of workers at each project who stand to benefit if taxpayers satisfy the prevailing wage and apprenticeship requirements.

Compliance with the PWA requirements is crucial for taxpayers seeking to realize increased tax benefits under the IRA and the attorneys at Buchanan Ingersoll & Rooney PC are uniquely positioned to assist clients, including investors and/or developers of energy projects, in examining these detailed requirements.  The attorneys at Buchanan Ingersoll & Rooney PC will provide additional analysis regarding the final regulations and additional guidance in the near future.   To receive additional analysis, please subscribe to our future insights.