United States: Highlights Of The Proposed Regulations On IRA Prevailing Wage And Apprenticeship Requirements

Highlights

• The U.S. Department of the Treasury and IRS on Aug. 29, 2023, announced proposed regulations regarding increased credit or deduction amounts for which taxpayers can qualify by meeting prevailing wage and registered apprenticeship requirements for energy-related projects established by the Inflation Reduction Act of 2022 (IRA).
• This Holland & Knight alert provides further detail on various aspects of the proposed regulations and other matters key to securing increased credit or deduction amounts available through IRA-related energy projects.

Ten months after the release of initial guidance, the U.S. Department of the Treasury and IRS on Aug. 29, 2023, issued proposed regulations regarding increased credit or deduction amounts available for taxpayers satisfying prevailing wage and registered apprenticeship (collectively, PWA) requirements for energy-related projects established by the Inflation Reduction Act of 2022 (IRA). (See Holland & Knight's previous alert, "Treasury, IRS Issue Proposed Regulations on IRA Prevailing Wage and Apprenticeship Requirements," Aug. 29, 2023.)

The proposed regulations affect the PWA requirements for these energy tax incentives: Sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E and 179D. Because satisfaction of the PWA requirements significantly increases the tax incentives, adherence to the rules is important. Taxpayers with projects of more than 1 megawatt (MW) AC or that begin construction after Jan. 28, 2023, should adopt practices to ensure satisfaction of the rules depicted in the chart below:

The following provides additional insight on the proposed regulations and other matters key to securing increased credit or deduction amounts.

Prevailing Wages

Generally conforming to the guidance issued with respect to prevailing wages in Notice 2022-61, while clarifying certain definitions and providing procedures for determining the prevailing wage, the proposed regulations:

• Clarify that the prevailing wage requirements apply not only to those laborers and mechanics and who are considered employees, but also to those who are considered independent contractors. They also generally adopt the definitions of "laborer," "mechanic" and "construction, alteration, or repair" as included in existing guidance.
• State that prevailing wages must be paid not only to those laborers and mechanics on-site, but also to workers on secondary sites in specific circumstances.
• State that the prevailing wage is determined at the time the construction, alteration or repair begins. They also clarify that the wages need not be updated during construction if the DOL publishes updated prevailing wage determinations. However, updated rates must be followed if the contract is modified. Such modification would include when the contract is updated to change the scope of the contract – either the scope of the work or covered time period.

Note that most taxpayers will be able to locate the applicable prevailing wage as published by DOL, but if there is no applicable prevailing wage rate, the proposed regulations set the expectation that the taxpayer will request a supplemental rate from DOL 90 days prior to beginning of construction. Once DOL responds with the supplemental rate, such rate applies retroactively. Taxpayers can request a reconsideration of DOL's supplemental rate, and DOL offers instructions for requesting a rate.

Though the PWA requirements become binding only when a tax return is filed claiming the increased incentive, thus making corrections and paying a penalty not required until a return is filed, the proposed regulations allow taxpayers to make corrections (namely, paying the required prevailing wage plus interest to laborers or mechanics) prior to the return's filing. Penalty amounts are higher if the failure to pay a prevailing wage is due to intentional disregard.

The proposed regulations provide a nonexhaustive list of facts that may be relevant, including whether a taxpayer corrected failures once discovered, whether the taxpayer posted prevailing wage rates in a prominent place of work or whether there was a past history of violations. Paying such catch-up wages and interest prior to filing the return can avoid costly penalties for intentional disregard. Even where a taxpayer transfers an eligible credit under Section 6418, the transferor taxpayer remains the party solely liable for curing a failure to pay prevailing wages. If a cure is not made, then the transferee taxpayer is not entitled to the increased credit amount.

Apprenticeship

The proposed regulations generally conform to the guidance issued with respect to the apprenticeship requirement in Notice 2022-61, while providing clarity on apprenticeship programs and the good faith effort exception. Among parameters:

• Taxpayers must pay apprentices at least the rate specified by the registered apprenticeship program according to their level of progress for their classification in the applicable wage determination, including bona fide fringe benefits as applicable. Apprentices may be paid at less than the prevailing rate for work performed consistent with the occupation of the registered apprenticeship program if they are 1) qualified apprentices from a registered apprenticeship program who perform work with respect to the construction, alteration or repair of a qualified facility, or 2) individuals in the first 90 days of probationary employment as an apprentice in a registered apprenticeship program who have been certified by DOL.
• Taxpayers can meet the good faith effort exception for the apprenticeship requirement if 1) the request for apprentices was denied for reasons other than the taxpayer, contractor or subcontractor's refusal to comply with the program's standards and requirements, or 2) the program failed to respond within five business days of receiving a request (the program must acknowledge receipt). A new request must be made every 120 days to continue meeting the exception.
• Penalty amounts are higher if the failure to pay prevailing wages is due to intentional disregard. The proposed regulations provide a nonexhaustive list of facts that may be relevant, including whether the taxpayer corrected failures once discovered or whether the taxpayer required apprentices in contracts with contractors and subcontractors. Paying any penalty amounts prior to being notified by the IRS regarding a failure to meet the apprenticeship requirement can avoid costly penalties for intentional disregard.
• Even where a taxpayer transfers an eligible credit under Section 6418, the transferor taxpayer remains the party solely liable for curing a failure to hire apprentices. If a cure is not made, then the transferee taxpayer is not entitled to the increased credit amount.

Documentation and Other Key Points

• Taxpayers are solely responsible for ensuring PWA requirements are met if they claim enhanced credit or deduction values, even when work is done by contractors or subcontractors. This is true even in a circumstance in which the taxpayer transfers the tax credit.
• Taxpayers are solely responsible for recordkeeping and reporting to the IRS evidence that the PWA requirements have been met. The proposed regulations provide a list of items that the IRS expects it will require at the time a claim is filed, including wages paid and hours worked for each laborer or mechanic, along with the applicable classification and any labor agreements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.