On August 29, 2023,1 the IRS and Treasury Department released proposed regulations (the Proposed Regulations) regarding the prevailing wage requirements (the Prevailing Wage Requirements) and the apprenticeship requirements (the Apprenticeship Requirements and, together with the Prevailing Wage Requirements, the Labor Requirements) under the Internal Revenue Code (the Code), as amended by the Inflation Reduction Act of 2022 (the IRA). Taxpayers generally must satisfy the Labor Requirements in order to receive the full amount of certain energy transition tax credits (each, an Increased Credit) for eligible facilities, properties, projects, or equipment (each, a Project).
The following is a summary of significant provisions in the Proposed Regulations.
General Guidance
- Incorporation of Davis-Bacon Act. Consistent
with Notice 2022-61 (the Notice),2 the
Proposed Regulations rely on various definitions and guidance under
the Davis-Bacon Act (the DBA).3 The preamble to the
Proposed Regulations (the Preamble) explains that the Proposed
Regulations incorporate elements of the DBA only to the extent
relevant and consistent with sound tax administration. For example,
the Proposed Regulations incorporate the definitions of
"laborer" and "mechanic," "construction,
alteration, or repair," "wages," and
"employed" from the DBA and rely on substantive DBA
guidance with respect to wage determinations and recordkeeping, in
each case, with appropriate changes for the particular context of
the Labor Requirements.
- Implications for credit transfers. In addition to taxpayers that claim an Increased Credit on their own federal income tax returns, the Proposed Regulations apply to taxpayers that elect to transfer an Increased Credit pursuant to Section 6418 of the Code.4 Specifically, a credit transferor is responsible for satisfying the Labor Requirements, making any Correction Payment, Underpayment Penalty Payment, or Labor Hour Penalty Payment (each as defined below), and complying with the recordkeeping requirements with respect to a transferred Increased Credit.
Prevailing Wage Requirement Guidance
- Generally. The IRA provides that, in order to
receive an Increased Credit with respect to a Project, a taxpayer
must ensure that laborers and mechanics employed by the taxpayer
(or any contractor or subcontractor) in the construction,
alteration, or repair of the Project be paid wages at least equal
to the prevailing rate determined by the US Department of Labor
(the DOL) in accordance with the DBA.
- General wage determinations. The Proposed
Regulations confirm that taxpayers may rely on the general wage
determinations published on www.sam.gov, which provide prevailing wage and
bona fide fringe benefit rates for laborers and mechanics for the
various classifications of work performed with respect to specified
types of construction in certain geographic areas.
- Supplemental wage determinations and additional
classifications. The Proposed Regulations provide special
procedures in the event the DOL has not issued a general wage
determination for the relevant geographical area or type of
construction or, if such a general wage determination has been
issued, the determination does not provide wages for the relevant
labor classifications. In such case, the taxpayer must request a
supplemental wage determination or request a prevailing wage rate
for an additional labor classification from the DOL, in each case,
by submitting the request and certain supporting materials directly
to the Wage and Hour Division of the DOL. A supplemental wage
determination or prevailing wage rate for an additional labor
classification provided to the taxpayer after the construction,
alteration, or repair of a Project begins would apply retroactively
to the start of the relevant work. The Proposed Regulations also
provide a procedure for taxpayers to appeal a DOL decision, which
was absent from the Notice.
- Obligations to update prevailing wage rates.
The Proposed Regulations require taxpayers to use the general wage
determination in effect when the construction of a Project begins,
without any obligation to update the prevailing wage rates if the
DOL publishes a new general wage determination thereafter. A new
general wage determination, however, would be required if an
engineering, procurement, and construction (or similar) contract is
amended to (1) include additional, substantial construction,
alteration, or repair work not within the original scope of work or
(2) require work to be performed for an additional time period. In
addition, taxpayers generally are required to update the applicable
wage rates with respect to any alteration or repair of a Project
that begins after placement into service.
- Geographic areas. The Proposed Regulations
provide that a taxpayer must use the applicable wage determination
for the work performed in each geographic area where the
construction, alteration, or repair of a Project occurs. For this
purpose, a "geographic area" is defined as the county,
independent city, or other civil subdivision of the state in which
the Project is located.
- Multiple construction sites. A Project is
treated as located in a geographic area (or areas) that includes
the primary construction site. A Project also is treated as located
in a geographic area (or areas) including an additional site, but
only if (1) a significant portion of the Project is constructed,
altered, or repaired at the additional site; (2) the construction
at the additional site is for the specific use of the
taxpayer's Project rather than reflecting manufacture or
construction of a product available for the general public; and (3)
the additional site is established specifically for, or is
dedicated exclusively to, the construction, alteration, or repair
of the Project for at least a period of weeks.
- Support sites. A Project is treated as located
in a geographic area (or areas) that includes a support site that
is established specifically for, or is dedicated exclusively to,
the construction, alteration, or repair of the Project and is
adjacent (or virtually adjacent) to a primary or secondary
construction site. Examples of support sites include job
headquarters, batch plants, and tool yards.
- Offshore Projects. In the case of an offshore
Project, the taxpayer may rely on the general wage determination
for the relevant category of construction that is applicable in the
geographic area closest to the area in which the Project will be
located.
- Multiple construction sites. A Project is
treated as located in a geographic area (or areas) that includes
the primary construction site. A Project also is treated as located
in a geographic area (or areas) including an additional site, but
only if (1) a significant portion of the Project is constructed,
altered, or repaired at the additional site; (2) the construction
at the additional site is for the specific use of the
taxpayer's Project rather than reflecting manufacture or
construction of a product available for the general public; and (3)
the additional site is established specifically for, or is
dedicated exclusively to, the construction, alteration, or repair
of the Project for at least a period of weeks.
- Routine maintenance. The Proposed Regulations
confirm that the Prevailing Wage Requirements do not apply to
routine operations and maintenance (O&M) work, provided that
the work is ordinary, regular, and designed to maintain existing
functionality of the Project. By contrast, the Prevailing Wage
Requirements apply to isolated and infrequent repairs of a Project
to restore specific functionality or adapt the Project for a
different or improved use.
- Rate of pay for apprentices. A taxpayer (or
any contractor or subcontractor) is permitted to pay apprentices
(or individuals in the first 90 days of probationary employment as
an apprentice) below the prevailing wage rate, provided that the
apprentice (or individual) is participating in a registered
apprentice program. The taxpayer, however, is required to pay such
an apprentice (or individual) the full prevailing rate if the
DOL's office of apprenticeship or state equivalent withdraws
its approval of the program.
- Correction and penalty payments. The IRA
permits taxpayers to cure a failure to comply with the Prevailing
Wage Requirements by (1) paying the applicable laborer or mechanic
the amount of underpaid wages, plus interest at the penalty rate
(Correction Payments) and (2) paying a $5,000 penalty to the
Treasury for each underpaid laborer and mechanic (Underpayment
Penalty Payment). If such a failure is found to be due to
intentional disregard, the amount of each Correction Payment is
tripled and the amount of each Underpayment Penalty Payment is
doubled.
- Timing of payments. The Proposed Regulations
provide that a taxpayer is not obligated to make Correction
Payments or Underpayment Penalty Payments until the taxpayer files
a federal income tax return claiming the Increased Credit.
Taxpayers, however, are permitted to make Correction Payments to
laborers and mechanics at any time after the initial payments are
made and in advance of the filing of such tax return in order to
limit the amount of additional interest included in the applicable
Correction Payments. By contrast, the earliest time that a taxpayer
can make an Underpayment Penalty Payment is at the time of filing
such tax return.
- Missing laborers and mechanics. The Proposed
Regulations do not provide an exception to the requirement to make
Correction Payments to laborers and mechanics that cannot be
located. The Preamble, however, requests comments on this topic,
which indicates that the IRS and Treasury Department are still
considering the issue.
- Intentional disregard. The Proposed
Regulations define "intentional disregard" as the knowing
or willful failure to satisfy the Prevailing Wage Requirements,
which is determined based on all the relevant facts and
circumstances. In addition, the Proposed Regulations create a
rebuttable presumption against a finding of intentional disregard
if the taxpayer makes any Correction Payments and Underpayment
Penalty Payments before receiving a notice of a tax return
examination.
- Timing of payments. The Proposed Regulations
provide that a taxpayer is not obligated to make Correction
Payments or Underpayment Penalty Payments until the taxpayer files
a federal income tax return claiming the Increased Credit.
Taxpayers, however, are permitted to make Correction Payments to
laborers and mechanics at any time after the initial payments are
made and in advance of the filing of such tax return in order to
limit the amount of additional interest included in the applicable
Correction Payments. By contrast, the earliest time that a taxpayer
can make an Underpayment Penalty Payment is at the time of filing
such tax return.
- Penalty waiver. The Proposed Regulations
provide a limited penalty waiver in the case of certain de
minimis failures to comply with the Prevailing Wage
Requirements. An Underpayment Penalty Payment will be waived for a
calendar year if (1) the laborer or mechanic is paid below the
prevailing rate for 10 percent or less of all pay periods in the
calendar year (or part thereof) during which the laborer or
mechanic worked on the construction, alteration, or repair of the
Project or (2) the difference between the amount the laborer or
mechanic was paid and the amount required to be paid under the
Prevailing Wage Requirements for the calendar year (or part
thereof) is not greater than 2.5 percent of the amount required to
be paid. In order to qualify for the waiver, the taxpayer must make
the Correction Payment by the earlier of 30 days after discovery of
the failure and the date on which the taxpayer files the federal
income tax return claiming the Increased Credit.
- Project labor agreements. The Proposed Regulations provide that a taxpayer is not required to make an Underpayment Penalty Payment with respect to a laborer or mechanic employed under a pre-hire collective bargaining agreement that establishes the terms and conditions of employment for a specific Project (and satisfies certain other conditions), but only if the taxpayer makes any Correction Payments on or before the date the taxpayer files the federal income tax return claiming the Increased Credit.
Apprenticeship Requirement Guidance
- Generally. The Proposed Regulations confirm
that a taxpayer must comply with the Labor Hours Requirement, the
Ratio Requirement, and the Participation Requirement (each as
defined below) with respect to a Project in order to satisfy the
Apprenticeship Requirements. A noncompliant taxpayer, however, will
be deemed to have satisfied the Apprenticeship Requirements if it
has made a good faith effort to do so (the Good Faith Effort
Exception).
- Labor Hours Requirement. A taxpayer must
ensure that a statutory percentage of the total labor hours of
construction, alteration, or repair work with respect to a Project
is performed by qualified apprentices (the Labor Hours
Requirement). The statutory percentage is 10 percent for Projects
that began construction before 2023, 12.5 percent for Projects that
begin construction in 2023, and 15 percent for Projects that begin
construction during or after 2024.
- Ratio Requirement. A taxpayer must ensure that
a Project complies with any apprentice-to-journey worker ratio
required by the DOL or state equivalent (the Ratio Requirement).
Notably, the Proposed Regulations provide that labor hours worked
by apprentices on a day when the applicable ratio is not met are
not counted as qualified apprentice labor hours for purposes of
calculating the applicable percentage under the Labor Hours
Requirement.
- Participation
Requirement. A taxpayer (and any contractor or
subcontractor) that employs four or more individuals to perform
construction, alterations, or repairs with respect to a Project
must employ one or more qualified apprentices for the relevant
work.
- Labor Hours Requirement. A taxpayer must
ensure that a statutory percentage of the total labor hours of
construction, alteration, or repair work with respect to a Project
is performed by qualified apprentices (the Labor Hours
Requirement). The statutory percentage is 10 percent for Projects
that began construction before 2023, 12.5 percent for Projects that
begin construction in 2023, and 15 percent for Projects that begin
construction during or after 2024.
- The Good Faith Effort Exception. A taxpayer is
eligible for the Good Faith Effort Exception if the taxpayer has
requested qualified apprentices from a registered apprenticeship
program and such request has been denied, provided that the request
is denied for a reason other than the taxpayer's (or any
contractor's or subcontractor's) noncompliance with program
requirements, or the program does not respond to the taxpayer
within five business days after receiving a request.
- Scope of written request. The Proposed
Regulations provide that, to qualify for the Good Faith Effort
Exception, a taxpayer (or any contractor or subcontractor) must
make a written request to at least one registered apprenticeship
program that (1) has a geographic area of operation that includes
the location of the Project or that can reasonably be expected to
provide apprentices to the location of the Project; (2) trains
apprentices in the occupation(s) needed by the taxpayer,
contractors, or subcontractors performing construction, alteration,
or repair with respect to the Project; and (3) has a usual and
customary business practice of entering into agreements with
employers for the placement of apprentices in the occupation for
which they are training.
- Denials and nonresponsive programs. The
Proposed Regulations provide that a taxpayer may rely on the Good
Faith Effort Exception with respect to a denial, or lack of
response, from a registered apprenticeship program for 120 days
after the date on which the request was submitted. Thereafter, a
taxpayer would be required to submit an additional request to the
program if it seeks to continue to qualify for the Good Faith
Effort Exception.
- Scope of written request. The Proposed
Regulations provide that, to qualify for the Good Faith Effort
Exception, a taxpayer (or any contractor or subcontractor) must
make a written request to at least one registered apprenticeship
program that (1) has a geographic area of operation that includes
the location of the Project or that can reasonably be expected to
provide apprentices to the location of the Project; (2) trains
apprentices in the occupation(s) needed by the taxpayer,
contractors, or subcontractors performing construction, alteration,
or repair with respect to the Project; and (3) has a usual and
customary business practice of entering into agreements with
employers for the placement of apprentices in the occupation for
which they are training.
- Penalty payments. The IRA permits taxpayers to
cure a failure to comply with the Labor Hours Requirement or the
Participation Requirement by paying a penalty to the Treasury equal
to $50 for each labor hour for which either requirement is not met
(Labor Hour Penalty Payments). If such a failure is found to be due
to intentional disregard, the amount of each Labor Hour Penalty
Payment is multiplied by 10.
- Intentional disregard. Similar to the Prevailing Wage Requirements, the Proposed Regulations define "intentional disregard" as the knowing or willful failure to satisfy the Apprenticeship Requirements and create a rebuttable presumption of no intentional disregard if the taxpayer makes any Labor Hour Penalty Payments before receiving a notice of a tax return examination.
Recordkeeping
- Consistent with the Notice, the Proposed Regulations confirm
that the recordkeeping standards of Section 6001 of the Code and
the associated Treasury Regulations apply for purposes of the Labor
Requirements. At a minimum, a taxpayer claiming or transferring an
Increased Credit must retain payroll records for each laborer,
mechanic, or qualified apprentice employed by the taxpayer (or any
contractor or subcontractor) in the construction, alteration, or
repair of the applicable Project.
- In addition, such a taxpayer must comply with certain additional recordkeeping requirements that are specific to the Prevailing Wage Requirements and the Apprenticeship Requirements.
Proposed Effective Date
- The Proposed Regulations are proposed to apply to Projects
placed in service in taxable years ending after the date these
regulations are published as final regulations in the Federal
Register and the construction or installation of which begins after
the date the Proposed Regulations are published as final
regulations in the Federal Register.
- Taxpayers may rely on the Proposed Regulations with respect to construction or installation of a Project beginning on or after January 29, 2023, and on or before the date the Proposed Regulations are published as final regulations in the Federal Register. From and after October 30, 2023, however, any taxpayer that chooses to do so must follow the Proposed Regulations in their entirety and in a consistent manner.
Looking Ahead
- The IRS and Treasury Department will accept public comments to
the Proposed Regulations until October 30, 2023.
- A public hearing on the Proposed Regulations is scheduled for November 21, 2023.
Footnotes
1. On the same day, the IRS and Treasury Department released Frequently Asked Questions and Publication 5855.
2. We discussed the Notice in a previous client alert.
3. The DOL recently released a final rule under the DBA.
4. We discussed the proposed regulations under Section 6418 in a recent client alert.
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.