IRS, Treasury Release Prevailing Wage, Apprenticeship Final Regulations

The IRS and the Treasury Department on June 18 released final regulations concerning the prevailing wage and apprenticeship (PWA) requirements related to increased credit or deduction amounts for some clean energy incentives introduced by the Inflation Reduction Act of 2022 (IRA). 

In general, taxpayers are eligible for increased credit amounts by satisfying the PWA requirements or one of the exceptions found under Internal Revenue Code Section 45(b)(6)-(8). By satisfying the PWA requirements, taxpayers can generally increase the base amount of the credit or deduction by five times. A dozen credits and the Section 179D deduction reference the PWA requirements, with the specific applicability varying depending on the particular IRA provision. 

The IRS and Treasury received 342 written comments in response to the PWA proposed regulations.

Interaction with Davis-Bacon Act

While the Davis-Bacon Act (DBA) provides a framework for prevailing wages in the context of federal contracts, the IRS and Treasury clarified in the final regulations that the DBA was not intended to be strictly mirrored for purposes of the IRA. According to the final regulations, if Congress had intended for the IRA to strictly adhere to DBA guidance, it would have explicitly stated so in the statute and included additional statutory language beyond the reference found under Section 45(b)(7). Many comments from stakeholders suggested conforming to DBA guidance and precedent. However, the IRS and Treasury reaffirmed the general approach taken in the proposed regulations, incorporating DBA guidance only to the extent it is relevant for prevailing wages and the administration of the relevant IRA tax provisions.

For example, significant commentary from stakeholders suggested adopting various prefiling compliance requirements analogous to those under the DBA. The IRS and Treasury generally avoided this, citing the need for sound tax administration. While the government encourages practices that align with the policy goals of the PWA requirements and sound record-keeping activities, they opted not to impose any prefiling requirements. This decision is based on the fact that the increased credit amounts provided by the PWA requirements are an optional benefit that is not binding until the taxpayer files a tax return claiming the increased amount. However, the facts and circumstances surrounding the taxpayer's prefiling activities may still support a conclusion as to whether the additional intentional disregard penalty would be applicable.

Conversely, the IRS and Treasury did incorporate the DBA concept of “the site of the work” with respect to secondary sites to help define the applicability of PWA requirements at those locations, including unrelated third-party manufacturing activity occurring offsite. This reflects the government's approach of adopting DBA guidance narrowly, to the extent such adoption supports the sound tax administration of IRA provisions.

PWA Exceptions and Transition Rules

The two principal exceptions to the PWA requirements are the Beginning of Construction (BOC) and One Megawatt exceptions. Qualified facilities or energy projects that began construction before January 29, 2023, or have a maximum net output of less than one megawatt AC, are eligible for increased credit amounts without needing to meet the PWA requirements.

To provide clarity, the government reiterated that the prevailing wage requirements apply to the construction, alteration, or repair of a facility, whereas the apprenticeship requirements apply only to the construction period of a facility. Following the principles under Section 45, the PWA requirements apply to the portion of the activity that generates a credit or deduction under the applicable Internal Revenue Code section.

Commenters raised concerns about the confusion caused by the varying effective dates of the PWA requirements across different credit provisions. In the interest of sound tax administration, the government determined that a transition rule was appropriate. The final rules state that any work performed before January 29, 2023 (60 days after the publication of Notice 2022-61), is not subject to the PWA requirements, regardless of whether there is an applicable BOC exception. Therefore, for Sections 45L, 45Z, and 48C, taxpayers need only comply with the PWA requirements for construction, alteration, or repair activities occurring on or after January 29, 2023.

The government also acknowledged the confusion over what constitutes the beginning of construction for purposes of the BOC exception. To provide uniformity, the final rules adopt the DBA definition of construction, consistent with the general approach in the proposed rules. Thus, the activities that trigger the PWA requirements are any activities that constitute construction under Treas. Reg. §1.45-7(d)(3). However, the final rules provide transition relief for taxpayers who relied on definitions in prior IRS notices to determine activities that triggered the initial stages of construction. Penalties are waived for those taxpayers, provided they make correction payments to impacted workers within 180 days of the publication of the final rules.

For the One Megawatt exception, the final rules largely adopt the proposed rules while reaffirming that the definition of a qualified facility, energy project, or energy storage technology for purposes of the exception will follow the guidance under the respective Code sections.

Taxpayer Responsibilities for PWA Requirements

Stakeholders requested guidance on the taxpayer's responsibility for compliance with PWA requirements, given that the taxpayer may not have contracted directly with all contractors and subcontractors. Comments included proposed safe harbors if the taxpayer contracted with third parties to ensure compliance, suggestions to permit contractors to make corrective payments on behalf of the taxpayer, and concerns over the application of the PWA requirements in the context of credit transfers under Section 6418. 

The government reiterated that the burden of compliance, including any correction or penalty payments, must be the taxpayer’s responsibility. However, the final rules provide flexibility in how the payments are made, as long as there is adequate record-keeping, and generally did not adopt any changes from the proposed rules.

Regarding the taxpayer’s obligation to appropriately apply the applicable prevailing wage rates, and to reduce uncertainty, the final rules clarify that the applicable prevailing rates are determined at the time the contract for the construction, alteration, or repair of the facility is executed by the taxpayer and a contractor (and apply to the contractor’s subcontractors). The final rules also incorporate the substantiality concept discussed in the preamble to the proposed rules, clarifying that there is no obligation to update the wage rate if a contractor is provided additional time to complete its original commitment or if additional work is merely incidental. If work is contracted over an indefinite period, there is an annual obligation to update the applicable wage rates.

Apprenticeship Guidance

To assist with complying with the apprenticeship requirements, the final rules provide various examples on how to calculate labor hours. Generally, taxpayers must consider all labor hours, including those worked by contractors with fewer than four employees, from the beginning of construction through the facility’s placed-in-service date. Training hours of qualified apprentices count towards the labor hours requirement only if the hours relate to construction, alteration, or repair work.

The final rules confirm that, consistent with registered apprenticeship program industry practice, the ratio requirement must be met daily to ensure that apprentices are properly overseen by journey-workers.

For record-keeping purposes, taxpayers are ultimately responsible for compliance with the PWA requirements and may not rely solely on certifications from contractors and subcontractors. To assist with compliance, taxpayers must maintain records, which could include hiring a third party to manage them. 

The final rules provide scenarios to address privacy concerns and personally identifiable information (PII) by offering three alternatives: (1) taxpayers may collect and physically retain redacted records from every relevant contractor and subcontractor; (2) taxpayers may utilize third-party vendors to collect and physically retain records on behalf of the taxpayer with redacted PII; and (3) taxpayers, contractors, and subcontractors may physically retain unredacted records for their own employees. In all scenarios, unredacted records must be made available to the IRS upon request.

The good faith effort exception was adjusted after reviewing comments and consulting with the Department of Labor. The exception is deemed satisfied if there is no registered apprenticeship program within the geographic area of operation. To qualify, the taxpayer must provide a written request that includes proposed dates, the occupation of apprentices, location, expected apprentice hours, contact information for the taxpayer or contractor, and who will employ the apprentices (the taxpayer or a contractor). This request must be sent to at least one Registered Apprenticeship Program (RAP) within the facility’s geographic area, although apprentices can be sourced from any location. The request must be sent 45 days before the apprentice is set to begin work, with any subsequent requests to the same RAP made 14 days before the apprentice starts. The period for the good faith effort exception has been extended from 120 days to 365 days (or 366 for leap years).

The RAP must respond substantively to the specific request; automated or non-substantive replies do not count. The taxpayer is not required to follow up with the RAP or respond to a non-substantive reply. Compliance with "established standards and requirements" means that a taxpayer cannot claim to meet the good faith effort exception by refusing to pay user fees if required; they can reach out to a different RAP with different requirements if needed. The good faith effort exception cannot be used for a RAP sponsored by the taxpayer; if no apprentices are available, the taxpayer must contact a different RAP.

The IRS and Treasury considered feedback that the apprenticeship requirements could pose challenges for taxpayers relying on foreign labor to install equipment, as foreign contractors and subcontractors may not be able to hire apprentices from registered programs. They suggested expanding the good faith effort exception to accommodate these taxpayers. However, the IRS and Treasury, informed by the DOL, clarified that foreign employers can hire qualified apprentices or register apprenticeship programs if they meet certain conditions, such as having a physical presence and legal authorization to operate in the U.S. Ultimately, the IRS and Treasury decided not to create special exceptions for taxpayers using foreign contractors.

Miscellaneous Observations

• In addition to issuing the final regulations, the IRS updated its PWA FAQs
• The final rules address the PWA requirements as they relate to Indian Tribal governments. 
• Project labor agreements (PLAs) are addressed in the final rules, notably as a way to avoid penalty payments if certain wage and apprenticeship requirements are met as part of a PLA. 
• While the IRS and Treasury do not intend to enact prefiling compliance requirements, there may be commercial considerations related to lenders, investors, and transferee taxpayers, if applicable. 
• The IRS and Treasury also addressed the PWA requirements as they apply to specific code sections.