The Inflation Reduction Act of 2022 (IRA) created many new and revised tax incentives to develop clean energy projects. Among many of these incentives, Congress included a requirement that taxpayers meet prevailing wage and apprenticeship (PWA) standards in the construction of a project to foster growth in good-paying jobs in the energy section. Taxpayers that do not meet these standards will be entitled to a tax benefit, but generally this results in an 80% haircut to the tax credit or deduction.
On Nov. 29, 2022, the IRS released Notice 2022-61 establishing the initial guidance on meeting these standards.
Code Sections Affected
The listed Code sections all have a prevailing wage and apprenticeship requirement:
| Section 30C – Alternative Fuel/EV Charger Credit | Section 45V – Clean Hydrogen Production Credit |
| Section 45/45Y – Production Tax Credit | Section 45Z – Clean Fuel Production Credit |
| Section 45L – New Energy Efficient Homes Credit | Section 48/48E – Investment Tax Credit |
| Section 45Q – Tax Credit for Carbon Sequestration | Section 48C – Advanced Manufacturing Tax Credit |
| Section 45U – Nuclear Power Production Credit | Section 179D – Energy Efficient Commercial Buildings Deduction |
Beginning Construction Is the First Gate to Prevailing Wage and Apprenticeship Requirements
The date a new energy project begins construction determines whether taxpayers need to comply with the PWA requirements. The release of Notice 2022-61 started a 60-day clock, after which projects must meet the PWA requirements. Projects that “begin construction” prior to Jan. 29, 2023, do not need to meet PWA requirements to claim the maximum tax credit or deduction amount.
Notice 2022-61 maintained two longstanding “begin construction” standards: (1) the Physical Work Test, and (2) the Five Percent Safe Harbor. The Physical Work Test finds construction has begun, subjectively, when work of a “significant nature” has been performed for a project. The Five Percent Safe Harbor finds construction has begun, objectively, when a taxpayer has paid or incurred at least 5% of the total cost of a facility.
Both tests require the taxpayer to demonstrate continuous construction or efforts to complete the project, regardless of when construction began. In general, production tax credit and investment tax credit projects placed in service no later than four years after the year construction began will meet this standard. This four-year safe harbor is extended to six years for projects that began construction in 2016, 2017, 2018 or 2019, and five years for projects that began construction in 2020.
Meeting the Prevailing Wage and Apprenticeship Requirements
The PWA standards in the IRA require renewable energy projects to (i) pay “laborers and mechanics” (distinct from managerial and administrative workers) a prevailing wage, and (ii) ensure the employment of an adequate number of apprentices from registered apprenticeship programs. Adequate employment is generally determined by apprentice labor hours and, depending on the project, can include specific headcount requirements. In Notice 2022-61, the IRS provided some clarity on how taxpayers may demonstrate they have achieved these objectives.
Prevailing wage determinations are based on (i) wage determinations from the Department of Labor (DOL), and (ii) adequate record-keeping to prove the taxpayers (and taxpayers’ contractors and subcontractors) have paid wages at or above those levels. Taxpayers are required to use DOL published wage rates at www.sam.gov for geographic areas and for types of jobs or labor classifications. If the DOL has not published a prevailing wage, the taxpayer must contact [email protected] for a determination, providing the type of facility being constructed, location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications.
Notice 2022-61 provided three examples, in which all taxpayers meet the prevailing wage standard by maintaining records to establish that paid wages were not less than prevailing wage rates. These records include the wage rates provided by the Department of Labor, the laborers and mechanics who performed construction work on the project, the classifications of work they performed, their hours worked in each classification, and the wage rates paid for the work.
Apprenticeship determinations are based on meeting (i) labor hour requirements, subject to any federal or state apprentice ratios required; (ii) apprentice participation requirements; and (iii) adequate record-keeping requirements, such as accounting for contractors and subcontractors, to prove hiring of qualified apprentices.
Labor hour requirements are generally satisfied by meeting an applicable percentage of labor hours performed by all apprentices employed by the taxpayer and all contractors and subcontractors, measured against the total labor hours to construct the facility. The applicable percentages are as follows: apprentice labor hours of 10% of total for construction that begins pre-2023, 12.5% for 2023, and 15% for 2024 and later.
Notice 2022-61 clarifies that the aggregate project apprentice hours can meet the applicable percentage even if an individual contractor does not independently meet the requirement. Taxpayers that do not meet the apprenticeship requirements on the metrics can still meet the requirement on a good faith effort exception, which essentially keeps taxpayers from being penalized if there are insufficient apprentices to hire if the taxpayer made reasonable business efforts to comply and can document these efforts. As with the prevailing wage standard, record-keeping is essential to prove that taxpayers either complied with the apprenticeship requirements or made a good faith effort to find and employ apprentices who did not exist.
IRS Safe Harbors
The IRS established safe harbors for complying with the prevailing wage and apprenticeship requirements.
The Notice 2022-61 examples, discussed above, identify the required types of records a taxpayer must keep to demonstrate that a project satisfies the PWA requirements. For prevailing wages, this includes an obligation that taxpayers use published DOL prevailing wage rates or affirmatively contact the DOL via email at [email protected] for an applicable prevailing wage rate for the location of the project and job description. For the apprenticeship labor requirement, if the appropriate percentages of apprentice-to-journeyworker ratios are met, and records are maintained as described above, the project will be considered to have satisfied the “Apprenticeship Labor Hour,” “Apprenticeship Ratio” and “Apprenticeship Participation” statutory requirements with respect to the project.
This record-keeping requirement is consistent with general record-keeping for tax filings and is not a heightened standard for project developers and owners.
The IRS noted that it will issue additional regulations to clarify and explain the prevailing wage and apprenticeship requirements in more detail. Expect to see those IRS regulations in early 2023.