Clean Energy Tax Credit Prevailing Wage and Apprenticeship Proposed Regulations
On August 30, 2023, the U.S. Treasury Department (the “Treasury”) and the Internal Revenue Service (the “IRS”) published proposed regulations in the Federal Register providing updated guidance on the prevailing wage requirements and apprenticeship requirements (collectively, “PWA Requirements”) for projects to receive increased clean energy tax credits added to the U.S. Internal Revenue Code (the “Code”) by the Inflation Reduction Act of 2022 (the “IRA”). The proposed regulations update prior guidance issued by the Treasury and IRS under IRS Notice 2022-61.
The regulations are intended to be applicable with respect to the PWA Requirements in respect of the investment tax credits (“ITCs”) under Sections 48 and 48E of the Code and the production tax credits (“PTCs”) under Sections 45 and 45Y of the Code as well as other similarly drafted provisions that include PWA Requirements, including Sections 30C, 45L, 45Q, 45U, 45V, 45Z, 48C, and 179D of the Code. In the case of ITCs and PTCs, the PWA Requirements must be satisfied in order for projects to receive increased credit amounts. While certain provisions within the proposed regulations are viewed as taxpayer friendly—particularly with respect to corrective actions for technical non-compliance—the guidance underscores the administrative burden that correct compliance with PWA Requirements poses to sponsors and developers for claiming increased credits. Taxpayers may rely on the proposed regulations for any project with a beginning of construction date (“BOC”) on or after Jan 29, 2023, and before final regulations are published. The following provides a high-level summary of relevant guidance included in the proposed regulations.
Continuity with DBA Requirements
While IRS Notice 2022-61 had established that Department of Labor prevailing wage determinations would generally be controlling for purposes of the PWA Requirements, the proposed regulations further clarify the extent to which such Department of Labor rules apply, specifically incorporating certain provisions under the Davis-Bacon Act (the “DBA”)—which requires the payment of minimum prevailing wages determined by the Department of Labor to laborers and mechanics working for Federal agencies related to the construction, alteration, or repair of public buildings and public works—where the Department of Labor has determined that such provisions are relevant for claiming increased tax credits under the IRA and consistent with sound tax administration.
Determination of Prevailing Wages
Consistent with IRS Notice 2022-61, the proposed regulations provide that the PWA Requirements for payment of prevailing wages apply to payments both in respect of employees and independent contractors (including subcontractors). The proposed regulations clarify that this characterization does not have any follow-on implications as to the treatment of independent contractors as employees for other tax purposes and does not impact the characterization of payments made to independent contractors (e.g., treatment of amounts as wages or compensation for tax purposes). The proposed regulations define wages for purposes of satisfaction of the PWA Requirements by reference to 29 CFR 55.2 including basic hourly pay rates as well as the value of amounts contributed to fringe benefit funds, plans, or programs.
Guidance under IRS Notice 2022-61 had generally indicated that prevailing wage determinations applicable as of the BOC would not need to be updated during the construction of a facility for purposes of the PWA Requirements; however, the proposed regulations have clarified that prevailing wages will need to be redetermined when a contract is changed to include additional substantial construction, alteration, or repair work not within the scope of the original contract, including where any option to extend the term of a construction contract is exercised. This guidance is perhaps unsurprising where the scope of construction is materially expanded or with respect to alteration or repair work separate from the original construction work on a facility; however, requiring prevailing wages to be redetermined for work done pursuant to the exercise of an option to extend a construction contract may raise concerns among sponsors and developers, particularly as it applies to contractors and subcontractors. While the sponsor or developer will have control over its own contracts (perhaps opting for longer-term contracts as a result), it will also be important that they communicate with contractors and subcontractors, whose wage rates factor into the satisfaction of the PWA Requirements for the facility, regarding the implications of these rules. At a minimum, this clarification will result in the potential for increased construction costs if not also resulting in uncertainty as to whether the prevailing wage requirement has been satisfied for a facility. The proposed regulations also specify that construction, alteration, or repair does not include routine maintenance work after the facility is placed in service.
The proposed regulations provide some further guidance as to what wage determinations should be applied for purposes of the PWA Requirements clarifying that when a facility spans two or more adjacent geographic areas and more than one general wage determination could apply (e.g., a laborer or mechanic working on construction in both areas), the taxpayer would satisfy the PWA Requirements by ensuring laborers and mechanics satisfy the highest rate for each classification under the general wage determinations. Clarification for offshore facilities is also provided, establishing that the general wage determination for the closest onshore geographic area may be relied upon for purposes of the PWA Requirements. Where construction of a facility is conducted at secondary sites, the general wage determination will be based on the primary facility location unless such secondary site is established specifically for or dedicated exclusively to the construction of the relevant facility.
Where no general wage determinations are applicable based on the specific role of a laborer or mechanic, eligible taxpayers may follow the procedures for general wage determinations generally applicable to federal agencies. Where such a request for a general wage determination must be made, the IRS indicated that it would expect requests for a determination be made no more than 90 days prior to the BOC; however, if a request for determination is made after construction because an additional classification is necessary, the determination would be applied retroactively.
While the guidance in respect of prevailing wages increases the complexity of satisfying the PWA Requirements, the proposed regulations generally provide taxpayer favorable guidance in respect of correcting noncompliance. As an initial matter, the proposed regulations establish that the obligation to make corrective payments only arises as of the time an increased credit is claimed on a tax return. In other words, increased energy credits will not be unavailable as a result of technical noncompliance during the construction period where corrective action is undertaken as of the time the return is filed claiming the applicable energy credit. Further, IRS deficiency procedures do not apply to penalties for failure to meet PWA Requirements (but would apply to a disallowance of an increased credit if corrective action were not taken prior to claiming the increased credit). The making of corrective payments and payment of any applicable penalties also create a rebuttable presumption against intentional disregard of the PWA Requirements (which result in higher penalty assessments in respect of lapses).
The proposed regulations provide the IRS with waiver authority for penalties in respect of minor infractions of the wage requirements such as those arising from payroll errors, errors that were small in amount or for a limited number of payroll periods provided that the taxpayer makes corrective action within 30 days of becoming aware of the error. The proposed regulations also make clear that there will be no penalty assessed in connection with corrective payments where such corrective payments are required as a result of a supplemental wage determination (i.e., where a request for an additional general wage determination under the DBA procedures) provided that the payment is made within 30 days of the date of the determination of the relevant prevailing wage. However, there is a strict obligation to make corrective payments, even where a laborer or mechanic cannot be found (requiring compliance with applicable state requirements under such circumstances such as following unclaimed property rules).
Interaction of Apprenticeship Requirements
Under Section 45(b)(8) of the Code, to satisfy apprenticeship obligations for increased tax credits, a taxpayer must ensure that (i) the “applicable percentage” of the total labor hours in respect of the construction, alteration, and repair of the facility are performed by qualified apprentices (the “Labor Hours Requirement”), (ii) applicable ratios of apprenticeship-to-journeyworker ratios area satisfied on a daily basis (the “Ratio Requirement”), and (iii) each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to a facility must employ one or more qualified apprentices (the “Participation Requirement”). Under the proposed regulations, the Ratio Requirement is a necessary element of the Labor Hours Requirement (if the Ratio Requirement is not met, hours worked by apprentices in excess of the applicable ratio are not counted towards the Labor Hours Requirement and apprentices must be paid prevailing wages for such hours). Further, even if the Labor Hours Requirement is satisfied but the Participation Requirement is not, the taxpayer would not be eligible for the increased credit unless the taxpayer pays applicable penalties under Section 45(b)(8)(D) of the Code with respect to the total hours that that the Participation Requirement is not satisfied in respect of or meets the Good Faith Effort Exception (described below).
Good Faith Effort Exception
Section 45(b)(8)(D) provides an exception to the strict application of the PWA Requirements in respect of apprentices where a taxpayer establishes that it has requested apprentices from a registered apprenticeship program (the “Good Faith Effort Exception”), where the apprenticeship requirements will be deemed satisfied without penalty. The proposed regulations flesh out the requirements for satisfaction of the Good Faith Effort Exception requiring the relevant taxpayer, contractor, or subcontractor to make a written request to at least one registered apprenticeship program that ordinarily places apprentices in the relevant occupation needed by the taxpayer, contractor, or subcontractor within the geographic area of the facility. However, if a reasonable estimation of the apprentices needed for the construction, alteration, or repair of the facility—including in respect of differing occupational requirements—would require requests of more than one registered apprenticeship program, the taxpayer, contractor, or subcontractor must make such additional requests in order to satisfy the Good Faith Exception. The proposed regulations would require the written request to include information concerning the dates of employment, the occupation or classification needed, the location and type of work to be performed, the number of apprentices needed, the number of hours the apprentices will work, and the name and contact information of the person requesting the apprentices. The written request would also be required to include a statement that the request for apprentices is made with an intent to employ apprentices in the occupation for which they are being trained and in accordance with the requirements and standards of the registered apprenticeship program. If a request is denied in full by the apprenticeship program, additional requests should be made within 120 days of such denial.
The proposed regulations indicate that the Good Faith Effort Exception does not generally eliminate the obligation to satisfy the apprenticeship requirements but applies to treat a portion of the relevant requirements as having been satisfied on the basis of the portion of the request that was denied or not responded to. This may leave a taxpayer in a position where the Good Faith Effort Exception is satisfied but failures nonetheless occur (and are subject to penalty) because of a failure of the Labor Hours Requirement, the Ratio Requirement, or the Participation Requirement that would not have been satisfied even if an apprentice had been available to fulfill the request.
Penalties for Apprenticeship Noncompliance
For failures of the Labor Hours Requirement, the proposed regulations follow the statutory requirements in providing that the hours subject to a penalty would be calculated by subtracting the total labor hours worked by all qualified apprentices consistent with the Ratio Requirement from the total labor hours that should have been worked by qualified apprentices under section 45(b)(8)(A)(ii). As the Participation Requirement is not hours based, the proposed regulations determine the cure penalty based on a notional number of hours that an apprentice would have worked equal to the total number of labor hours performed for the relevant taxpayer, contractor, or subcontractor during construction, alteration, or repair of the facility divided by the total number of individuals employed by that taxpayer, contractor, or subcontractor who performed construction, alteration, or repair work on the facility.
Timing for Substantiating Satisfaction of the PWA Requirements
Under the proposed regulations, taxpayers are required to substantiate compliance with the PWA Requirements at the time a return claiming the increased credit is filed, and not on a current basis (i.e., at the time each payroll payment is made). Further, the preamble indicates that the IRS expects that taxpayers will be required to report the following at the time returns are filed: (i) the location and type of qualified facility; (ii) the applicable wage determinations for the type and location of the facility; (iii) the wages paid (including any correction payments) and hours worked for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (iv) the number of workers who received correction payments; (v) the wages paid and hours worked by qualified apprentices for each of the laborer or mechanic classifications engaged in the construction, alteration, or repair of the facility; (vi) the total labor hours for the construction, alteration, or repair of the facility by any laborer or mechanic employed by the taxpayer or any contractor or subcontractor; and (vii) the total credit claimed. Satisfaction of the above information requirements would be expected from a taxpayer even where the relevant laborer or mechanic is employed or engaged through contractors and subcontractors.
Responsibility for PWA Requirement Compliance
While proposed regulations with respect to the transfer of tax credits under Section 6418 of the Code provide that liability for recaptured credits lies with the transferee that actually uses the credit to offset its tax liability rather than the eligible taxpayer that owns the facility generating the credit, for purposes of the PWA Requirements, the obligation to make corrective payments and pay any associated penalties remains with the eligible taxpayer that owns the facility.
 Reg-100908-23; RIN 1545-BQ54.
 2022-52 I.R.B. 560.
 40 U.S.C. 3141 (1931).