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Background
On August 16, 2022, President Biden signed the Inflation Reduction Act (the “IRA”),
which included provisions for clean energy tax and climate tax
incentive credits for taxpayers – generally builders,
developers and owners of clean energy facilities – that require
prevailing wages be paid to employees and that registered
apprentices are utilized for the construction of energy efficient
commercial and residential buildings, electric vehicle charging
infrastructure and other clean energy projects. The tax incentives
under the IRA are structured in two tiers: a base rate and a higher
rate (also known as a “bonus”) that is five times the
base rate when certain requirements are met.
The higher (more beneficial) rate will generally only be
available to taxpayers with respect to a qualified facility,
property, project or equipment (solar, wind, H2, CCUS), referred to
as a ”facility,” where the taxpayer “begins
construction” on such facility on or after January 29, 2023,
if the taxpayer meets the prevailing wage and apprenticeship
requirements under the IRA. A taxpayer can benefit from the higher
tax benefits with respect to a facility without having to comply
with these requirements if the taxpayer “begins
construction” on a facility before January 29, 2023.
On November 30, 2022, the Internal Revenue Service (the IRS)
published a notice, “Prevailing Wage and Apprenticeship Initial
Guidance Under Section 45(b)(6)(B)(ii) and Other Substantially
Similar Provisions,” (the “Notice”) to provide
guidance on the specific labor standards that taxpayers must meet
to qualify for the enhanced clean energy and climate tax incentives
under the IRA. The Notice also provides critical guidance on the
meaning of “begin construction” for those taxpayers
seeking to establish that they are not subject to the wage and
apprenticeship requirements for facilities already underway. There
are two methods that may be used to establish the beginning of
construction: (1) “the physical work test” and (2) the
“five percent safe harbor”. Under the physical work test,
construction begins when physical work of a significant nature
begins. Under the five percent safe harbor, construction has begun
if the facility has paid or incurred five percent or more of the
total cost of construction.
Applicability of the Wage and Apprenticeship Requirements
The wage and apprenticeship requirements apply to the tax
credits enacted or amended by the IRA as follows:
* The credits under Sections 45, 48, 45Y, and 48E are
not subject to the wage and apprenticeship requirements if the
applicable facility has a maximum net output of less than 1
megawatt.
Specifics of the Wage and Apprenticeship Requirements
Prevailing Wage Requirements
The IRA requires taxpayers seeking a credit to provide laborers
and mechanics employed in the construction, alteration or repair of
a facility with wages at rates not less than the prevailing rates
of similar employees for similar type of work in the locality in
which such facility is located, as determined by the Secretary of
Labor. The Department of Labor’s Wage and Hour Division posts
labor classifications and their prevailing wage rates in wage
determinations on http://www.sam.gov. If there is no published
prevailing wage determination for a particular geographic area and
type of construction, the taxpayer must proactively request a wage
rate or wage determination by contacting the Department of Labor,
Wage and Hour Division via email at IRAprevailingwage@dol.gov.
The taxpayer must also maintain sufficient records to establish
that its laborers and mechanics were paid wages not less than such
prevailing rates. Such records could include, but are not limited
to, documentation identifying the applicable wage determination,
the laborers and mechanics who performed construction work on the
facility, the classifications of work they performed, their hours
worked in each classification, and the wage rates paid for the
work.1
Apprenticeship Requirements
The IRA provides that developers of facilities seeking a credit
are required to use apprentices from government-registered
apprenticeship programs for construction, alteration and repair
work. The taxpayers need to satisfy two sets of requirements
regarding apprenticeships. Under the apprenticeship labor hour
requirement, in 2023, these apprentices must account for 12.5% of
the total labor hours of the project in 2023 and 15% in 2024 and
thereafter. This requirement is subject to prescribed
journeyman-to-apprentice ratios. In addition, under the
apprenticeship participation requirement, each taxpayer, contractor
and subcontractor employing four or more individuals for a project
must employ at least one qualified apprentice from a
government-registered apprenticeship program meaning a program
registered under the National Apprenticeship Act or by the DOL.
Finally, taxpayers must maintain sufficient records to establish
that these quotas have been satisfied for the duration of the
project.2
The taxpayers may be able to rely on the “good faith effort
exception” included in the IRA to comply with the
apprenticeship requirements. Under this exception, a taxpayer is
deemed to have satisfied the apprenticeship requirements with
respect to a facility if the taxpayer has requested qualified
apprentices from a registered apprenticeship program and at least
one of the following has occurred: (i) such request has been
denied, but not due to the taxpayer’s failure to comply with
the program standards, or (ii) the registered apprenticeship
program fails to respond to such request within five business days
after the date on which the program received such request. It is
important that the taxpayer maintain records that establish the
request was made and the program’s denial or non-response to
the request.
Meaning of ‘Begin Construction’
As noted above, taxpayers that begin construction prior to
January 29, 2023, may still benefit from the higher tax credit
rates without having to comply with the wage and apprenticeship
rules. Taxpayers may use the following methods to establish that
construction has begun: (i) starting physical work of a significant
nature (“physical work test”) or (ii) paying or incurring
5% or more of the total cost of the facility (“five percent
safe harbor”).
The “beginning of construction” standard is not new
for taxpayers—for instance, the IRS has based the
availability of tax credits for solar, wind and carbon capture
projects on the year in which construction of a project began. The
IRS previously issued a number of project-type specific notices
(“previous notices”) for such projects under IRS Sections
45, 45Q and 48 that explain how a facility could “begin
construction” in the context of these projects. In the Notice,
the IRS refers to these previous notices for determining when
construction commences under IRS Sections 30C, 45V, 45Y and 48E and
when installation begins under Section 179D.
Physical Work Test
Under the physical work test, construction begins when physical
work of a significant nature begins, as long as construction, or
efforts toward construction, are continuous. This test focuses on
the nature of the work performed, not the amount of work or the
costs incurred to date. There is no set threshold of work required
to satisfy this test. Physical work does not include preliminary
activities (e.g., planning or designing, securing financing,
exploring, researching, obtaining permits, licensing, conducting
surveys, preparing environmental or engineering studies or clearing
a site). Work performed by or for a taxpayer by other persons under
a binding written contract can be considered when determining
whether construction has begun.
Both on-site and off-site work may be taken into account for
purposes of demonstrating that physical work of a significant
nature has begun. Physical work of a significant nature does not
include work to produce property that is either in existing
inventory or is normally held in inventory by a vendor.
Five Percent Safe Harbor
Under the five percent safe harbor, construction is considered
to have begun on a facility if: (i) a taxpayer pays or incurs 5% or
more of the total cost of such facility and (ii) the taxpayer
continues to advance toward completion of such facility. All costs
properly included in the depreciable basis of the facility are
considered in determining whether the five percent safe harbor has
been met. For property that is produced for the taxpayer by another
person under a binding written contract with the taxpayer, property
costs incurred by the other person prior to receipt of the property
by the taxpayer are deemed incurred by the taxpayer.
Key Takeaways
For taxpayers that expect to begin construction on facilities on
or after January 29, 2023, it is important to be aware of these new
wage and apprenticeship regulations and ensure compliance programs
are in place. Establishing compliance programs may require
significant planning and, in certain instances, additional legal
advice, particularly for taxpayers that do not have experience with
the prevailing wage rates and government-registered apprenticeship
systems. For those taxpayers seeking to establish that they
“began construction” on a facility before January 29,
2023, it is critical to be in a position to provide evidence that
these projects have begun in advance of the January 29, 2023,
deadline.
We expect the Treasury Department and the IRS to issue
additional guidance in the coming months to further clarify the
operation of the new wage and apprenticeship requirements, and we
are actively monitoring these developments on behalf of our
clients.
Footnotes
1. If a taxpayer does not comply with the prevailing wage
requirement, the taxpayer can become eligible to receive a credit
if the taxpayer corrects the non-compliance by providing backpay to
employees, as applicable, and paying a specified penalty to the
Department of Labor.
2. As with the prevailing wage requirement, if a taxpayer
does not comply with the apprenticeship requirement, the taxpayer
can become eligible to receive a credit if the taxpayer corrects
the non-compliance by paying a specified penalty to the Department
of Labor.
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.
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