On November 30, 2022, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2022-61 (Notice), providing guidance on the application of key provisions of the Inflation Reduction Act of 2022 (IRA) and starting the “clock” on the 60-day exception period to the prevailing wage and apprenticeship requirements (Prevailing Wage and Apprenticeship Requirements).
Notice 2022-61 provides preliminary guidance on the standards that will apply in determining whether the IRA’s new Prevailing Wage Rate and Apprenticeship Requirements are satisfied, which satisfaction generally is required to claim the maximum renewable energy credits available under the post-IRA credit regime. It further confirms that existing IRS notices regarding the “beginning of construction” requirement will also apply in determining whether an exclusion from the application of the Prevailing Wage and Apprenticeship Requirements is available.
The Prevailing Wage and Apprenticeship Requirements
As detailed in our August 18, 2022, Tax and Energy Update, taxpayers generally are required to meet the Prevailing Wage and Apprenticeship Requirements to qualify for the enhanced amount of renewable energy tax credits available following the changes made by the IRA unless construction on the project begins before the date that is 60 days after the issuance of guidance with respect to such requirements or the applicable project has a maximum net output of less than 1 MW(ac).
The relevant tax credits include the investment tax credit under Internal Revenue Code (Code) Sections 48 and 48E (ITC); the production tax credit under Sections 45 and 45Y (PTC); the carbon capture and sequestration credit under Section 45Q (Carbon Capture Credit); the clean hydrogen production tax credits under Section 45V; the tax credits under Sections 30C, 45L, 45U, 45Z, and 48C; and the increased deduction available under § 179D.
The Notice provides clarity on how taxpayers may demonstrate they have satisfied these requirements, including providing that the relevant terms and definitions have the same meaning given to those terms in the existing Department of Labor regulations found in 29 CFR § 5.2 (also known as the Davis-Bacon Act).
The Prevailing Wage Requirement
To satisfy the Prevailing Wage Requirement, the taxpayer must ensure that any laborers and mechanics employed by the taxpayer and any of its contractors and subcontractors are paid prevailing wages in the locality in which the relevant project is located (as determined by the Secretary of Labor) during the construction of such project and with respect to subsequent alterations or repairs of the project following its placement in service (which ranges from 5 years for ITC projects to 12 years for Carbon Capture Credit projects).
To determine the prevailing wage rates applicable to a project, the Notice directs taxpayers to access a website (www.sam.gov) on which the Secretary of Labor has published, and will continue to publish, prevailing wage determinations for various geographic areas and construction types. If the Secretary of Labor has not published an applicable prevailing wage rate determination for that locality, or one or more labor classifications relevant to the project is not listed, the taxpayer may rely on certain procedures established by the Secretary of Labor. To rely on these procedures, taxpayers must request such a determination from the Department of Labor’s Wage and Hour Division. Any such request generally must describe the type of project, project location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for any proposed classification.
The Notice further defines several key terms used with respect to this requirement by reference to the Davis-Bacon Act. As such, the term “laborer or mechanic” generally includes only workers whose duties are manual or physical in nature and not mental or managerial. Workers employed in an executive, administrative, or professional capacity are also not deemed to be “laborers or mechanics.” In addition, the reference to the Davis-Bacon Act indicates that the Prevailing Wage Requirement should generally apply only to work at the project site, with certain limited exceptions (such as off-site work at a location established specifically for the performance of the contract or project).
Additionally, taxpayers are required to maintain and preserve sufficient records to establish that laborers and mechanics were paid wages not less than the established prevailing rates. Sufficient records should include, but are not limited to, the relevant wage determinations, the mechanics and laborers who performed the work, the classifications of the work performed, the hours worked in each classification, and the wage rates paid.
The Apprenticeship Requirement
To satisfy the Apprenticeship Requirement, the taxpayer must also ensure that with respect to the construction of a qualified facility, no fewer than the “applicable percentage” of total labor hours are performed by qualified apprentices. The applicable percentage is 10% for projects beginning construction before 2023, 12.5% for projects beginning construction during 2023, and 15% for projects beginning construction thereafter. Each contractor and subcontractor who employs four or more individuals to perform construction on an applicable project must employ at least one qualified apprentice.
The Notice provides that taxpayers must comply with the apprentice-to-journeyworker ratio requirements of the Department of Labor or the applicable state and must ensure they have one apprentice for each taxpayer, contractor, or subcontractor that employs four or more individuals to construct, alter, or repair the applicable project.
In the event that the Apprenticeship Requirement is not satisfied, the IRA provides that taxpayers nonetheless will be deemed to have satisfied the requirement if they request qualified apprentices from a registered apprenticeship program and the request is denied or not responded to within five business days (Good Faith Effort Exception). The Notice provides that in order to qualify for the Good Faith Effort Exception, taxpayers must request apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in the particular industry.
Taxpayers must also comply with recordkeeping requirements with respect to apprentices, similar to those imposed for prevailing wage rates, that are sufficient to establish satisfaction of the Apprenticeship Requirement or, if applicable, to document the taxpayer’s request for qualified apprentices and the subsequent denial or nonresponse.
The “Beginning of Construction” Exception
As previously noted, taxpayers with projects that begin construction prior to the date that is 60 days after the publication of the Notice will be deemed to have satisfied the Prevailing Wage and Apprenticeship Requirements for purposes of claiming enhanced tax credits (Beginning of Construction Exception). Thus, the Notice, as corrected on December 6, 2023, clarifies that taxpayers now need to begin construction prior to January 29, 2023, to satisfy the Beginning of Construction Exception.
The Notice further confirms that the existing IRS “beginning of construction” guidance issued under Sections 45, 45Q, and 48 of the Code (Beginning of Construction Notices) will also apply in determining when construction of ITC, PTC, or Carbon Capture projects begins for purposes of the Beginning of Construction Exception. Principles from IRS Notice 2013-29 and IRS Notice 2016-31 will apply for purposes of such determination for projects eligible for Sections 30C, 45V, 45Y, 48E, and 179D of the Code.
Pursuant to the Beginning of Construction Notices, a taxpayer can demonstrate beginning of construction and meet the Beginning of Construction Exception in one of two ways: (x) starting physical work of a significant nature (the Physical Work Test) or (y) paying or incurring 5% or more of the total cost of the project (the Five Percent Safe Harbor).
Once a taxpayer begins construction on a project, it is also required to comply with a continuity requirement unless the project is placed in service within a safe harbor period (generally four calendar years (or six calendar years in the case of the Carbon Capture Credit) after the calendar year during which construction of the project begins). This safe harbor period was extended to six years for PTC and ITC projects that began construction in 2016, 2017, 2018, or 2019 and five years for PTC and ITC projects that began construction in 2020.
Because of the significant impact the Prevailing Wage and Apprenticeship Requirements have on the value of the credits available to taxpayers or the required incremental costs to satisfy such requirements, the clarifications and processes established in the Notice are critical guidance relating to the changes made by the IRA and could have significant impact on the relevant taxpayers and projects and their costs and economics.
From a substantive perspective, the Notice provides helpful initial clarity on what compliance with the Prevailing Wage and Apprenticeship Requirements will require. Perhaps most important is the IRS’s confirmation that the existing “beginning of construction” guidance and Notices can be relied on for purposes of applying the Beginning of Construction Exception. This means that taxpayers’ prior efforts, and current plans, to “begin construction” prior to January 29, 2023, to avoid the 80% reduction in the applicable tax credit amount, or to mitigate a potential increase in construction and maintenance costs required to meet these requirements, will continue to be important. As such, the “beginning of construction” issue will continue to be an area of focus and due diligence for all parties involved in such projects.
Finally, although several questions remain unanswered with respect to these requirements, including some of those addressed by taxpayers in comment letters previously submitted to the IRS, the Notice indicates that additional guidance will be forthcoming, so we hope such questions will be answered by future guidance.
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