Failure to Meet Prevailing Wage Requirements Can Cost You 80% of Energy Credits

The Inflation Reduction Act (“IRA”) created and expanded several credits available for businesses who invest in clean energy alternatives. Many of the credits have a “base amount” available to businesses, which can be multiplied by five if the business meets the prevailing wage and apprenticeship (“PWA”) requirements for the applicable credits.  

Under the IRA, these requirements apply to facilities and projects where construction began 60 days or more after the publication of initial guidance by Treasury and the IRS on November 30, 2022. Accordingly, the PWA requirements apply to projects that begin on or after January 29, 2023. The IRS released proposed rules regarding the PWA requirements on August 29, 2023, which further detailed how companies can comply with the PWA requirements. Taxpayers may rely on these proposed regulations for construction and projects beginning on or after January 29, 2023. 

Impacted Energy Credits 

The prevailing wage and apprenticeship requirements do not apply to all the credits contained in the IRA, and certain credits only require the prevailing wage requirements be met to qualify for increased credit amounts. Some companies may also qualify for either the “one megawatt” (“1 MW”) exception or “beginning of construction” (“BOC”) exception. 

The following credits must meet both the prevailing wage requirements and the apprenticeship requirements to qualify for the increased credit amounts: 

• IRC Sec. 30C alternative fuel vehicle refueling property credit 
• IRC Sec. 45 renewable electricity production credit 
• IRC Sec. 45Q credit for carbon oxide sequestration 
• IRC Sec. 45V credit for production of clean hydrogen 
• IRC Sec. 45Y clean electricity production credit 
• IRC Sec. 45Z clean fuel production credit 
• IRC Sec. 48 energy credit 
• IRC Sec. 48C qualifying advanced energy project credit 
• IRC Sec. 48E clean electricity investment credit 
• IRC Sec. 179D energy efficient commercial buildings deduction 

The following credits need to meet only the prevailing wage requirements to qualify for the increased credit amounts: 

• Section 45L new energy efficient home credit  
• Section 45U zero-emission nuclear power production credit 

 Prevailing Wage Requirements 

The federal government sets minimum wages (“prevailing wages”) for workers who are employed on certain government projects. These wages are set yearly by the Department of Labor and vary depending on the work to be done and the geographical area where the work or project will be completed. The Department of Labor releases both basic hourly rates and fringe benefit hourly rates. Taxpayers can use the website www.sam.gov to help determine the appropriate rates based on their geographic area and the labor classification.  

The IRA incentivizes taxpayers to pay all laborers and mechanics they employ (or their contractor or subcontractor employees) wages that are equal to or exceed these prevailing rates by tying the amount of credit to the use of these wages. Companies who meet the PWA requirements will be able to claim increased credit amounts. 

Apprenticeship Requirements 

The IRA also added apprenticeship requirements, which contain more components than the prevailing wage requirements. There are three requirements that must be met: 

1. Labor hours requirement – requires that the taxpayer ensure that either 10%, 12.5%, or 15% of the total labor hours performed are performed by qualified apprentices from a registered apprenticeship program, depending on the date on which construction began. 

1. Ratio requirement – requires taxpayers to ensure that the ratio of apprentices to journey workers established by the registered apprenticeship program are met each day. 

1. Participation requirement – requires taxpayers who employ four or more laborers or mechanics in the construction, alteration, or repair of a qualified facility to hire at least one “qualified apprentice.” 

A “qualified apprentice” is an individual who is currently participating in a Registered Apprenticeship program. A Registered Apprenticeship program must meet the requirements under the National Apprenticeship Act (29 CFR 29 and 30).  

Documentation and Recordkeeping to Meet PWA Requirements  

The proposed rules highlight multiple aspects taxpayers will need to account for to meet the PWA requirements. Businesses will need to ensure that each employee is being paid the minimum prevailing wage for the job they perform. The prevailing wage rate is adjusted annually, which means taxpayers will need to monitor the changes yearly and adjust accordingly.  

Taxpayers also need to maintain documentation, including hours worked by each employee, contractor, or subcontractor; total wages paid to each worker, and the job classification for each worker. They also need to ensure that any subcontractors they use during the project meet all the requirements as well. They will need to keep track of basic hourly rates paid and fringe benefit hourly rates.  

Correction of Noncompliance 

Taxpayers who fail to meet the PWA requirements will be allowed to claim the credit provided they cure the defects in a timely manner. Taxpayers who fail to meet the prevailing wage requirements must make correction payments after discovering noncompliance and pay a penalty to the IRS when they file the return to claim the credit. Correction payments must equal the difference between what the worker was paid and what the prevailing rate was, plus interest on the difference. However, if the underpayment is due to “intentional disregard,” the correction payment must be three times this difference amount. 

The penalty that must be paid to the IRS is equal to $5,000 per worker who was not paid at the prevailing wage rate. Again, that amount increases if the underpayment was due to “intentional disregard” – up to $10,000 per worker. The penalty may be waived if the taxpayer makes the correction payment within the earlier of 30 days after becoming aware of the underpayment or the date on which the credit is claimed. Alternatively, the penalty may be waived if the taxpayer has put a qualifying labor agreement in place.  

Taxpayers who fail to meet the apprenticeship requirements may pay a penalty up to $50 per worker for failing to meet these requirements as a “cure”. However, if the taxpayer can show that they requested qualified apprentices from a registered apprenticeship program and were either denied or did not receive a response, they will be exempt under a good-faith exception. Under the proposed rules, taxpayers would need to contact multiple apprenticeship programs to show good faith.   

Exceptions to PWA Requirements 

The IRA contains two exceptions to these requirements. If a company/facility meets the requirements for either exception, they may claim the full credit amount without meeting the PWA requirements.  

1. One Megawatt Exception: If a facility has a maximum output of less than one megawatt (as measured in alternating current), it is still eligible to claim the full credit amount. 

1. Beginning of Construction Exception: If a facility/taxpayer is eligible for the credit and began construction before January 29, 2023, the facility/taxpayer does not need to meet the PWA requirements to claim the full credit. 

It cannot be overstated how important it is to meet the PWA requirements for these credits. Failure to meet the requirements will result in a business being limited to only the base credit instead of the increased amount – a reduction of 80%. Taxpayers who intend to claim these credits should work with a trusted adviser to make sure they meet these requirements.