On June 25, 2024, the Internal Revenue Service (the “IRS”) and the Department of the Treasury (“Treasury”) published final regulations regarding the prevailing wage and apprenticeship requirements (the “PWA requirements”) established by the Inflation Reduction Act of 2022 (the “IRA”) with respect to clean energy tax incentives.  In addition to the final regulations, the IRS also released Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact Sheet and updated Publication 5855, IRA Prevailing Wage & Registered Apprenticeship Overview and Prevailing wage and apprenticeship frequently asked questions.

The final regulations generally apply to facilities that begin construction after June 25, 2024, although taxpayers may rely on them prior to such time provided the taxpayers follow the final regulations in their entirety and in a consistent manner.

Background

The PWA requirements apply to most clean energy tax credits, including the credits under Code sections 48 (energy property), 45 (renewable electricity production), 45Q (carbon capture), 45V (clean hydrogen production), 45Z (clean fuel production), and 48C (advanced energy projects).

Compliance with the PWA requirements is generally a condition of receiving a 5x multiplier to the base amount of the applicable clean energy tax credit. For example, the base investment tax credit rate of 6% would be multiplied by five to produce a credit rate of 30% if the PWA requirements are satisfied.

The PWA requirements generally do not apply to facilities that began construction before January 29, 2023 (the “BOC Exception”) or electricity-generating facilities that have a maximum net output of less than one megawatt (the “One Megawatt Exception”).  The PWA requirements also include correction and penalty payments to cure noncompliance with the PWA requirements, with enhanced correction and penalty payment amounts in the case of intentional disregard.

The final regulations generally track the statutory requirements and proposed regulations (discussed by us here), with important additional rules or modifications discussed below. 

The final regulations do not include final regulations under Sections 48 or 48E and therefore do not address application of the PWA requirements to the investment tax credit.  For a discussion of the proposed regulations under Section 48, see our prior alert here.

Pre-Filing Activities and Intentional Disregard Factors

The IRS’s authority to determine a taxpayer’s compliance with the PWA requirements generally arises only after the taxpayer files a claim for the increased tax credit.  As a result, the IRS and Treasury rejected comments requesting that the final regulations impose pre-filing requirements on taxpayers to establish their eligibility for the increased tax credit (such as registering the facility or providing regular payroll records).  However, in the audit process, the IRS may require taxpayers to submit all applicable payroll records and other supporting documentation and may conduct on site visits or interviews with workers.

The Code and final regulations encourage real-time compliance with the PWA requirements through threat of increased correction and penalty payments in the case of intentional disregard.  In this regard, the final regulations incorporate and expand upon the list of factors in the proposed regulations for demonstrating intentional disregard.  Additional factors include, for example, whether the taxpayer monitors and investigates complaints that it has not complied with the PWA requirements.

Transition Rule for Work Occurring Before January 29, 2023

The final regulations provide a new transition rule for work beginning before January 29, 2023 (the date that is 60 days after the publication of Notice 2022-61, which provided initial guidance on the PWA requirements, discussed by us here).  Under this transition rule, any work performed before January 29, 2023 is not subject to the PWA requirements, regardless of whether there is a BOC Exception that applies to the relevant credit.

This transition rule may be useful if the taxpayer begins construction prior to January 29, 2023 with the intention of satisfying the BOC Exception but fails to satisfy the BOC Exception for other reasons (for example, because the facility fails to satisfy the continuity requirement, discussed by us here).  The transition rule is also helpful for tax credits under sections 45L, 45Z, and 48C, which have no BOC Exception.  Although the transition rule is presented in the regulations under section 45, the preamble to the regulations makes clear that the intent is to apply the transition rule to all credits that reference the PWA requirements of section 45, including sections 45Q, 45V, and 45Y.

Laborers or Mechanics Who Cannot be Located

The final regulations provide relief to taxpayers who are unable to make correction payments due to their inability to locate the underpaid laborers and mechanics.  Under final regulations, a taxpayer will be deemed to have made correction payments to the underpaid laborer or mechanic who cannot be located if the taxpayer can demonstrate compliance with the applicable state unclaimed property law and all federal and state withholding and information reporting requirements with respect to the payments. 

Comment: The statutory provisions offer no de minimis exception to the payment of prevailing wages.  Failure to pay (or cure any failure to pay) even one laborer prevailing wages can cause the taxpayer to be ineligible for the increased tax credit for the entire facility.  This new rule under the final regulations will help taxpayers who want to make correction payments to underpaid laborers but are unable to do so for lack of knowledge regarding their location.  The rule presumes availability of identifying information (social security numbers) with respect to the laborers, however, since it requires that withholding occur; taxpayers who do not or cannot obtain the laborers’ identifying information from the contractor may see no benefit from this new rule.  

Scope of PWA Requirements

The prevailing wage requirements apply with respect to the construction of a facility and with respect to the alteration or repair of a facility.  The apprenticeship requirements apply only with respect to construction of a facility.  

The preamble to the final regulations clarifies that the PWA requirements are limited in scope.  Under the general rule provided for in the final regulations, the PWA requirements apply only to the portion of the activity on the site of the work (or secondary site) that is creditable or deductible under the applicable Code section.

Comment: In the case of a wind facility claiming the production tax credit, for example, the PWA requirements are best viewed as applying to each turbine (together with its tower and supporting pad) and not to any access roads, substation, or other work on site (or at a secondary site) that is separate from the “qualified facility.”  

Definitions

The final regulations modify (or decline to modify) certain key definitions impacting the scope of the PWA requirements, as discussed below.

“Construction, alteration, or repair”

The final regulations follow the proposed regulations in defining “construction, alteration, or repair” expansively by cross reference to 29 CFR 5.2.  As a result, “construction, alteration, or repair” includes all types of work on the facility, including altering, remodeling, installing of items fabricated offsite, painting and decorating, manufacturing, or furnishing of materials, articles, and supplies or equipment on the site of the work, and certain demolition or removal activities. 

The preamble to the final regulations explains that this definition of “construction, alteration, or repair” is in contrast to the meaning of “construction” for purposes of the BOC Exception, with respect to which there is longstanding guidance acknowledged by the IRS in Notice 2022-61, discussed by us here.  Initial activities, such as demolition or land clearing, may constitute “construction” for purposes of the PWA requirements but would not constitute “construction” for purposes of the BOC Exception.  To provide transition relief, the final regulations waive penalties for qualifying taxpayers who failed to comply with the PWA requirements for certain initial activities and make correction payments to the impacted workers.

“Maintenance” v. “Alteration or Repair”

The final regulations provide additional guidance on the distinction between “maintenance” and “alteration or repair” subject to prevailing wage requirements and remove an example that was in the proposed regulations on this point.  The proposed example had provided that “alteration or repair” would include replacement of a malfunctioning inverter in a solar farm after the solar farm had been placed in service.  The preamble to the final regulations explains that this example was “not indicative of ordinary practices in the solar industry” and so was removed.  Because of the “highly factual nature” of the distinction between maintenance and alteration or repair, the IRS and Treasury rejected taxpayer requests for other examples illustrating the distinction.

“Laborer” and “Mechanic”

The IRS and Treasury considered comments requesting that the final regulations exclude certain specialized employees from the definition of laborer and mechanic.  Commentators requested, for example, that the definition of laborer and mechanic exclude (i) engineers, architects, inspectors, testers, and troubleshooters; (ii) wind or solar commissioning technicians; (iii) workers involved in tie-ins and other commissioning, testing, and troubleshooting of grid-connected facilities after mechanical completion; (iv) workers associated with initial energization, testing, and synchronization of installed equipment; (v) wind turbine commissioners; and (vi) other similar professionals. In requesting these exclusions, commenters analogized work described in the DOL Field Operations Handbook (FOH) that is not covered under the Davis Bacon Act unless those individuals are performing the duties of a laborer or mechanic.

While the final regulations do not adopt any industry-specific exceptions to the definition of laborer and mechanic, the preamble acknowledges that “the DOL FOH may provide some guidance to taxpayers.”  The preamble cautions, however, that whether an individual is a laborer or mechanic will depend on the specific job duties and the relevant facts and circumstances.

Timing for Determining Prevailing Wages

The final regulations provide that the applicable prevailing wage rates are determined at the time the contract for the construction, alteration, or repair of the facility is executed by the taxpayer and a contractor (rather than when work subject to the prevailing wage requirements begins).  This is a taxpayer-friendly rule intended to improve certainty around project costs and financing at the time of contracting.  The final regulations also impose no requirement to update the prevailing wage rates if the contractor is given more time to complete its original commitment or if the additional work is merely incidental.

Qualifying Project Labor Agreements and Penalty Waivers Generally

The final regulations provide that, as under the proposed regulations, penalties for failure to comply with the PWA requirements do not apply if the taxpayer uses a “qualifying project labor agreement” and makes the required correction payments before filing a return claiming the credit. Under the final regulations, qualifying project labor agreements will be required to include provisions requiring the payment of wages at rates that are not less than the prevailing rates, include contract provisions complying with the apprenticeship requirements, and establish a mechanism for workers, labor organizations, and taxpayers to correct any underpayments. 

The final regulations also revise and clarify the limited penalty waiver rules, applicable to failures small in amount or limited in duration.  The final regulations increase the maximum underpayment amount available for the limited penalty waiver (from 2.5% to 5% of all amounts required to be paid in a calendar year) and adjust the period for making the correction payment (from 30 days after the taxpayer first becomes aware of the failure, to the last day of the first month following the end of the calendar quarter in which the failure occurred).

The IRA provides a “good faith effort” exception to the apprenticeship requirements, pursuant to which a taxpayer is deemed to satisfy the apprenticeship requirements if the taxpayer requests apprentices from a registered apprenticeship program and (i) such request is denied, and the denial is not the result of the taxpayer’s refusal to comply with the established standards and requirements of the registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to the taxpayer’s request.  

The proposed regulations had provided guidance on this “good faith effort” exception (discussed by us here), which the final regulations generally adopt.  However, the final regulations—

• also require the taxpayer, contractor, or subcontractor to make an initial written request for qualified apprentices from the registered apprenticeship program at least 45 days before the apprenticeship work begins and, in the case of subsequent requests, no later than 14 days before the apprenticeship work begins; and

• permit the taxpayer, contractor, or subcontractor to rely on a denial of a written request for 365 days (rather than 120 days in the proposed regulations) before having to submit an additional written request(s), if the initial written request is denied or not responded to.

The final regulations also clarify the scope of the “good faith effort” exception with respect to situations in which only part of the request is denied.  In addition, the final regulations confirm that if there is no registered apprenticeship program within a geographic area of operation that includes the location of the facility (which is expected to be rare), taxpayers will be deemed to satisfy the “good faith effort” exception for the qualified apprentices they (or the contractor or subcontractor) would have requested for that occupation and location. 

Special Rules on Section 45Z

Section 45Z, the clean fuel production credit, does not contain a BOC Exception to the PWA requirements.  Instead, section 45Z(f)(6) provides that projects placed in service before January 1, 2025, are exempt from the prevailing wage requirements with respect to construction of the facility, and section 45Z(f)(7) provides that rules similar to the rules of section 45(b)(8) with respect to apprentices apply.  Thus, although there is a placed-in-service exception as to payment of prevailing wages, on the face of the statute there is no exception to the requirement to use apprentices.  The lack of a parallel exception for use of apprentices seemed to be a drafting oversight, and the proposed regulations compounded the confusion by referencing the use of apprentices as to alterations and repairs.

The final regulations do not provide for a placed-in-service exception to the use of apprentices generally on the basis that no such general exception is found in the statute but do provide a transition rule that limits the applicability of the apprenticeship requirements to construction that occurs after September 23, 2024.  This means that although a facility that is placed in service before 2025 has no prevailing wage requirements with respect to its construction, the taxpayer must satisfy the apprenticeship requirements with respect to its construction, but only as to apprentices used in construction after September 23, 2024.  

In addition, the transition rule discussed above applies to the PWA requirements for section 45Z so that, even as to facilities placed in service after December 31, 2024, the PWA requirements are inapplicable to work that occurred before January 29, 2023.  

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