IRS Issues Proposed Regs on Prevailing Wage and Apprenticeship Requirements for Increased Clean Energy Credit or Deduction

(Parker Tax Publishing September 2023)

The IRS issued proposed regulations regarding increased clean energy credit or deduction amounts available for taxpayers satisfying prevailing wage and registered apprenticeship (collectively, PWA) requirements established by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169). The proposed regulations also address specific PWA or prevailing wage recordkeeping and reporting requirements and affect taxpayers intending to claim increased credit or deduction amounts pursuant to the IRA, including those intending to make elective payment elections for available credit amounts, and those intending to transfer increased credit amounts. REG-100908-23.

Background

Under the Inflation Reduction Act of 2022 (IRA) (Pub, L. 117-169), increased clean energy credit amounts are available under Code Secs. 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, and Code Sec. 48E, and an increased deduction is available under Code Sec. 179D, for taxpayers satisfying certain prevailing wage and registered apprenticeship (PWA) requirements. The principal PWA requirements are set forth in Code Sec. 45(b)(6), (7), and (8). In general, Code Sec. 45(b)(6) provides the increased credit amount for taxpayers satisfying the PWA requirements or meeting one of the exceptions, Code Sec. 45(b)(7) provides the prevailing wage requirements (Prevailing Wage Requirements), and Code Sec. 45(b)(8) provides the apprenticeship requirements (Apprenticeship Requirements).

The increased credit amounts are also generally available under Code Secs. 45, 45Y, 48, and Code Sec. 48E with respect to certain facilities with a maximum net output (or capacity for energy storage technology under Code Sec. 48E) of less than one megawatt (One Megawatt Exception). Additionally, increased credit and deduction amounts are available under Code Secs. 30C, 45, 45Q, 45V, 45Y, 48, 48E and Code Sec. 179D without meeting the PWA requirements if beginning of installation or beginning of construction (BOC) occurred before the date that is 60 days after the IRS issued guidance with respect to the requirements of Code Sec. 45(b)(7)(A) and (8) (BOC Exception). Further, under a Good Faith Effort Exception provided by Code Sec. 45(b)(8)(D)(ii), a taxpayer is deemed to have satisfied the Apprenticeship Requirements with respect to a qualified facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program and such request is denied or the registered apprenticeship program fails to respond to the request.

In November 2022, the IRS published Notice 2022-61, providing guidance with respect to the PWA requirements in Code Sec. 45(b)(7)(A) and (8), including initial guidance for determining the beginning of construction for Code Sec. 45 and other credits and the beginning of installation under Code Sec. 179D. Notice 2022-61 also started the 60-day period applicable for determining if taxpayers qualify for the increased credit or deduction amounts by satisfying the BOC Exception. Therefore, if a taxpayer began construction or installation of a facility before January 29, 2023, then the taxpayer is eligible for the increased credit amount without satisfying the PWA requirements, provided the taxpayer is otherwise eligible for the credit.

On August 30, the IRS published proposed regulations in REG-100908-23 regarding the PWA requirements established by the IRA. The IRS also released frequently asked questions (FAQs) and Publication 5855, which is an overview of the PWA requirements and the applicable credits.

Proposed Regulations

Under Code Sec. 45(b)(7)(A), the increased credit is available with respect to a qualified facility if a taxpayer ensures that laborers and mechanics are "paid wages at rates not less than the prevailing rates. . . in accordance with [the Davis-Bacon Act (DBA)]." The DBA, enacted in 1931, requires the payment of minimum prevailing wages to laborers and mechanics working on certain contracts entered into by federal agencies and District of Columbia. Thus, the proposed regulations incorporate DBA statutory and regulatory guidance that is relevant for purposes of claiming the increased tax credit and consistent with sound tax administration. For example, the proposed regulations largely adopt DBA guidance relating to wage determinations and the meaning of pertinent terms such as "laborer" and "mechanic"; "construction, alteration, or repair"; "wages"; and "employed".

The proposed regulations provide that, in order to earn the increased credit under Code Sec. 45(b)(6) by satisfying the PWA requirements, the taxpayer is solely responsible for: (1) ensuring that the relevant laborers and mechanics are paid wages not less than the prevailing rate whether employed directly by the taxpayer, or by a contractor, or a subcontractor, and (2) ensuring that the Apprenticeship Requirements are satisfied. The proposed regulations also provide that the taxpayer is solely responsible for the PWA recordkeeping requirements, the correction and penalty provisions under the Prevailing Wage Requirements, and the Good Faith Effort Exception and penalty provisions under the Apprenticeship Requirements. However, nothing in the proposed regulations is intended to supersede requirements that might otherwise apply to a taxpayer, contractor, or subcontractor by state or federal law.

Generally, the proposed regulations define the term "taxpayer" to mean any taxpayer as defined in Code Sec. 7701(a)(14), including applicable entities described in Code Sec. 6417(d)(1)(A). This will generally be the entity that claims the credit (as increased under Code Sec. 45(b)(6)), or makes an elective payment election under Code Sec. 6417 with respect to such credit amount on a federal income tax return. The Code Sec. 45 credit, including the increased credit amount available under Code Sec. 45(b)(6), is an eligible credit subject to the newly enacted Code Sec. 6418, which allows "eligible taxpayers" to elect to transfer certain credits to unrelated taxpayers rather than using the credits against their federal income tax liabilities. In the case of credits transferred under Code Sec. 6418, the proposed regulations provide that the term "taxpayer" also means the eligible taxpayer that determines the eligible credit to be transferred and makes a transfer election under Code Sec. 6418 to transfer any specified credit portion (including 100 percent) of an eligible credit determined with respect to any eligible credit property of such eligible taxpayer for any tax year.

Prevailing Wage Requirements

The proposed regulations provide that a taxpayer would satisfy the Prevailing Wage Requirements with respect to the construction, alteration, or repair of a facility by ensuring that all laborers and mechanics employed by the taxpayer, or any contractor or subcontractor, in the construction, alteration, or repair of a facility are paid wages at rates that are not less than the prevailing rates determined by the Department of Labor in accordance with the DBA.

Consistent with the DBA and 29 CFR 5.2, and solely for purposes of the Prevailing Wage Requirements, the proposed regulations provide that a laborer or mechanic would be considered employed by the taxpayer, contractor, or subcontractor if the individual performs the duties of a laborer or mechanic for the taxpayer, contractor, or subcontractor (as applicable), regardless of whether the individual would be characterized as an employee or an independent contractor for

other federal tax purposes. The definition of employed for purposes of the Prevailing Wage Requirements will generally be different and broader than the definition used elsewhere in the Code, for example with respect to employment taxes, as well as the associated reporting and withholding obligations. Thus, laborers and mechanics who are independent contractors for employment tax purposes may be considered employed for purposes of the Prevailing Wage Requirements.

The proposed regulations require the payment of prevailing wages at the time work is performed with respect to the construction, alteration, or repair of a facility in order to claim the increased credit. The proposed regulations also provide that the requirement becomes binding only when the increased credit is claimed on a return. Thus, the correction and penalty payment requirements of Code Sec. 45(b)(7)(B)(i) will become applicable to a taxpayer upon the occurrence of the taxpayer's failure to satisfy the Prevailing Wage Requirements of Code Sec. 45(b)(7)(A), which occurs whenever wages are paid to a laborer or mechanic below the prevailing wage rates. According to the IRS, that failures will occur, and the obligation to make correction and penalty payments will have arisen, during the course of the construction, alteration, or repair of a qualified facility must be viewed in the context of taxpayers not needing to satisfy the Prevailing Wage Requirements in the absence of an increased credit being claimed on a return. Thus, the proposed regulations provide that the obligation to make correction payments and pay the penalty would not become binding until a return is filed claiming the increased credit, and the proposed regulations do not require payment of the correction payment or the penalty until the time the increased credit is claimed.

Apprenticeship Requirements

To satisfy the apprenticeship requirements of Code Sec. 45(b)(8), taxpayers must meet certain requirements with respect to labor hours (Labor Hours Requirement), apprentice-to-journeyworker ratios (Ratio Requirement), and participation by apprentices (Participation Requirement). The proposed regulations clarify the interaction among these requirements. The proposed regulations explain that the Labor Hours Requirement generally is subject to the Ratio Requirement. The proposed regulations further explain that the Participation Requirement applies in addition to the Labor Hour Requirement and the Ratio Requirement. Therefore, in order to meet the requirements of Code Sec. 45(b)(8), a taxpayer generally is subject to all three components of the Apprenticeship Requirements. If a taxpayer satisfies the applicable Labor Hours Requirement but fails the Participation Requirement, then the taxpayer is not eligible for the increased credit unless the taxpayer complies with the penalty provisions of Code Sec. 45(b)(8)(D) with respect to the total hours that are not met with respect to the Participation Requirement or meets the Good Faith Effort Exception.

Recordkeeping Requirements

Under the proposed regulations, taxpayers are required to establish compliance with the Prevailing Wage Requirements at the time a return claiming the increased credit is filed. The proposed regulations provide that a taxpayer would be required to do so on such forms and in such manner as the IRS provides in forms, publications, or other guidance.

The IRS expects that taxpayers will be required to report at the time of filing a return the following information: (1) the location and type of qualified facility; (2) the applicable wage determinations for the type and location of the facility; (3) 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; (4) the number of workers who received correction payments; (5) 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; (6) 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 (7) the total credit claimed.

Proposed Applicability Date

The regulations are proposed to apply to facilities, property, projects, or equipment placed in service in tax years ending after the date the regulations are published as final in the Federal Register and the construction or installation of which begins after the date these regulations are published as final regulations in the Federal Register. However, taxpayers may rely on the proposed regulations with respect to construction or installation of a facility, property, project, or equipment beginning on or after January 29, 2023, and on or before the date these regulations are published as final regulations in the Federal Register, provided that beginning after October 29, 2023 (i.e., 60 days after the August 30, 2023, filing of the proposed regulations with the Federal Register), taxpayers follow the proposed regulations in their entirety and in a consistent manner.

For a discussion of the prevailing wage and apprenticeship requirements, see Parker Tax ¶104,150.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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