Final Regulations Issued on Prevailing Wage and Apprenticeship Requirements under the Inflation Reduction Act

On June 18, 2024, the US Internal Revenue Service (“IRS”) and Department of the Treasury (“Treasury”) issued final regulations (“Final Regulations”) establishing rules for taxpayers intending to satisfy the prevailing wage and apprenticeship (“PWA”) requirements to claim increased tax credits, of up to five times the base amount, for qualifying clean energy projects under the Inflation Reduction Act of 2022. While largely adopting the previously issued proposed regulations (“Proposed Regulations”), the Final Regulations provide a number of important clarifications and updates to address many of the over 300 comments submitted to Treasury. This Legal Update highlights some of the key clarifications and updates made by the Final Regulations.

Scope of the Final Regulations

The Final Regulations apply to most of the renewable energy tax credits available under the Internal Revenue Code (“Code”) that are subject to the PWA requirements; including, among others, the production tax credits under Sections 45 (wind, solar and other qualifying technologies), 45V (hydrogen) and 45Y (technology-neutral clean electricity), and the credit for carbon capture and sequestration under Section 45Q.

Notably, the Final Regulations do not finalize the proposed regulations that were issued with respect to the investment tax credits under Section 48 (wind, solar and storage and other qualifying technologies) and 48E (technology-neutral clean electricity) (together, the “ITC”), which require special rules to address ITC-specific consideration, such as recapture and aggregation of energy properties. The IRS and Treasury intend to issue separate guidance to address the PWA requirements with respect to the ITC. In the meantime, for purposes of the ITC, taxpayers may rely on the proposed regulations that were issued under Sections 48 and 48E. 

Beginning-of-Construction Exception and the Transition Rule

Generally, qualifying projects (with the exception of projects claiming certain credits, as discussed below) that began construction before January 29, 2023 (“BOC”) are not subject to the PWA requirements (the “BOC Exception”). To achieve BOC and be eligible for the BOC Exception, a taxpayer must, prior to January 29, 2023, either (i) start physical work of a significant nature (“Physical Work Test”) or (ii) pay or incur 5% for more of the total cost of the project (“Five Percent Safe Harbor”). The Final Regulations provide for a transition rule where any work performed before January 29, 2023 will not be subject to the PWA requirements, regardless of whether such work satisfied the Physical Work Test or Five Percent Safe Harbor. 

In addition, with respect to projects claiming credits under Sections 45L, 45A, and 48C for which the BOC Exception does not apply, taxpayers will still be able to take advantage of the transition rule for work performed prior to January 29, 2023, however, they must comply with the PWA requirements for construction, alteration and repair work occurring on or after January 29, 2023. Section 45U, which applies to alterations or repairs of a qualified nuclear power facility occurring after December 31, 2023, is carved out from the transition rule.

Similarly, for projects that initially met the BOC Exception, but later failed to continue to satisfy it, taxpayers may take advantage of the transition rule for work performed prior to January 29, 2023; however, they must satisfy the PWA requirements for work occurring on or after that date. 

Construction, Alteration, Repair and Maintenance

The Final Regulations clarify that the PWA requirements apply to the construction of a project even if BOC has not yet been achieved. While in many cases construction for purposes of the PWA requirements will also satisfy the Physical Work Test and constitute BOC, there is not complete overlap. For example, the Final Regulations clarify that preliminary activities—such as demolition and removal of an existing structure—are subject to the PWA requirements, notwithstanding that such activities would not satisfy the Physical Work Test. As this point was not entirely clear under the Proposed Regulations, the Final Regulations provide transitional relief for projects that did not satisfy the PWA requirements with respect to preliminary activities. However, such relief is only with respect to penalties. Taxpayers will still be required to make curative payments to laborers and mechanics who performed preliminary activities at rates below the applicable prevailing wage. 

Although the Final Regulations define “construction,” for purposes of the PWA requirements, more broadly than the Physical Work Test, the Final Regulations clarify that the PWA requirements apply only to the portion of the construction, alteration, or repair activity that is creditable. For example, in the case of a wind project claiming production tax credits under Section 45, construction on each wind turbine, its tower, and its supporting pad would be subject to the PWA requirements, but not construction on other equipment included in the project, such as the substation. As noted above, the Final Regulations do not specifically address the ITC. It will be interesting to see whether Treasury takes a similar approach with respect to the ITC, and whether only those construction activities—the cost of which is included in the ITC-eligible basis of the project—will be subject to the PWA requirements. 

On that note, the Final Regulations clarify that the site of the work includes secondary sites only if a significant portion of the work is performed there specifically for a qualified facility. However, the PWA requirements do not apply to unrelated third-party manufacturers producing materials, supplies, equipment, or prefabricated components for multiple customers, or for the general public.

Like the Proposed Regulations, the Final Regulations maintain the distinction between alteration and repair work on the one hand (where prevailing wage requirements generally apply whether the work occurs before or after a qualified facility is placed in service) and maintenance work on the other hand (where prevailing wage requirements generally only apply if the work occurs before a qualified facility is placed in service). The Final Regulations clarify that maintenance normally involves the activity of keeping the project in its current condition so that it may continue to be used, whereas repair work normally includes an activity that: (i) improves the project, either by fixing something that is not functioning properly or by improving upon the project’s existing condition; (ii) involves the correction of individual problems or defects and is not continuous or recurring; or (iii) improves the project’s structural strength, stability, safety, capacity, efficiency, or usefulness. However, the Final Regulations do not provide additional examples to help distinguish between the two, and did not adopt the example provided in the Proposed Regulations, stating that ultimately the determination of whether work is properly viewed as alteration or repair or maintenance is dependent on the facts and circumstances. 

Timing of Prevailing Wage Determination

The Final Regulations require prevailing wage rates to be determined at the time the contract for the related work is executed. In addition, such prevailing wage rates apply to any subcontract entered into under such contract. This is in contrast to the Proposed Regulations, which would have required the determination to be made as of the date construction began under the contract. These revisions should provide developers with more pricing certainty when negotiating construction contracts. 

Consistent with the Proposed Regulations, new wage determinations are generally not required over the lifetime of a contract, unless there is substantial new work under the contract, or there are significant extensions to the project. The Final Regulations clarify that additional time to complete original work or the addition of incidental work would not require a new wage determination. However, in the case of contracts that involve alteration or repair over an indefinite period that is not tied to the completion of any specific work, such as a typical O&M agreement, wage rates must be updated annually. 

The Final Regulations generally maintain the procedures set forth in the Proposed Regulations allowing for taxpayers or the contractors and subcontractors to request a supplemental wage determination where there is no applicable wage rate, such as where there is no determination issued for the geographic area of the type of construction. However, unlike the Proposed Regulations—which would have required requests for a supplemental wage determination to be made no more than 90 days before the beginning of construction—the Final Regulations allow a taxpayer to make such a request up to 90 days prior to execution of the contract. Like the revisions described above, this should allow developers to achieve more pricing certainty at the time of execution of the contract.

Apprenticeship

The Final Regulations clarify that the apprenticeship requirements apply only during the construction of the facility, not to alterations or repairs after the facility is placed in service. This clarification resolves an ambiguity in the Code and confirms that, once a project is operational, it is no longer required to comply with the apprenticeship requirements. 

With respect to the exception from the apprenticeship requirements for a taxpayer that has made a good faith effort to satisfy such requirements (“Good Faith Effort Exception”), the Final Regulations generally retain the same framework as the Proposed Regulations but include a number of clarifications. In general, under the Good Faith Effort Exception, a taxpayer is required to make a written request for qualified apprentices to at least one registered apprenticeship program that: (i) has a geographic area of operation that includes the location of the project; (ii) trains apprentices in the occupation(s) needed to perform construction with respect to the project; and (iii) has a usual and customary business practice of entering into agreements with employers for the placement of apprentices in the occupation for which they are training. However, the Final Regulations provide for a deemed satisfaction of the Good Faith Effort Exception if there is no apprenticeship program in the geographic area of operation of the project. 

For taxpayers that both make a request for qualified apprentices to a registered apprenticeship program and qualify for the Good Faith Effort Exception, the Final Regulations have extended the period during which a taxpayer is not required to submit additional requests for qualified apprentices to continue to qualify for the exception. Taxpayers now have 365 days—instead of 120—to make their additional request for qualified apprentices. The Final Regulations also clarify that taxpayers do not need to make their additional requests to the same registered apprenticeship program that received the taxpayer’s previous request. 

Penalties and Cures

Taxpayers who fail to comply with the PWA requirements are subject to reduced credit amounts and potential penalties, unless they make timely corrections. The correction and penalty payments are calculated based on the difference between the wages paid and the wages required, plus interest, and a fixed amount per worker or per hour, depending on the type of failure. The Final Regulations provide for interest payments accruing from the time of failure. The correction and penalty payments may be avoided or reduced in certain circumstances, such as good faith efforts, collective bargaining agreements, or prompt payment of shortfalls. When qualifying for a waiver of penalties, the Final Regulations remove the knowledge requirement, and provide that corrections for failure to comply with the PWA requirements must be made by the last day of the first month following the end of the calendar quarter in which the failure occurred, and the maximum underpayment amount must not exceed 5% of all amounts required to have been paid in a calendar year. 

The correction and penalty payments are increased if the failure to comply with the PWA requirements is found to result from "intentional disregard.” The Final Regulations expand on the factors demonstrating intentional disregard, including whether the taxpayer has conducted regular reviews of the applicable prevailing wage rates, investigated complaints resulting from suspected failures to pay the applicable prevailing wage, and conducted quarterly or more frequent reports on compliance. Failure to maintain and preserve records to establish compliance for relevant tax years is also now a factor in the Final Regulations for determining if there was “intentional disregard.”

Even if there has been an “intentional disregard” to comply with the PWA requirements, correction payments can be made, and are due within 180 days after a final determination by the IRS to be eligible for the increased credit amount.

Transferability Under Section 6418

With respect to tax credit transfers, the Final Regulations have generally adopted the Proposed Regulations without change. Specifically, under the Final Regulations, (i) obligations to satisfy the PWA requirements remain with the eligible taxpayer (i.e., the seller of the tax credit), and the eligible taxpayer remains responsible for any corrections and penalties; and (ii) the obligation to satisfy the PWA requirements becomes binding upon the earlier of the filing of the eligible taxpayer’s return or the transferee taxpayer’s return. 

Recordkeeping and Reporting Requirements

Taxpayers who intend to claim increased credit amounts by meeting the PWA requirements must also comply with specific recordkeeping and reporting to document their compliance. The recordkeeping requirements include maintaining payroll records, contracts, wage determinations, apprentice registrations, and other relevant information sufficient to establish compliance with the PWA requirements for the relevant tax years. The reporting requirements include submitting annual certifications, quarterly reviews, and notices of non-compliance to the IRS, as well as providing information to the workers and the US Department of Labor (“DOL"). The Final Regulations provide that a completed DOL Form WH-347 is considered a sufficient record of payment of prevailing wages.

The Final Regulations also expand the list of documentation sufficient to demonstrate compliance with the PWA requirements, including records of actions taken to prevent, mitigate, or remedy any failures to satisfy the PWA requirements, and also provide three ways to satisfy recordkeeping requirements, including using third party vendors to retain such information.

Applicability Dates

The Final Regulations are effective 60 days after their date of publication (the “Publication Date”). The Final Regulations apply to projects that are placed in service in taxable years ending after the Publication Date and the construction of which begins after the Publication Date. Taxpayers generally may rely on the Final Regulations for projects that are placed in service in taxable years ending on or prior to the Publication Date, or where construction begins prior to the Publication Date, if the Final Regulations are applied in their entirety and in a consistent manner.

Conclusion

The PWA requirements have significant implications for developers of clean energy projects and their investors and other stakeholders in the development, construction and operation of such projects. Developers and investors should review the Final Regulations and consult with their legal and tax advisors to determine their eligibility for—and ensure their compliance with—the PWA requirements to obtain increased tax credits available for their current and future projects.