IRS Announces Final Regulations Implementing Prevailing Wage and Apprenticeship Requirements for Clean Energy Projects Under the Inflation Reduction Act

At a Glance

• Under the final regulations, with some exceptions, the IRS will use the same methods for determining the beginning of construction as the DOL uses for work subject to the Davis-Bacon Act, which are more expansive and encompass more preparatory activity than contemplated under the prior guidance.
• The IRS also revised and clarified its guidance regarding which wage determinations apply to clean energy projects under the IRA.
• The final regulations also provide additional clarification regarding when a taxpayer must pay prevailing wages after a qualifying project is placed into service.
• The participation requirement requires a taxpayer, contractor or subcontractor who employs four or more individuals in the construction of the qualified facility at any time during the construction, regardless of whether they are employed at the same location or at the same time, to hire apprentice workers.

On June 18, 2024, the U.S. Treasury Department and the Internal Revenue Service (IRS) published final regulations implementing the prevailing wage and apprenticeship requirements for clean energy tax credits for construction projects under the Inflation Reduction Act (IRA).

When and Which Prevailing Wage Rates Apply

The prior guidance, published by Treasury and the IRS in the form of proposed regulations and notices, allowed taxpayers to meet either the physical-work test (based on when the taxpayer started physical work of a substantive nature) or the 5% safe harbor rule (when the taxpayer paid or incurred expenditures of 5% or more of the total cost of the project) to determine when construction has begun for purposes of the clean energy tax credits established under the IRA. This meant that activities such as site clearing, including the removal of old wind turbines, was considered preliminary in nature; and therefore the prevailing wage and apprenticeship requirements would not apply to work undertaken for such activities.

Under the final regulations, with some exceptions, the IRS will use the same methods for determining the beginning of construction as the Department of Labor uses for work subject to the Davis-Bacon Act (DBA), which are more expansive and encompass more preparatory activity than contemplated under the prior guidance.

The IRS also revised and clarified its guidance regarding which wage determinations apply to clean energy projects under the IRA. The proposed regulations stated that the wage determinations in effect at the time construction began are the determinations applicable to the work. However, the final regulations revised this to provide that the wage determinations at the time a taxpayer signs the contract with a contractor will control for that contractor and any subcontractors under that contract for the duration of the project. If a taxpayer engages multiple contractors, then there could be multiple wage determinations applicable to the project depending on the dates of the separate contracts.

The final regulations also provide additional clarification regarding when a taxpayer must pay prevailing wages after a qualifying project is placed into service. For example, work on an alternative-fuel vehicle-refueling station never requires the taxpayer to pay prevailing wage after the station is put into service. But qualifying facilities like wind or solar farms must pay prevailing wages for alteration and repair work during the 10 years when the taxpayer is receiving the enhanced tax credit after the facility is placed into service. Alteration and repair work, unlike the original project, does not have an accompanying apprenticeship requirement.

The IRS declined to set a de minimis standard for separating regular maintenance work from alteration or repair work, and instead relied on the application of DBA requirements to make this distinction. However, the IRS also revised the applicable wage rate for alteration and repair work to allow a taxpayer to use the wage rate in place at the time it signs the contract for such work, similar to the revisions to the original construction standard.

Apprenticeship Requirements

The final regulations provide three noteworthy clarifications to the proposed regulations.

First, the labor-hour requirement is not a contractor-by-contractor or trade-by-trade calculation. Rather it is an aggregate of all labor hours worked by laborers and mechanics on the construction of the facility.

Second, the hours of an apprentice in his or her first 90 days of a program do count towards the total apprentice labor hours even if this is a probationary period for the program (it is important that these hours must be worked on the construction site to count for the labor-hours requirement).

Third, the participation requirement requires a taxpayer, contractor or subcontractor who employs four or more individuals in the construction of the qualified facility at any time during the construction, regardless of whether they are employed at the same location or at the same time, to hire apprentice workers.

Record-Keeping and Pre-filing Requirements

While the final regulations do not impose any pre-filing requirements, they make clear that a taxpayer’s self-correction of underpayments of prevailing wages as well as curing shortfalls of apprentice labor hours may support a waiver of a penalty or at a minimum a finding of no intentional disregard and, therefore, not result in an enhanced penalty.

The final regulations also set forth some rebuttable presumptions against finding a taxpayer intentionally disregarded prevailing wage or apprenticeship requirements if the taxpayer makes corrective payments or apprenticeship cure payments before a notice of examination from the IRS.

In both instances, a taxpayer will only be able to make these corrections if the taxpayer is collecting and maintaining accurate payroll records for its own workers as well as the workers employed by contractors and subcontractors.

What’s Next

Though the regulations are quite comprehensive, they do not finalize the IRS’s rules with respect to the exceptions applicable to qualifying facilities that produce less than one megawatt of power, which will be addressed in a future final rulemaking.

In addition, the IRS noted that it will not offer private letter rulings on IRA issues at this time, but that this remains subject to change as the IRS gathers more data and finalizes more of the implementing rules and regulations.

While the final regulations provide much needed guidance and predictability for taxpayers, they also make clear that the next step for anyone seeking the enhanced clean energy tax credits is to tighten internal compliance programs to guard against penalties or potential loss of the enhanced tax credits.