Understanding IRS Credits, Regulations & Compliance

The Inflation Reduction Act of 2022 (IRA) aims to incentivize companies to implement a number of goals. Among other objectives, goals include building additional infrastructure, manufacturing equipment needed to strengthen domestic supply chains, reducing energy costs and greenhouse gas emissions, increasing the number of available jobs, and paying wages not less than the prevailing rates for workers’ efforts.

In particular, the IRA incentivizes the development of clean energy jobs within the U.S. by incorporating specific wage and labor requirements.

On June 18, 2024, the Internal Revenue Service (IRS) released final regulations that clarify the rules under which renewable, or “clean,” energy projects may be eligible to receive a 30% investment tax credit if the project meets specific prevailing wage and apprenticeship requirements. While most of this tax credit will go to project owners, much of the responsibility for ensuring compliance with these new requirements will inevitably fall on the contractors and subcontractors who are primarily responsible for hiring and paying workers on such projects. 

In this article, we have outlined the final regulations concerning these prevailing wage and apprenticeship requirements, and identified the responsibilities that construction business owners should be prepared to assume.

 

Information for Employers & Potential Penalties

In the final regulations (2024-13331.pdf), the IRS emphasized its dedication to helping taxpayers, advisers and other stakeholders ensure compliance with the new prevailing wage and apprenticeship requirements. As part of that effort, the IRS released Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact Sheet and updated Publication 5855, IRA Prevailing Wage & Registered Apprenticeship Overview and the prevailing wage and apprenticeship frequently asked questions.

Compliance with the new requirements will be critical for most renewable energy projects. For projects that fail to meet them, the credit is reduced to one-fifth of the full amount. For example, a taxpayer utilizing the investment tax credit under Internal Revenue Code (the Code) Section 48 or the Clean Electricity Investment Credit under Code Section 48E will generally only qualify for 6% (down from 30%) if the project fails to meet the new requirements. For project owners, this reduction in the investment tax credit could significantly — and negatively — impact the profitability of the project. Further, even if the IRS does not reduce the allowable credit for a taxpayer failing to meet the new requirements, the Code and final regulations impose significant penalties for noncompliance. Therefore, it is in the best interest of such owners to ensure that they are meeting the new requirements.
 

Paid Wages Must Be Equal to (or Greater Than) Prevailing Wages 

In general, a project owner must pay prevailing wages to laborers and mechanics employed by the project owner or any of the project owner’s contractors or subcontractors in the construction, alteration or repair of a renewable energy project. The prevailing wages are published by the Department of Labor (DOL) for the geographic area and type of construction facility that is being built. The published wages must include all labor classifications for the construction, alteration or repair work to be done on the facility by laborers and mechanics. Separately, the regulations also require the project owner to maintain records in order to substantiate prevailing wage requirements, including, among other listed information, basic employee information, the location and type of qualified facility, the hourly rates of wages paid for each applicable labor classification, the total labor hours worked and the total wages paid. 

“Laborer” and “mechanic” are defined as individuals whose duties are manual in nature, including anyone who spends more than 20% of their time on laborer or mechanic duties. The term “employed” is very broad and encompasses employees and independent contractors who work on the construction, alteration or repair of a renewable energy project.

If there is no prevailing wage publication, the project owner is required to request a supplemental wage determination or wage rate from the DOL and provide certain employee identification information.
 

Apprenticeship Requirements to Increase Occupational Opportunities

Generally, the rules require a percentage of all construction, alteration, or repair work performed on a project to be done by qualified apprentices. The amount of work that must be performed by qualified apprentices is measured by the amount of total labor hours performed by apprentices compared to all hours of work performed on the project (the labor hours requirement).

For facilities that began construction after Dec. 31, 2023, 15% of the total labor hours must be performed by qualified apprentices. The term “labor hours” the total number of hours devoted to the construction, alteration or repair work by any individual employed by the project owner or any contractor or subcontractor. The Code specifically excludes any hours worked by foremen, superintendents, owners or persons employed in an executive, administrative or professional capacity.

A “qualified apprentice” is any individual who is employed by the project owner or any contractor or subcontractor participating in a registered apprenticeship program. The aforementioned percentages are also subject to any applicable requirements for apprentice-to-journeyworker ratios set by the DOL or any applicable state apprenticeship agency (the apprenticeship ratio requirement). Finally, each project owner, contractor or subcontractor who employs four or more individuals to perform construction, alteration, or repair work must employ one or more qualified apprentices to perform such work (the participation requirement).

The final regulations clarified that the apprenticeship requirements apply only to the construction of the renewable energy project, including alteration and repair work performed prior to the project being placed into service, and do not apply to alteration or repair work occurring after the project was placed into service. This was an important and welcomed clarification of the apprenticeship requirements. 

 

Burden of Compliance Likely to Fall on Contractors’ & Subcontractors' Shoulders

As noted above, failure to comply with the IRS’ proposed prevailing wage and apprenticeship requirements will result in a reduction of the investment tax credit, from 30% to 6%. This is merely one example illustrating the consequences behind a taxpayer not fully utilizing the investment tax credit under Section 48 or the Clean Electricity Investment Credit Under Code Section 48E. As such, it is financially in the best interest of project owners, contractors and subcontractors to ensure compliance with the final regulations.

That said, a project owner is only required to provide evidence of compliance. The actual hiring, recordkeeping and other efforts associated with ensuring such compliance are, for all intents and purposes, likely to be delegated to the contractors and subcontractors who actually hire and pay the workers on renewable energy projects.

It is important that no party (a project owner, contractor or subcontractor) assumes that the counterparty to the construction contract will assume responsibility for compliance with these proposed regulations. Looking ahead, it is quite likely that project owners will add language in contracts that specifically indicates that prevailing wage and apprenticeship policies, recordkeeping and reporting are the responsibility of the contractor or subcontractor.

Where such language has not been included in contracts — and to protect their own interests — construction companies that provide workers (employees or independent contractors) for such projects should also demand that language clarifying these responsibilities is included in any relevant contract, particularly where such clarifying information does not already exist.

In so doing, project owners, contractors and subcontractors can help ensure that these critical compliance requirements are met and can be demonstrated to the appropriate regulators.