Employers who meet prevailing wage and apprenticeship requirements in the Inflation Reduction Act’s renewable energy credit rules qualify for a 5x higher credit, but compliance can be complicated, and mistakes can be costly.
The Inflation Reduction Act of 2022 (IRA) significantly modified tax credits available for renewable energy projects. Among the credits created or expanded under the new law, Section 30C Alternative Fuel Vehicle Refueling Property Credit (for EV chargers), Section 48 investment tax credit (ITC), and the Section 45 production tax credit (PTC) include a multiplier option that could increase the value of the credits for businesses that comply with certain prevailing wage and apprenticeship (PWA) requirements.
Taxpayers can claim a core level of credit on expenditures that qualify for an incentive. Outlays that qualify under the ITC or EV charger credit earn a base credit of 6% of their cost basis, while renewable energy production in 2024 earns a base credit of 0.6 cents per kWH for the PTC. The law includes a significant incentive for taxpayers claiming these credits if they meet certain requirements related to payment of “prevailing wages” to workers involved in the projects and the engagement of apprentices in the process. Projects that meet these PWA requirements qualify for a 5x multiplier on either credit, jumping the value of the EV charger and ITC to 30% of the cost basis and the 2024 PTC to 3 cents per kWh.
Projects that meet these PWA requirements qualify for a 5x multiplier on either credit.
The tax savings generated by this multiplier can substantially affect the calculation of a renewable energy project’s cost. However, the process necessary to navigate and document compliance can be complex, and the potential costs of noncompliance can be severe. Taxpayers considering claiming the enhanced credits for their credit-eligible renewable energy project need to understand the requirements of the IRA prevailing wage and apprenticeship provisions and implement systems that will track and report compliance accurately and timely.
Two exceptions to the PWA requirements
Before looking more closely at the PWA requirements that affect most claims for the IRA renewable energy credits, it’s worth noting two types of projects that qualify for the multiplier without having to meet those requirements. The law allowed projects that were under construction by Jan. 29, 2023, to qualify for the multiplier without meeting the PWA rules, and it permits an ongoing exemption for smaller ITC and PTC projects that have a maximum net output of 1 megawatt (MW) of electrical or thermal energy. Projects that meet these conditions can claim the higher level of the credits even if they don’t comply with the PWA requirements.
Is the 5x multiplier worth the increased recordkeeping workload and penalty risk?
Most organizations presented with the option to take a 6% or 30% credit on the same expenditures would think that the answer is obvious — claim the higher credit. However, the IRA prevailing wage and apprenticeship requirements are complex rules that aren’t easy to understand, require thorough documentation, and can result in significant penalties if the compliance isn’t met. Once undertaken, the burden of compliance runs with the project and — in the case of the ITC and 30C charger credits — throughout the recapture period for any additional construction, alteration, or repair following placing the project in service.
In order to weigh the benefit of the higher credit against the increased costs of compliance and the risk of penalties, businesses need a clear understanding of the rules. IRS regulations on the topic provide some insights on how to support a claim for the enhanced credit.
To claim the benefit of the enhanced credits available to taxpayers who meet PWA rules, organizations will check a box on their return stating they have met the requirements and attach an “increased credit amount statement” summarizing the applicable wage determinations and the hours worked and wages paid for each laborer or mechanic classification; wages paid and hours worked by qualified apprentices; correction payments made; total labor hours for construction of the property; and a declaration under penalties of perjury that such information is true, accurate, and complete. The documentation to support the increased credit amount statement is detailed and voluminous.
The applicable prevailing wages for a project are determined at the time the prime contract is executed and locked in unless there is a scope change or modifications. Wage determinations, which can be found on the U.S. Department of Labor’s (DOL) website, include a set of wages and fringe benefits that the DOL has ruled to be prevailing for a given labor category in a given locality. The wage determinations vary by labor category and location, so it’s possible that one project might have to meet multiple prevailing wage requirements for the same person, if multiple labor classifications apply, in order to qualify for the increased credit. The requirements extend to the taxpayer’s employees as well as contractors and subcontractors.
The applicable prevailing wages for a project are determined at the time the prime contract is executed and locked in unless there is a scope change or modifications.
Some taxpayers may be familiar with similar prevailing wage rules that apply to federal contractors under the Davis-Bacon Act (DBA). There are a few distinctions between the IRA prevailing wage and apprenticeship rules and the DBA requirements. The two programs can differ over what would constitute the “start of construction” when determining the dates of applicability for PWA v. DBA, and the beginning of construction can actually have a different meaning when it comes to determining eligibility for the IRA renewable energy credits. In addition, the IRA credit PWA requirements apply to the taxpayer’s employees, contractors, and subcontractors, while DBA rules would exclude taxpayer’s internal employees from the calculation. Finally, while many contractors and subcontractors may employ union apprentices, the additional requirements related to labor provided by qualified apprentices on qualifying energy projects are unique to the PWA rules for IRA tax credits.
The apprenticeship requirements are satisfied if each taxpayer, contractor, or subcontractor that employs four or more laborers or mechanics employs at least one qualified apprentice, at least 15% of the total labor hours spent on the project are completed by “qualified apprentices,” and the project complies with a daily ratio of apprentices to journeyworkers.
In the absence of an apprenticeship program, a taxpayer can sponsor its own apprenticeship program in order to qualify. The rules do allow for a “good-faith” exemption when an employer can demonstrate that no apprentices are available due to a request to a registered apprenticeship organization being denied or not responded to. An employer would document compliance with this requirement by requesting an apprentice from an appropriate agency and keeping the response on file. It would apply only to those hours for which the apprentice was requested, so it wouldn’t excuse an employer from failing to make additional requests going forward.
The apprenticeship requirements are satisfied if each taxpayer, contractor, or subcontractor that employs four or more laborers or mechanics employs at least one qualified apprentice, at least 15% of the total labor hours spent on the project are completed by “qualified apprentices.”
Documenting compliance with IRA prevailing wage and apprenticeship requirements
The IRS doesn’t require an employer to submit all the relevant documentation to support an enhanced renewable energy credit claim, just a summary in the “increased credit amount statement,” but taxpayers will need significant documentation to support the increased credit in the event of an examination or upon diligence in the instance of a credit transfer or tax equity investment. To support a claim for the enhanced credit, taxpayer records must include:
Identifying info for each laborer or mechanic including the name, the last four digits of a Social Security or tax identification number, address, telephone number, and email address. Some of the information can be redacted.
The location and type of construction.
The labor classification applied to each laborer and mechanic.
Hourly rates paid, including rates of contributions for bona fide fringe benefits.
Total hours worked per person per pay period.
Total wages paid to each person per pay period, including any deductions.
Records that support payments at less than prevailing wages to apprentices, if applicable. These would include records of an individual’s participation in a registered apprenticeship program and the applicable wage rates and apprentice-to-journeyworker ratios prescribed by said registered apprenticeship program.
Records related to any cure provisions paid/corrections made in the event the employer found and corrected instances of noncompliance with the PWA requirements.
Records related to posting of prevailing wage rates as well as any complaints received by taxpayer, contractor, or subcontractor related to wages paid below prevailing wage rates.
Written requests to registered apprenticeship programs.
Monitoring during recapture period of prevailing wages for alteration or repair (although no apprentices are required in this phase).
Much of this information may already exist in one-off locations throughout the employer’s system, but it can still be an administrative challenge to find and gather it together in a report for tracking purposes. Further, for large, complex projects with many subcontractors, the process of ensuring each contractor/subcontractor is compliant with PWA requirements can also present an administrative challenge. Finally, while each taxpayer, contractor, and subcontractor needs to provide PWA-related documentation for their employees, ultimately the taxpayer is responsible for ensuring and documenting compliance.
Curing mistakes and paying penalties
Although the PWA requirements are complex, the Treasury regulations clearly reinforce the value of good-faith attempts at compliance, timely review of relevant information, and speedy remediation of self-identified errors. If an employer identifies noncompliance, covered employees must be paid the difference between the prevailing wage and what they received, plus interest. Payroll records must reflect the remediation and the interest payment. In order to identify these problems quickly, employers who plan to claim the increased credit should be running payroll reports weekly or biweekly and verifying that prevailing wages are being paid to all laborers or mechanics working on the project. In addition, keeping track of the apprentice-to-journeyworker ratio on a daily basis is important because if the ratio isn’t met, additional apprentices on-site must be treated and paid as journeyworkers. In some cases, this may result in a difference in the amount the apprentice was paid and the rate they would need to be paid as a journey worker at prevailing wage rates. The treatment of apprentices as journeyworkers if the daily ratio isn’t met could also impact progress toward the requirement of 15% of all labor hours being performed by qualified apprentices throughout the project. Taxpayers wishing to claim the enhanced credit should continuously monitor the percentage of apprentice hours.
Failure to timely remediate can lead to significant penalties. Employers who fail to comply with PWA requirements must pay a penalty of $5,000 per laborer/mechanic not paid prevailing wages and $50 per hour for missing apprentice hours. In another nod to the value of quick remediation, the penalty can be waived if the cure is made by the last day of the first month following the end of the calendar quarter in which the failure occurred. In worst-case scenarios, if the IRS determines that failure to comply with the PWA rules was due to “intentional disregard,” the penalty can be three times the amount of back pay owed, plus interest, plus a $10,000 per worker per year fine. Ultimately, the employer bears the responsibility for compliance with the rules, corrections, and tracking down employees who are owed remediation payments.
Failure to timely remediate can lead to significant penalties.
Planning ahead for PWA compliance
Employers who plan to claim the larger credit by meeting PWA requirements should take steps from the outset to make sure their compliance is well documented and frequently verified. Outside consultants offer a variety of investment tax credit studies to help make sure that a business is eligible for the full amount of the credit it claims. Software tracking systems designed for IRA PWA tracking are available to help collect and consolidate the wide variety of payroll information needed to effectively document and review compliance with the rules. These tools can help an organization remain in compliance with the rules and to quickly remediate any discrepancies that may arise, thereby limiting exposure to penalties. The value of the credit multipliers can make a significant difference in the amount of available credit, but only if the taxpayer takes the proper precautions to minimize the impact of any potential noncompliance.
