The Internal Revenue Service made significant revisions last week in the wage and apprentice requirements with which developers must comply to claim tax credits at the full rates in the Inflation Reduction Act.
Some of the revisions will require revisiting existing construction and operations and maintenance contracts.
The revisions are in final wage and apprentice regulations that can be found here.
The IRS clarified that apprentices do not have to be used for work after a project is placed in service.
It said the wage and apprentice requirements do not apply to work done before January 29, 2023.
Background
The Inflation Reduction Act restored tax credits to the full rates for projects that use renewable energy to generate electricity, increased tax credits for carbon capture and authorized new tax credits for such things as standalone storage and clean hydrogen, plus authorized bonus credits for projects in "energy communities" or that use domestic content.
The changes came with fine print.
Mechanics and laborers employed directly by the developer or by construction contractors or subcontractors to work on a project must be paid the same "prevailing wages" that are paid on federal construction jobs not only during construction, but also for work on any "alteration" or "repair" for the next five to 12 years after the project is in service. These wages must be paid for five years after the in-service date on projects on which investment tax credits are claimed and for the period that production or carbon capture tax credits are claimed on other projects.
"Qualified apprentices" must also be used for 12.5% or 15% of total labor hours. The percentage is 12.5% for projects on which construction started in 2023 and 15% for projects on which constructions starts in 2024 or later.
These requirements grew out of a promise by President Biden during the last campaign that green jobs would be well-paying jobs and that the government would help workers who want to learn new trades tied to the green economy.
Projects on which construction started by January 28, 2023 and small facilities with nameplate capacities under 1 MWac are exempted from the wage and apprentice requirements.
Failure to comply means a project cannot qualify for tax credits at the full rates. The owner would be left with tax credits at only a fifth of the full rate: for example, a 6% rather than 30% investment tax credit.
Developers are expected to make cure payments in the event the IRS finds gaps in compliance to preserve the full tax credits. Workers who were underpaid would have to be paid the shortfall plus interest at the federal short-term rate plus 6%, and the project owner would have to pay $5,000 per affected worker per year to the Treasury as a penalty. The cure for missed apprentice hours is $50 an hour. The cure payments are much higher if the IRS finds that the failure to comply was due to "intentional disregard."
Contract Negotiations
Construction and O&M contracts for projects that were not under construction for tax purposes by January 28, 2023 now come with standard clauses requiring contractors to comply with the wage and apprentice requirements.
Early versions of these clauses, especially around the time the Inflation Reduction Act passed, required contractors to comply with whatever the IRS requires and allowed change orders, usually up to a cap, to cover the additional cost. Contractors have been pushing back since then on having to interpret what the tax law requires. They prefer specific instructions from the developer.
Most contracts require the contractor to reimburse the owner for any cure payments it must make to preserve the full tax credits. Contractors want a cap on their exposure. Caps in construction contracts are a percentage of the contract price and in O&M contracts are usually expressed as a percentage or a multiple of the annual O&M fee. For other insights into contract negotiations, see "Wage and Apprentice Negotiations."
Scope
The wage and apprentice requirements do not apply to work that an equipment manufacturer does at a factory.
They apply to work by mechanics and laborers, meaning people whose work is physical or manual in nature, at the project site and secondary construction and support sites. Transportation between a secondary construction or support site and the project site is also subject to the requirements.
A "secondary" construction site is a construction site dedicated for a period of time to making a significant portion of a single project as opposed to a factory that makes products for sale to a wider market. Examples of "support" sites are office trailers, tool yards, batch plants and borrow pits that are adjacent or virtually adjacent to the project site or a secondary construction site.
Foremen who devote more than 20% of their time during a workweek to manual or physical labor must be paid at least the prevailing wage rate for the physical work.
The wage and apprentice requirements apply not only to private-sector projects claiming tax credits, but also to projects owned by tax-exempt and state or local government entities, rural electric cooperatives, the Tennessee Valley Authority and Alaska native claims corporations that plan to apply for direct cash payments from the IRS in lieu of tax credits.
Indian tribes do not have to pay prevailing wages to their own employees, but prevailing wages must be paid by private contractors working on tribal projects.
Apprentices do not have to be used for work after a project is placed in service.
The IRS added more detail to what is considered an "alteration" or "repair." Making an improvement whose cost is capitalized or fixing a piece of malfunctioning equipment is a repair that requires compliance with the wage and apprentice requirements.
However, workers do not have to be paid prevailing wages for doing basic maintenance, such as regular cleaning, replacing materials such as filters and light bulbs and recalibrating equipment. Maintenance is routinely scheduled and continuous or recurring.
The wage and apprentice requirements apply to all work during "construction." Construction starts once work starts on the project site or at a secondary or support site. This is the test under the Davis-Bacon Act administered by the US Department of Labor rather than the physical work and 5% tests the IRS has used until now to determine when construction starts for tax purposes. For example, demolition and site clearance are considered construction under the Davis-Bacon Act even though they are not considered the start of physical work on the project to claim a project is under construction to qualify for tax benefits.
Anyone who failed to pay the right wages due to confusion over when construction started has until December 22 this year to make up the shortfall to the affected workers with interest and avoid a penalty.
Wages
The required wages vary by job type and location. They are published on the US Department of Labor website here. However, there are no postings for some job types and locations.
The IRS said that developers, contractors or subcontractors in such situations should send emails requesting wage determinations toIRAprevailingwage@dol.gov with a prescribed list of information. The department will try to respond to wage requests within 30 days.
Requests for wage determinations should be sent within 90 days before signing contracts for construction or work on alterations and repairs or promptly after work starts if the need for a wage determination was not apparent earlier. The wages must be incorporated in contracts within 180 days after the wage determination or the wages will have to be updated.
Any wage determination relates back to the start of work. The contractor has 30 days after the wage determination to catch up any workers who were underpaid. The back wages in such cases do not have to be paid with interest.
The required wages include fringe benefits. Higher cash wages can be paid in lieu of fringe benefits. Wage determinations usually include an additional hourly rate for such benefits, but contributions for some benefits may be expressed as a formula.
Apprentices can be paid less. Their wage rates are set by the apprentice program and are a percentage of an experienced construction worker's wage, depending on the progress level of the apprentice. However, the apprentice must be paid the full wage for any work that falls outside the labor classification for which he or she was sent to the job site and for any work performed outside the required apprentice ratios. Apprentices must be paid the fringe benefits specified by the apprentice program. If there is none, then the apprentice must be paid full fringe benefits.
Offshore wind projects should use the prevailing wages for the closest location on shore.
The wage rates that must be paid are locked in when the construction contract is signed by both parties and then again when signing a contract for alterations or repairs. However, they must be reset to current wage rates if the contract is later amended to add substantially to the scope of work or extend the contract period. All subcontracts under a prime contract—no matter how many tiers of subcontracts—must use the same wages that apply to the prime contract. The wages must be reset in each new contract year under any contract that has an indefinite term and is not tied to completion of any specific work.
If the work on a project straddles two locations with different wage rates, then the contractor should pay the wages for each location based on where the work is done.
Apprentices
The IRS views the obligation to use apprentices as having three elements: hours, ratio and participation.
First, qualified apprentices must work 12.5% or 15% of total labor hours, depending on the year construction started on the project for tax purposes. "Qualified apprentices" are workers registered in programs usually run by unions to train workers in construction trades. There were more than 23,000 registered apprentice programs in 2023. The US Department of Labor website shows at least 641,044 registrants in such programs currently, counting apprentices only in states that report data to the federal government.
Second, apprentice programs have journeyworker-to-apprentice ratios that are like limits on class size to ensure that students get enough attention from teachers. The US Department of Labor or delegated state apprenticeship agencies also have them. Work done by extra apprentices will not count toward the labor hour requirement, and extra apprentices must be paid the full prevailing wages rather than the reduced wages that normally apply to apprentices. Whether apprentices are extra is determined on a daily basis.
Third, each contractor or subcontractor with at least four mechanics and laborers working on a project during construction must have at least one apprentice. The workers do not have to be employed at the same time.
Developers will have to work harder to find apprentices than suggested by the Inflation Reduction Act. The statute said that a project will be excused from use of apprentices if a good-faith effort is made to find apprentices, but the apprentice program does not answer within five business days or the request is denied.
The IRS said a project will be excused only for 365 days at a time (366 in the case of a leap year) and must make another attempt by the end of each such period. It added more detail to what it considers a good-faith effort. The requests must be made to apprentice programs that serve the area where the project is located or can reasonably be expected to provide the types of trainees needed. For instance, a contractor cannot request welder apprentices from an apprentice program for electricians and treat the denial of the request as excusing the need to employ welder apprentices. Requests to apprentice programs must be sent electronically or by registered mail. There are detailed instructions for what such requests must say.
The initial request to an apprentice program must be made at least 45 days before the apprentices are needed. Later requests to the same program must be made at least 14 days before apprentices are needed.
If there is no apprentice program that covers the project location, trains apprentices in the occupations needed and supplies apprentices to employers, then the project is deemed to have made a good-faith effort without the need to file a request for apprentices. However, the US Department of Labor or a state apprentice agency should be contacted in such cases for help finding apprentices.
Some contractors and developers have their own apprentice programs. However, it is not a good-faith effort to find apprentices to be turned down by one's own program.
The request for apprentices cannot be made to a labor union with whom the project has a project labor agreement. It must be made to the apprentice program directly.
Contractors should forward copies of requests to apprentice programs to the project owner within five business days.
Whether 12.5% or 15% of total labor hours were worked by apprentices is tested by combining total hours across all the contractors. Thus, for example, if two contractors fell short and one had more apprentice hours than needed, as long as the one with extra hours did not violate the journeyworker-to-apprentice ratio so that the extra apprentice hours count, the project can still pass the hours test.
Tracking Compliance
Developers must check wage rates and do at least a quarterly review of wages paid by their contractors and subcontractors to ensure compliance. They should also get representations that contractors and subcontractors have not been debarred by a state or municipality or the US Department of Labor for failure to pay federal, state or local prevailing wages.
This is helpful to being able to show that a developer did not intentionally disregard the requirements if violations are later uncovered by the IRS. The cure payments are higher if there was intentional disregard: workers who are underpaid must be paid three times the shortfalls plus interest, and the penalty to the Treasury increases to $10,000 per affected worker per year for wage violations and to $500 per missed apprentice hour.
Use of a consultant to check compliance does not provide any special protection from penalties.
Wage rates should also be posted in a prominent place on the job site or sent to workers in a written notice. The developer should ensure workers have a way to report suspected failures to pay the proper wages or comply with the apprentice requirements. Workers should be asked to acknowledge they understand that the project owner must comply with the wage requirements to claim certain tax benefits on the project. Other steps that should be taken to ensure the project owner will not be found to have intentionally disregarded the wage and apprentice requirements can be found at 26 CFR § 1.45-7(c)(3).
A developer who spots problems before the IRS finds them will not be held in intentional disregard if cure payments are made before the IRS sends a notice that it is looking into the "increased credit" claimed on a project.
Project owners must keep records to prove compliance or ensure that a third-party vendor or the contractors retain them. The records must include at a minimum payroll records for each mechanic, laborer and qualified apprentice working on the project during construction or on alterations and repairs after. The IRS said the records "may include" WH-347 forms that are sent to the US Department of Labor on federally-funded construction jobs and 11 other items related to wages and nine other items related to apprentices. The lists can be found at26 CFR § 1.45-12(c) and (d). Personal information can be redacted to comply with privacy laws, but must be made available to the IRS upon request.
Cure Payments
Violations of the wage and apprentice requirements are not expected to lead to loss of tax credits in practice as project owners are expected to make cure payments and require contractors to reimburse them.
Cure payments must be made within 180 days after the IRS identifies a failure in a final adjustment notice.
The penalty of $5,000 per affected worker per year can be avoided in two situations.
It can be avoided by paying the wage shortfalls to affected workers with interest by the last day of the first month after the calendar quarter in which the wage shortfall occurred, but only if one of two other things is true. Either the worker cannot have been underpaid in more than 10% of all pay periods during the part of the year that he or she was employed on the project or the shortfall was not more than 5% of the total amount he or she should have been paid during the year.
The penalty is waived where the worker was working under a pre-hire collective bargaining agreement with one or more labor unions for a specific project and the wage shortfall is paid to the worker before the project owner files its annual return for the tax credit year. However, the collective bargaining agreement must check at least six boxes that can be found at 26 CFR § 1.45-7(c)(6)(ii). For example, if it fails to require use of apprentices, it does not qualify. (Only four boxes need to be checked for nuclear projects claiming section 45U tax credits.)
Project owners are able under section 6418 of the US tax code to sell many Inflation Reduction Act tax credits to other companies for cash. In cases where the tax credit on a project is sold, the obligation to make cure payments remains with the project owner. If it fails to make such payments, then it will be treated as having sold tax credits at only a fifth of the full rate.
