The U.S. Department of the Treasury and IRS on June 25, 2024, issued final regulations regarding increased credit or deduction amounts available for taxpayers satisfying prevailing wage and registered apprenticeship (collectively, PWA) requirements under the Inflation Reduction Act of 2022 (IRA). The final regulations, many of which are taxpayer-favorable, include additional helpful guidance and clarity.

The final regulations affect the PWA requirements for these energy tax incentives of the Internal Revenue Code: Sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, 48E and 179D. Because satisfaction of the PWA requirements significantly increases tax incentives, adherence to the rules is important. Taxpayers with projects of more than 1 megawatt (MW) AC or that begin construction after Jan. 28, 2023,¹ should adopt practices to help ensure satisfaction of the general rules depicted in the chart below:

The following provides additional insight on the final regulations, with a particular focus on how they differ from those proposed in August 2023.

Prevailing Wage Rules

Generally conforming to prior guidance, the final regulations:

• clarify that the prevailing wage requirements apply not only to those laborers and mechanics and who are considered employees, but also to those who are considered independent contractors; they also generally adopt the definitions of "laborer," "mechanic" and "construction, alteration or repair" as previously announced
• state that prevailing wages must be paid not only to those laborers and mechanics on-site, but also to workers on secondary sites in specific circumstances
• state that the prevailing wage must be paid at the time the construction, alteration or repair begins

Changes and clarifications in the final regulations include:

• Though the proposed regulations stated that the prevailing wage is determined at the time the construction, alteration or repair begins, the final regulations provide that the prevailing wages are determined at the time the contract is entered for the construction, alteration or repair of the facility or project is executed.
• Though the proposed regulations required that updated prevailing rates must be followed if the contract is modified, the final regulations narrow the circumstances to exclude situations where the contractor (or subcontractor) is simply given more time to complete the contemplated work or where there is additional work if such additional work is merely incidental.
• The time frame for which supplemental wage determination was adjusted. Under the proposed regulations, the supplemental wage determination was to be made prior to the beginning of construction. Under the final regulations, supplemental wage determinations may be sought from the DOL no more than 90 days before the contract between taxpayer and contractor is signed and the work is expected to be executed and require that the supplemental wage determinations received from the DOL are required to be incorporated into the contract within 180 days.
• The penalty waiver was revised such that there is no penalty for failure to meet the prevailing wage rules if a corrective payment is made to the mechanic or laborer by the last day of the first moth following the end of the quarter in which the failure occurred.

Apprenticeship Rules

Generally conforming to prior guidance, the final regulations:

• confirm that the Labor Hours Requirement applies to all work hours related to construction, alteration or repair of the facility or project prior to it being placed in service and need not be met on a contractor-by-contractor or trade-by-trade basis
• clarify that the Participation Requirement – which generally requires each taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work to employ one or more qualified apprentices to perform that work – does not require that such employment occur at the same time or location
• dictate that taxpayers must pay apprentices at least the rate specified by the registered apprenticeship program according to their level of progress for their classification in the applicable wage determination, including bona fide fringe benefits as applicable; apprentices may be paid at less than the prevailing rate for work performed consistent with the occupation of the registered apprenticeship program if they are 1) qualified apprentices from a registered apprenticeship program who perform work with respect to the construction, alteration or repair of a qualified facility, or 2) individuals in the first 90 days of probationary employment as an apprentice in a registered apprenticeship program who have been certified by the DOL
• confirm that taxpayers (and their contractors or subcontractors) can rely on the Good Faith Effort Exemption; under the exemption, the taxpayer, contractor or subcontractor must make a request to a registered apprenticeship program and either 1) the request for apprentices was denied for reasons other than the taxpayer's, contractor's or subcontractor's refusal to comply with the program's standards and requirements, or 2) the program failed to respond within five business days of receiving a request

Changes and clarifications in the final regulations include:

• Of great importance, the final regulations state that the apprenticeship rules apply only to construction, alteration and repair of the facility or project prior to the facility being placed in service. Once placed in service, the apprenticeship rules do not apply.
• Although the proposed regulations stated that the Good Faith Effort Exception lasted 120 days, under final regulations, the exception lasts 365 days (366 days in the case of a leap year).

Documentation and Other Key Points

The final regulations offer some additional clarity on the following points:

• They confirm that the obligation to satisfy the PWA rules becomes legally binding upon the filing of the tax return claiming the increased tax credit or deduction (or in the case of a transfer on the filing of the transferee taxpayer's return).
• They provide helpful clarity on factors that will be considered by the IRS in determining whether there has been intentional disregard of the PWA requirements (thereby triggering, inter alia, higher penalty amounts). Although, the proposed regulations provided a non-exhaustive list of facts and circumstances that would be considered the final regulations expanded on this list – for example, with respect to the prevailing wage rules whether the taxpayer utilizes a previously disbarred contractor or, with respect to apprenticeship rules, whether taxpayer regularly reviewed contractors' and subcontractors' use of qualified apprentices.
• The final regulations confirmed the scope of the PWA rules:
  • specifically that the rules apply only to the portion of activity that is creditable or deductible; this means, for example, only a portion of the facility or project used to produce the tax credit is subject to the PWA rules
  • excepted any work (construction, alteration or repair) performed prior to Jan. 29, 2023, from the PWA rules
• They confirmed the duration of the PWA rules – for example, under Sections 30C, 45L, 48C and 179D, there are no PWA obligations related to repair or alteration once the project or facility is placed in service. By contrast, under Section 45 or 48, the PWA requirements apply during the 10-year credit period or five-year recapture prior, respectively.

Notes

¹ Referred to as the "BOC Exception," facilities or projects that began construction prior to Jan. 28, 2023, are exempt from the PWA rules.