The Internal Revenue Service (IRS) published Notice 2022-61 (the Notice) in the November 30 Federal Register to provide guidance on the key prevailing wage and apprenticeship labor standards (W&A Requirements) generally required to obtain the full expected credit amount for tax credits enacted, expanded, or extended under the Inflation Reduction Act of 2022 (IRA). The W&A Requirements must be satisfied with respect to the construction of qualified facilities, properties, projects, or equipment (collectively, facilities) and, to varying extents, the alteration and repair of facilities.
W&A REQUIREMENTS
- All laborers employed by the facility owner, any contractor, or any subcontractor must be paid prevailing wages (based on the US Department of Labor/Davis-Bacon Act published prevailing rates for such work in a particular locality).
- A sufficient percentage of such laborers must be enrolled in a registered apprenticeship program under the National Apprenticeship Act (under Davis-Bacon Act rules).
Although expressed as a 5-times credit multiplier in the Internal Revenue Code (the Code), the W&A Requirements are best understood as standards that must be satisfied for a subject facility to receive the full amount of tax credits expected under the IRA and not be subject to an 80% haircut. For example, the otherwise understood (based on pre-IRA maximum credit rates) “full” 30% Section 48 investment tax credit would be reduced to 6% if an eligible facility subject to the W&A Requirements does not satisfy such requirements.
The W&A Requirements apply to the tax credits enacted or amended by the IRA as follows:
* The credits under Sections 45, 48, 45Y, and 48E are not subject to the W&A Requirements if the applicable facility has a maximum net output of less than 1 megawatt.
BEGIN CONSTRUCTION
Due to a 60-day built-in delay under the IRA that is triggered by the release of applicable guidance, the publication of Notice 2022-61 means that the W&A Requirements will generally apply to any subject facility if construction of such facility begins on or after January 29, 2023.
As expected, the Notice confirms that the longstanding “begin construction” standards set forth in a series of IRS notices under the Section 45 production tax credit, Section 48 investment tax credit, and Section 45Q carbon capture and sequestration credit pertaining to pre-IRA tax credit stepdown and phaseout schedules similarly apply for purposes of determining whether an applicable facility will be subject to the W&A Requirements under the aforementioned W&A Requirements phase-in rule.
At a high level, this longstanding guidance provides that construction “begins” through one of two methods: (1) the “Physical Work Test,” which provides that construction has begun when work of a “significant nature” is performed, and (2) the “Five Percent Safe Harbor,” which provides that construction has begun when a taxpayer has paid or incurred 5% of the total cost of a facility. By applying this longstanding “begin construction” guidance, the Notice also requires satisfaction of the “continuity requirement” pertaining to continuous construction or continuous efforts after a facility starts construction, but also with the existing taxpayer-friendly, placed-in-service-date-dependent, continuity safe harbors (e.g., the continuity requirement is deemed satisfied if an eligible facility with respect to the Section 45 production tax credit or Section 48 investment tax credit (other than with respect to offshore wind) is placed in service by the end of the fourth calendar year after the begin construction year).
MEETING THE W&A REQUIREMENTS
Under the Notice, the prevailing wage requirements are met if (1) laborers and mechanics employed in the construction, alteration, or repair of facilities have been paid the appropriate prevailing wages and (2) the taxpayer has maintained and preserved sufficient records substantiating such information.
Prevailing wages are generally based on the “prevailing wage determinations” for the appropriate geographical area and work type as determined by the Department of Labor and published on www.sam.gov. In the event that the appropriate prevailing wage is not available on the website, a taxpayer may email the Department of Labor at IRAprevailingwage@dol.gov for a determination of the prevailing wage, noting in the correspondence the facility, facility location, proposed labor classifications, proposed prevailing wages, job descriptions and duties, and any rationale for the proposed classifications.
The Notice clarifies that all persons receiving remuneration for services of the taxpayer, contractor, or subcontractor are subject to the prevailing wage requirements, regardless of their employee or independent contractor status.
The Notice also provides that the apprenticeship requirement is met where the taxpayer (1) satisfies the labor hour requirements set forth under the IRA, subject to any federal or state apprentice ratios required thereunder; (2) satisfies the apprentice participation requirements under the IRA; and (3) complies with certain recordkeeping requirements substantiating such information. However, while the Notice provides certain additional details, specificity, and examples regarding these apprenticeship requirements, it otherwise largely restates the requirements of the IRA provisions themselves.
The Notice also includes helpful examples of the types of recordkeeping the IRS expects may be used to substantiate a taxpayer’s satisfaction of the W&A Requirements.
PRIMARY TAKEAWAY
From a market perspective, the IRS guidance is in line with industry expectations. Accordingly, the major takeaway is that the Notice starts the clock on the IRA’s 60-day post-guidance deadline for a facility to “begin construction” to avoid being subject to the W&A Requirements. For developers and other market participants seeking to avoid being subject to the W&A Requirements, the Notice provides a January 29, 2023, deadline to “begin construction” on an applicable facility through procurement or offsite or onsite physical work under the identical pre-IRA rules that participants had sought to satisfy in order to navigate the pre-IRA, calendar-year-based tax credit stepdown and phaseout schedules.
Taxpayers may expect additional guidance on these topics, as the IRS and US Department of the Treasury signaled an intent to issue proposed regulations and other additional guidance with respect to the W&A Requirements.
For additional background on the green energy tax credits passed into law with the IRA, see our earlier LawFlash, Inflation Reduction Act Would Significantly Expand Federal Income Tax Benefits for Green Technology Industry.
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