The Very Timely PWA Requirements Finalized

On June 18, 2024, the Department of the Treasury (the “Treasury”) and the Internal Revenue Service (the “Service”) issued final regulations (T.D. 9998) (the “Final Regulations”)¹ regarding compliance with the prevailing wage and apprenticeship requirements (the “PWA Requirements”) impacting many of the clean energy tax credits introduced or expanded by the Inflation Reduction Act of 2022 (the “IRA”).² Our prior coverage of the proposed regulations released in August 2023 regarding the PWA Requirements (the “Proposed Regulations”) can be found here.³

The PWA Requirements are generally comprised of three parts: (i) the requirement to pay the prevailing wage for all laborers and mechanics during construction, alteration, and repair of a project or facility (“the prevailing wage requirements”); (ii) the requirement to use a minimum amount of apprentices during the construction of a project or facility (the “apprenticeship requirements”); and (iii) the record keeping requirements with respect to each of the prevailing wage requirements and apprenticeships requirements. To date, many taxpayers have been able to rely on the Beginning of Construction Exception — which applies to projects that began construction before January 29, 2023 — in order to qualify for a full credit amount without complying with the PWA Requirements, but many projects and facilities are beginning to transition into a regime of compliance with the PWA Requirements in order to be eligible for the full credit amount, so this final guidance is timely.

The Final Regulations made a number of clarifying comments and changes to the application of the PWA Requirements to a project or facility as compared to the Proposed Regulations. In the preamble to the Final Regulations, the Treasury and the Service describe a variety of taxpayer concerns and requests for clarifications received in connection with the Proposed Regulations. The Final Regulations are responsive to much of this feedback and show that the Treasury was really listening and wanting to make the rules workable (pun intended). The Final Regulations include real world examples and many accommodations and reasonable revisions to the Proposed Regulations. Nevertheless, satisfying the PWA Requirements remains a heavy lift.

The Final Regulations and the preamble include hundreds of pages of commentary and guidance, which are worthy of a full read.⁴ We provide a summary of notable highlights below:

Construction, Alteration, & Repair

• The Final Regulations clarify that construction, alteration, or repair does not include activities that are excluded from the prevailing wage requirements under the Davis-Bacon Act, allowing taxpayers to more comfortably rely on existing Davis-Bacon Act regulations and guidance.
• The Treasury and the Service also provided some relief for taxpayers by clarifying that the prevailing wage requirements and the apprenticeship requirements (1) do not apply to work that took place before January 29, 2023, even if the Beginning of Construction Exception is not satisfied and (2) only apply with respect to construction, alteration, or repair performed on the credit generating property.
  • However, any construction, alteration, or repair for purposes of the PWA Requirements may occur before a project or facility “begins construction” within the meaning of the Beginning of Construction Exception (which requires starting “significant physical work” or satisfying the “5% safe harbor”).
• The Final Regulations provide additional clarification regarding repair versus maintenance that is consistent with existing Davis-Bacon Act guidance, but the Final Regulations make clear that this will be a facts and circumstances analysis.
  • “Repair” — which is subject to the PWA Requirements — includes any activity that improves the facility (that is, fixing something that is not functioning properly or improving the facility’s existing condition). It also involves the correction of individual problems or defects as separate and segregable incidents (and not continuous or recurring) and improves the facility’s structural strength, stability, safety, capacity, efficiency, or usefulness.
  • “Maintenance” — which is not subject to the PWA Requirements — includes work that is needed to keep the facility in its current condition so that it may continue to be used and work that does not improve the current condition or function of a facility. It is routinely scheduled and continuous or recurring.

Wage Determinations

• In contrast to the Proposed Regulations, the Final Regulations provide that the general wage determination used for establishing prevailing wages is determined as of the date the relevant contract is executed by the taxpayer and any contractor. That general wage determination remains effective for the duration of the contract and for any additional contracts executed by such contractor and any subcontractor with respect to the construction, alteration, or repair of the relevant project or facility (presumably with respect to substantially the same scope of construction, alteration, or repair). This change allows taxpayers and contractors to more easily budget for wage rates at the time of contracting for work.
  • In the absence of a contract, the wage determination as of the date construction starts applies.
  • The same is generally true for alterations and repair work performed after placement in service.
• If a general wage determination is not available or if a general wage determination does not contain an applicable labor classification, requests for supplemental wage determinations shall be made no more than 90 days before (i) the execution of a contract for construction, alteration, or repair or (ii) the start of construction, alteration, or repair for work performed without a contract. If supplemental wage determinations are needed after the start of construction, alteration, or repair, the request should be made as soon as practicable.
  • Supplemental wage determinations are effective for 180 days, so taxpayers must either incorporate such determination into a contract or start construction in that time period for it to remain effective.
  • The Department of Labor (“DOL”) expects to resolve prevailing wage requests within 30 days or will otherwise request additional time at the end of the 30-day period.
• A new wage determination is needed if a contract is modified to include additional substantial construction, alteration, or repair work not within the scope of the original contract.
  • Contracts with no definite term or that are not tied to the completion of any specific work need updated prevailing wage rates on each anniversary date of the execution date of the contract.
• The Final Regulations permit taxpayers, contractors, and subcontractors to seek reconsideration or appeal of a supplemental wage determination.

Apprenticeship Requirements Generally

• The Final Regulations clarify that the percentage labor hours are calculated on a facility-by-facility basis, by aggregating all hours during the construction of such facility.
• The Final Regulations reflect that the apprenticeship requirements do not apply to work done after a project is placed in service, aligning the Final Regulations with the statute. This change provides substantial relief to taxpayers who are no longer faced with the dilemma of how to find apprentices before repairing equipment that is no longer functioning.
• The Final Regulations clarify that establishing beginning of construction for setting the labor hour threshold means the same thing as for the Beginning of Construction Exception.
• The Final Regulations clarify that the participation requirement for any taxpayer, contractor, or subcontractor to use one or more apprentices applies if such taxpayer, contractor, or subcontractor employs four or more individuals in the construction of a qualified facility over the entire course of construction regardless of whether they are employed at the same location or at the same time.
• The Final Regulations require that an initial request to an apprenticeship program must be made no later than 45 days before the qualified apprentices are requested to start work and any subsequent requests made to the same apprenticeship program must be made no later than 14 days before the apprentices are requested to start work. So, taxpayers cannot wait until the last minute to request apprentices.
• The Final Regulations provide further guidance on the “Good Faith Effort” exception to the apprenticeship requirements:
  • The Good Faith Effort exception is now satisfied if there is no registered apprenticeship program that has a geographic area of operation that includes the location of the facility, trains apprentices in the occupations needed, and has a usual and customary practice of entering into agreements with employers for the placement of apprentices.
    • The Final Regulations do not, however, describe how to demonstrate that no applicable apprenticeship program exists. Nonetheless, the Final Regulations do include the following as factors for determining whether to award an intentional disregard penalty: (a) whether the taxpayer has contacted the DOL for assistance in locating an apprenticeship program, and (b) whether the taxpayer has followed up with apprenticeship programs following the request for apprentices.
  • If a request for apprentices is denied or not responded to, the Good Faith Effort exception is satisfied as to those apprentices for the period for which apprentices were requested, not to exceed one year. This extends the Good Faith Effort exception beyond the 120-day period permitted in the Proposed Regulations, but taxpayers and contractors need to pay attention to the dates for which they are requesting apprentices when they communicate with apprenticeship programs.
    • The Proposed Regulation classified an apprenticeship program’s confirmation to the taxpayer that they had received the request for apprentices — even if automated and non-responsive — as a response making taxpayers unable to qualify for the Good Faith Effort exception for that apprentice request. The Final Regulations removes this concept, making it easier for taxpayers to meet the Good Faith Effort exception.
  • The Final Regulations clarify that employer-sponsored apprenticeship programs that are unable to employ a sufficient number of apprentices must still make a request to at least one other apprenticeship program in order to satisfy the Good Faith Effort exception.

Corrections and Penalty Payments

• The preamble and the Final Regulations also make clear that the PWA Requirements (and any penalties) only become binding once a tax return reflecting the credits is filed (and if the relevant credit is transferred, the earlier of when the transferee or transferor taxpayer files its return).
• The Final Regulations provide additional factors that will be considered when determining if taxpayers engaged in intentional disregard of the PWA Requirements, including whether the taxpayer: (i) conducted quarterly (or more frequent) reviews of applicable wage rates, labor classifications, and payroll records; (ii) provided laborers and mechanics notice of the PWA Requirements and gave them an opportunity to acknowledge such requirements; (iii) regularly reviews contractors and subcontractors use of qualified apprentices; (iii) developed and used a plan to utilize qualified apprentices; (iv) investigated complaints of retaliation or adverse action resulting from reports of suspected failure to pay prevailing wages or classifying workers correctly, or for violations of workplace standard laws; and (v) had procedures in place for individuals to report non-compliance with the PWA Requirements and whether the taxpayer investigated reports of non-compliance.
  • In general, the additions make clear that the Treasury and the Service will look more kindly on taxpayers that do more than simply include the PWA Requirements in their contracts and trust that contractors will comply.
• In order to avoid a penalty, correction payments for violations of the prevailing wage requirements must be made to workers by the last day of the month that follows the calendar quarter in which the violation occurred.
• The Final Regulations provide that taxpayers that cannot locate a laborer or mechanic are deemed to have made a corrective payment if such taxpayer shows evidence to establish compliance with state unclaimed property law and federal and state withholding and reporting requirements.
• In order take advantage of the penalty waiver, a laborer or mechanic may not have been underpaid by more than 5% of the total amount such laborer or mechanic was required to be paid.
• In a separate FAQ, the IRS points out that stakeholders can report a taxpayer’s non-compliance with the PWA Requirements on Form 3949-A.
• The Final Regulations generally accepted the cure provisions as outlined in the Proposed Regulations.

Recordkeeping and Reporting

• The Final Regulations provide an expanded, non-exclusive, list of the types of records that a taxpayer should maintain to document compliance:
  • Records to maintain and preserve with respect to the prevailing wage requirements may include:
    • DOL Form WH-347;
    • documentation supporting the applicable classification (for example, the applicable wage determination and copies of executed contracts for the work);
    • records demonstrating eligibility for a penalty waiver resulting from the use of a qualifying project labor agreement;
    • documentation of any failures to pay prevailing wages and actions to prevent, mitigate, or remedy such failure; and
    • records related to complaints received for failure to comply with prevailing wage requirements.
  • Records to maintain and preserve with respect to the apprenticeship requirement may include:
    • records demonstrating compliance with the Good Faith Effort exception;
    • amount and timing of penalty payment, records to document any failure of the apprenticeship requirements, and actions taken to prevent, mitigate, or remedy the failure;
    • records demonstrating eligibility for a penalty waiver resulting from the use of a qualifying project labor agreement;
    • records related to complaints received for failure to comply with apprenticeship requirements.
• The Final Regulations clarify that taxpayers need only maintain the last four digits of an individual’s social security number, rather than the full social security number.
• The Final Regulations permit taxpayers to satisfy the recordkeeping requirements in three ways:
  • The taxpayers may collect and physically retain relevant records from contractors or subcontractors. Personally identifiable information may be redacted from such records to comply with applicable privacy laws.
  • Taxpayers, contractors, and subcontractors may provide relevant records to a third-party vendor to physically retain on behalf of taxpayer. Personally identifiable information may be redacted from such records to comply with applicable privacy laws.
  • Taxpayers, contractors, and subcontractors may each retain the relevant unredacted records for their own employees.
• Importantly, under all three methods, unredacted copies must be available to the IRS upon request.
  • Taxpayers will need to consider carefully whether to rely on contractors and subcontractors to maintain the information necessary to demonstrate compliance with the PWA Requirements and should consider how it would impact their ability to audit the practices of their contractors and subcontractors, especially in light of the penalty safe harbor being based off of the date the violation occurred — as opposed to when it is discovered.
• The Final Regulations clarify that even if work is done pursuant to a qualifying project labor agreement, relevant records must be preserved and maintained.
• The Final Regulations also added that failure to maintain and preserve sufficient records to show compliance can be used at a factor when assessing whether to award an intentional disregard penalty.

45Z Special Rule

• The Final Regulations impose clarifying rules, including transition rules, with respect to the applicability of the PWA Requirements to certain qualified facilities for Code section 45Z, namely explaining how facilities may satisfy the PWA Requirements depending on when placed in service:
  1. A facility that is placed in service after December 31, 2024, must meet all PWA Requirements with respect to construction, alteration, or repair.
  2. A facility placed in service before January 1, 2025, must meet the prevailing wage requirements with respect to alteration or repair performed after December 31, 2024, and are only required to satisfy the apprenticeship requirements with respect to any construction occurring 90 days after June 25, 2024.

Applicability Dates

• The Final Regulations apply to projects or facilities that are placed in service in taxable years ending after June 25, 2024 and the construction of which began after June 25, 2024. For projects or facilities that were placed in service in taxable years ending on or prior to the June 25, 2024, taxpayers may follow either the Final Regulations or the Proposed Regulations, so long as one set of regulations is followed in its entirety and in a consistent manner.
  • The Final Regulations also contain certain “Transition Rules” that allow taxpayers to rely on the rules set forth in Notice 2022-61 and the Proposed Regulations while otherwise following the Final Regulations.
  • The Final Regulations provide for a “transition waiver” that allows taxpayers to avoid a penalty (but not avoid the requirements in their entirety) if they relied on the Proposed Regulations for determining when the activities of laborers or mechanics become subject to prevailing wages requirements as long as the taxpayer makes a corrective payment within 180 days of the publication of the Final Regulations.

¹ The Final Regulations are effective August 24, 2024 (that is, 60 days after publication in the Federal Register on June 25, 2024).

² Pursuant to the IRA, for most relevant credits, a project or facility, as applicable, will be eligible for the full credit amount (besides bonus credits) if: (1) it complies with the PWA Requirements; (2) begins construction prior to January 29, 2023 (the “Beginning of Construction Exception”); or (3) has a maximum net output of less than one MW(ac).

The tax credits subject to the PWA Requirements include: the alternative fuel vehicle refueling property credit (section 30C of the Internal Revenue Code of 1986, as amended (the “Code”)); the production tax credit (“PTC”) (Code section 45); the new energy efficient home credit (Code section 45L); the carbon oxide sequestration credit (Code section 45Q); the zero-emission nuclear power production credit (Code section 45U); the clean hydrogen production credit (Code section 45V); the investment tax credit (“ITC”) (Code section 48); the technology neutral ITC (Code section 48E) and PTC (Code section 45Y); the clean fuel production credit (Code section 45Z); the qualifying advanced energy projects credit (Code section 48C); and the energy efficient commercial buildings deduction (Code section 179D).

³ Our prior coverage of the PWA Requirements can be found here and here (See “1. Energy Production”).

⁴ While beyond the scope of this alert, the Final Regulations also provide specific rules of application for Indian Tribal governments.