TAKEAWAYS
- The proposed regulations adopt the Department of Labor’s published rates for prevailing wages for the relevant type of construction in the geographic location of the project.
- The proposed regulations provide additional guidance regarding the good faith exception to the qualified apprenticeship requirement that initially was described in IRS Notice 2022-61.
- The proposed regulations offer safe harbor relief from penalties and corrective payments.
On August 30, 2023, the Internal Revenue Service (IRS) published proposed regulations [REG-100908-23] in the Federal Register providing further guidance on compliance with the prevailing wage and apprenticeship requirements under the Inflation Reduction Act of 2022 (IRA), which taxpayers must comply with in order to receive the increased credit amounts (i.e., base credit amount multiplied by five) for new and continuing energy credit provisions. The proposed regulations expand upon prior guidance, IRS Notice 2022-61, which was issued on November 30, 2022, in order to start the 60-day clock on the start-of-construction exception from compliance with the prevailing wage and apprenticeship requirements. For Pillsbury’s analysis on IRS Notice 2022-61, use this link.
Incorporating Davis-Bacon Act into Regulations
The proposed regulations would provide for the adoption of definitions for terms such as “laborer,” “mechanic,” “construction, alteration, or repair,” “wages,” and “employed,” consistent with their meanings in the Davis-Bacon Act (DBA). The definitions under the DBA generally are broader than corresponding definitions in the Internal Revenue Code (IRC). Additionally, the proposed regulations would generally follow the wage determination requirements under the DBA but would not require weekly wage reporting to the IRS.
Prevailing Wage
The prevailing wage requirement is satisfied if a taxpayer ensures that all laborers and mechanics, either directly employed by the taxpayer or indirectly through a contractor or subcontractor, are paid wages that are at least equal to the prevailing wages as determined by the Department of Labor (DOL) under the DBA. General wage determinations would be based on the rates of prevailing wage published by the DOL (and found on its website) for the relevant type of construction in the geographical area where the facility under construction is located. The proposed regulations would provide that the employment classification (i.e., employee or independent contractor) of the laborer or mechanic is not relevant for these requirements, consistent with the rules under the DBA.
The proposed regulations largely require taxpayers to use the DOL’s general wage determination that is in effect at the time construction begins. Taxpayers are allowed to use that same general wage determination throughout the remainder of the project, unless a contract is modified to expand the scope of work, or to extend the time for work to be completed (including when an option to extend the term of a contract is exercised). The proposed regulations would require taxpayers to use an updated wage determination, however, if there is an alteration or repair to the facility after it has been placed in service.
The proposed regulations provide for limited circumstances where taxpayers can request a supplemental wage determination from the DOL (e.g., when the DOL has not published prevailing wage rates for the relevant geographical area or the specific type of construction). Such a request should be made no later than 90 days prior to the start of construction, alteration or repair, as applicable, or as soon as practicable after such start date in cases where the taxpayer was unable to reasonably determine in advance that a supplemental wage determination would be required. The proposed regulations address the issue of off-site construction locations by requiring taxpayers to comply with the prevailing wage and apprenticeship requirements for the qualified facility’s location, as well as any secondary sites where a significant amount of the construction, alteration or repair work takes place, and that were established specifically for the facility, or dedicated for the facility for a specified period of time for the construction, alteration, or repaid of the facility.
Apprenticeship
The apprenticeship requirement is satisfied if taxpayers meet the labor hours, apprentice-to-journeyworker ratio and participation requirements of IRC Section 45(b)(8) during the construction of the qualified facility. Little additional guidance is offered in the proposed regulations with respect to these requirements. The proposed regulations do provide, however, that, for any day where the apprentice-to-journeyworker ratio is exceeded, the calculation of the labor hours requirement would exclude the hours worked by apprentices that exceed such ratio.
The proposed regulations clarify the good faith exception provided in Notice 2022-61. The good faith exception is available when (i) the taxpayer requests qualified apprentices and is denied for reasons other than the taxpayer’s (or its contractor’s or subcontractor’s) refusal to comply or (ii) the registered apprenticeship program does not respond to a request from a taxpayer within five business days. The proposed regulations would require the taxpayer to submit an additional request every 120 days to continue to qualify for the good faith exception. The proposed regulations also limit the good faith exception only to the specific position of the request for apprenticeship that was denied or disregarded.
Recordkeeping
The proposed regulations clarify that taxpayers are solely responsible for compliance, recordkeeping and paying any corrective penalties with the prevailing wage and apprenticeship requirements. Among other things, these records should include each laborer and/or mechanic’s hourly rates, hours worked, wages paid, daily apprenticeship-to-journeyman ratios and participation in a registered apprenticeship program. In the event of a transfer of tax credits under IRC Section 6418, the transferee remains responsible for the maintenance of records and the payment of corrective penalties.
Corrections and Penalties
Taxpayers who fail to meet the prevailing wage and apprenticeship requirements must pay a penalty and make corrective payments. The proposed regulations provide that the obligation to pay the penalty and corrective payments is not binding until the return is filed. If a taxpayer makes the corrective payments at the time the failure is discovered, however, such taxpayer can decrease the interest expense associated with the corrective payment. If the IRS sends the taxpayer a notice (i.e., a final determination) informing the taxpayer of a failure to meet the prevailing wage and apprenticeship requirements, the taxpayer has 180 days to pay the penalty and make the necessary correction payments.
The proposed regulations would waive the penalty payment if (i) the taxpayer makes the required correction payments by the earlier of (a) 30 days after the taxpayer discovers the error, or (b) the date on which the tax return claiming the increased credit is filed, and (ii) either: (a) the laborer or mechanic is paid less than the prevailing wage for not more than 10% of the pay periods in the calendar year (or portion thereof) of employment or (b) the difference in wages paid and wages required is not greater than 2.5% required under the applicable prevailing wage.
Additionally, the proposed regulations would provide for a penalty waiver for taxpayers that have entered into collective bargaining agreements with one or more labor associations (“Qualifying Project Labor Agreements”). The proposed regulations require that the Qualifying Project Labor Agreements meet certain requirements including, but not limited to, (i) provisions relating to the payment of prevailing wages; (ii) guarantees against strikes, lockouts and other similar job disruptions; and (iii) adoption of labor dispute resolution procedures.
Final Analysis
The proposed regulations provide needed clarity to taxpayers who intend to satisfy the prevailing wage and apprenticeship requirements in order to receive the increased credit amounts. Taxpayers may rely on the proposed regulations until final regulations on the topic are published in the Federal Register.
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