IRS Issues Wage and Apprentice Requirements

IRS Issues Wage and Apprentice Requirements

November 29, 2022 | By Keith Martin in Washington, DC, David Burton in New York and Hilary Lefko in Washington, DC

The Internal Revenue Service issued wage and apprentice guidance this afternoon under the Inflation Reduction Act.

The guidance set off a race to start construction of new renewable energy, storage, hydrogen, biogas and carbon capture projects and electric vehicle charging infrastructure before the new wage and apprentice requirements take effect.

Projects must be under construction by January 28, 2023 to be exempted from the new requirements if, as expected, the guidance is published on November 30 in the Federal Register.

The new guidance is Notice 2022-61.

The IRS said the same principles that have been used since 2009 to qualify for tax credits on renewable energy projects will be used to determine whether a project was under construction in time. Thus, a developer must either start “physical work of a significant nature” at the project site or at a factory on custom-made equipment for the project or else “incur” at least 5% of the total project cost before the deadline. Costs are not considered incurred until equipment or services are delivered, with one exception. A payment before the deadline counts if the equipment or services are delivered within 3 1/2 months after the payment.

Projects must generally be completed within four years after the year construction starts. Offshore wind projects and projects on federal and Indian land have 10 years. Carbon capture projects have six years. Renewable power projects on which construction started during the period 2016 through 2020 have five to six years.

Taxpayers must keep records to prove the required wages were paid and apprentice hours were worked.  The records must identify the wage determinations, the mechanics and laborers who performed the work, the classifications of work they performed, their hours worked in each classification and the wage rates paid for the work.

The IRS answered a number of other questions that developers have been asking.

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 not only during construction, but also on any “alteration or repair” for the next five to 12 years after the project is in service, must be paid the same “prevailing wages” that are paid on federal construction jobs.  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 tax credits are claimed on other projects.

The required wages vary by job type and location. They are published on the US Department of Labor website at www.sam.gov. However, there are no postings for many job types or locations. 

The IRS said that developers in such situations should send emails requesting wage determinations to IRAprevailingwage@dol.gov with the “facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications.”

Qualified apprentices must also be used for 10% to 15% of total labor hours. The percentage is 10% for projects on which construction starts in 2022 or earlier, 12.5% for projects starting construction in 2023 and 15% thereafter.  At least one qualified apprentice must be used on any job that at least four individuals will handle.

The qualified apprentice program dates from the Great Depression when President Franklin Roosevelt hoped to have unemployed people learn construction trades by working alongside experienced workers. Registered apprenticeship programs are run mainly by labor unions and require certification by the US Department of Labor or a state apprenticeship agency.

Projects that are unable to find qualified apprentices are excused. An example is where a project does not get a response from a program within five business days after making a request.

The IRS said today that the wage and apprentice requirements apply generally only to work on the project site.  However, an adjacent or virtually adjacent laydown yard established for the project and transportation between it and the project site is considered work on the job site.

 Developers had been wondering whether the wage and apprentice requirements apply not only to construction contracts, but also to operations and maintenance agreements. The answer turns on whether work under the O&M agreement is an “alteration or repair” of the facility on which tax credits were claimed. The IRS said the phrase “alteration or repair” has the same meaning as “construction, prosecution, completion, or repair” in 29 CFR § 5.2(j), an answer that may require interpretation by the US Department of Labor.