IRS Issues Guidance on Final Wage and Practice Regulations

In much-anticipated guidance, the Internal Revenue Service (IRS) has released final regulations that clarify applicable minimum wage and seniority requirements for taxpayers claiming the full value of the Energy Production and Investment Tax Credits under the Inflation Reduction Act of 2022 (IRA).

Through an IRA, building owners can claim tax credits for clean energy construction projects that use a workforce that earns the minimum “governing” wage and employs skilled apprentices.

Last year, the IRS introduced proposed regulations and related guidance on how taxpayers can document compliance with these payroll and practice requirements. With the recently issued final regulations, the IRS has updated the FAQs and guidance to reflect the changes in the final regulations.

In its June 18, 2024 press release (IR-2024-168), the IRS emphasized its commitment to helping taxpayers, advisors, and other stakeholders ensure compliance. As part of this effort, the IRS released Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact Sheet, and updated Publication 5855, IRA Prevailing Wage & Registered Apprenticeship Overview and Prevailing Wage and Practice FAQs.

The prevailing wage and practice rules will be critical for projects covered by an IRA. For projects that do not meet the prevailing wage and practice requirements, the investment tax credit is reduced to one-fifth of the full amount that would otherwise be available to the taxpayer. For example, a taxpayer taking the investment tax credit will generally be eligible for only 6% (down from 30%) if the project does not meet the prevailing wage and practice requirements. Furthermore, even if the IRS does not reduce the allowable credit for a taxpayer that does not meet the prevailing wage and practice requirements, the Code and final regulations impose significant penalties for noncompliance.

I. Applicable wages

In general, the project owner must pay the prevailing wage rate to “laborers and mechanics” employed by the project owner or any of the project owner’s contractors or subcontractors in the construction, alteration, or repair of the renewable energy project. Applicable wage rates are published by the Department of Labor for the geographic area and type (or types) of construction being constructed. The published wage rates must include all employee classifications for the construction, alteration, or repair work to be performed on the facility by the laborers and mechanics. If there is no published prevailing wage rate, the project owner will need to request a supplemental wage rate or rate of pay determination from the Department of Labor. Separately, the regulations also require the project owner to maintain records to support the prevailing wage requirements, including, but not limited to, the following information: (i) basic employee information, (ii) location and type of qualifying facility, (iii) hourly wage rates paid for each applicable employee classification, (iv) total hours worked, and (v) total wage amounts paid.

The regulations define “laborers and mechanics” as individuals whose duties are manual in nature, including anyone who spends more than 20% of their time performing laborer or mechanic duties. The term “employee” is very broad and includes both employees and independent contractors who work on the construction, alteration, or repair of a renewable energy project.

II. Requirements for professional practice

Generally speaking, the regulations require that a certain percentage of all construction, alteration or repair work carried out on a project must be carried out by skilled apprentices. The amount of work that must be carried out by skilled apprentices is measured by the number of total hours worked by apprentices compared to all hours worked on the project (the hours worked requirement).

For projects that begin construction before January 1, 2024, 12.5% ​​of the total hours of work must be performed by skilled apprentices. For projects that begin construction after December 31, 2023, this percentage increases to 15%. The term “hours of work” is defined as the total number of hours spent on construction, alterations, or repairs by any person employed by the project owner or by any contractor or subcontractor. The Code specifically excludes any hours worked by (i) foremen, (ii) managers, (iii) owners, or (iv) persons employed in a managerial, administrative, or professional position. A “skilled apprentice” is any person employed by the project owner or by any contractor or subcontractor and participating in a registered apprenticeship program. The above percentages are also subject to any applicable apprentice to temp ratio requirements established by the Department of Labor or any applicable state apprenticeship agency (apprentice to temp ratio requirement). Finally, each project owner, contractor, or subcontractor employing four or more persons to perform construction, alteration, or repair work must employ at least one qualified apprentice to perform such work (participation requirement).

The final rule clarified that the practices requirement applies only to the construction of a renewable energy project, including alterations and repairs performed before the project is placed in service, and does not apply to alterations or repairs performed after the project is placed in service. This was an important and welcome clarification of the practices requirement.

III. Compliance Guidelines

Because of the significant consequences of not complying with the prevailing wage and work practice requirements, the IRS encourages taxpayers to proactively take steps to bring their projects into compliance. The IRS has listed several steps that taxpayers can take, but they are not necessarily limited to:

• Regular review of payroll records
• Ensuring that all contracts require contractors and their subcontractors to comply with applicable wage and work practice laws
• Regularly reviewing employee and mechanic classifications, prevailing pay rates, and the percentage of work hours to be performed by skilled apprentices
• Posting information about prevailing wage rates in a conspicuous and accessible place or otherwise providing written notice of prevailing wage rates to workers and mechanics during construction, alteration and repair work
• Establishing procedures that enable individuals to report concerns about non-compliance with applicable wage and work practice requirements without fear of retaliation or adverse action
• Investigation of reports of suspected non-compliance with applicable pay and work practice requirements
• Contact the Department of Labor’s Office of Apprenticeships or the appropriate state apprenticeship agency for assistance in locating registered apprenticeship programs