Wage and apprenticeship guidance issued for energy bonus credits

In brief

The Inflation Reduction Act of 2022 (IRA) created, extended, and expanded many tax credits to encourage production of clean energy, reduce carbon emissions, and promote domestic manufacturing. Many of the credits provide for a base rate, for example a percentage of the cost of constructing an asset or a dollar amount per unit of production, and increase the base rate for compliance with certain social policy-related requirements (bonus credits). The most significant and prevalent bonus credit provision is an increase of five times the base rate if the taxpayer meets certain prevailing wage and apprenticeship requirements.  

Taxpayers that begin construction of a relevant facility before the expiration of 60 days after Treasury issues guidance on the wage and apprenticeship requirements (60-day period end date) may be able to claim the wage and apprenticeship bonus credit although they do not meet the requirements. The IRS and Treasury have released Notice 2022-61, which provides preliminary guidance on the application of the wage and apprenticeship requirements. Notice 2022-61 states that it qualifies as guidance that starts the 60-day period, which ends on January 30, 2023.   

For consideration: Some project developers may find it advantageous to begin construction on IRA-eligible projects before the end of January to avoid uncertainty about compliance with these requirements. When beginning early construction is not feasible, companies should consider whether they may need a determination from the Department of Labor (DOL) of the prevailing wage rates that would apply to their projects and consider requesting that guidance as soon as possible.

Guidance

Notice 2022-61 provides preliminary guidance on the wage and apprenticeship requirements, including when construction of a facility and the installation of property begins, pending the anticipated issuance of proposed regulations. The notice “affects” facilities for which construction begins, and property for which installation begins, on or after January 30, 2023.

Notice 2022-61 provides the following guidance on these issues.

Prevailing wage requirements

A taxpayer and the taxpayer’s contractors and subcontractors must pay prevailing wages to mechanics and laborers employed in constructing, altering, or repairing a facility, property, project, or equipment. The taxpayer must maintain sufficient records, in accordance with the general recordkeeping requirements of Section 6001 and the related regulations, that establish compliance.

A determination of prevailing wages for a geographic area, type of construction, and labor classifications that DOL has published on www.sam.gov constitutes the prevailing wages for purposes of the prevailing wage requirement. If a labor classification is not listed, a taxpayer may provide certain information and propose labor classifications and prevailing wage rates to DOL via email and may rely on the resulting DOL determination. 

The prevailing rate for apprentices may be less than the prevailing rate for journeyworkers of the same classification. The prevailing wage rate for installing property for purposes of the Section 179D deduction is determined by reference to the prevailing wage rate for construction, alteration, or repair of a similar character in the locality where the property is located.

Apprenticeship requirements 

To satisfy the apprenticeship requirements, a taxpayer must:

(1)   Satisfy the apprenticeship labor hour requirement, subject to apprenticeship ratio requirements,

(2)   Satisfy the participation requirement, and

(3)   Maintain books and records, potentially including records for contractors or subcontractors, in accordance with Section 6001 and the related regulations, sufficient to establish compliance with these requirements.

A taxpayer will be considered to make a good faith effort in requesting qualified apprentices if the taxpayer requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry. The taxpayer must maintain adequate records of its request and an apprenticeship program’s denial of, or failure to respond to, the request.

Definitions

The following definitions apply for purposes of the prevailing wage and apprenticeship requirements.

• An individual is employed if the individual performs services in exchange for remuneration, regardless of whether the individual would be characterized as an employee or an independent contractor for other federal tax purposes. 
• “Wages” is defined under 29 CFR 5.2(p) and includes bona fide fringe benefits.
• “Laborer or mechanic’’ is defined under 29 CFR 5.2(m).
• ‘‘Construction, alteration, or repair’’ is defined under 29 CFR 5.2(j).
• The prevailing wage is the wage listed for a particular classification of laborer or mechanic in DOL’s wage determination for the type of construction and the geographic area, or as DOL otherwise determines. 
• A prevailing wage determination is one issued by DOL.
• An “apprentice-to-journeyworker ratio’’ means the ratio described under 29 CFR 29.5(b)(7).
• ‘‘State apprenticeship agency” is defined under 29 CFR 29.2.

Beginning of construction or installation 

Notice 2022-61 describes previous guidance addressing when construction begins for purposes of particular credits: Notice 2013-29, clarified, modified, and updated by subsequent notices (Section 45); Notice 2020-12 (Section 45Q); and Notice 2018-59, modified and clarified by subsequent notices (Section 48). Notice 2022-61 applies some of the methods and safe harbors authorized in these earlier notices to determine whether construction of a facility or installation of property begins before the 60-day period end date, which would allow a taxpayer to claim a bonus credit without complying with the wage and apprenticeship requirements.

Notice 2022-61 provides that principles similar to the physical work test and 5% safe harbor under Notice 2013-29, the continuity requirement under each earlier notice, and the continuity safe harbor under Notice 2016-31, apply for purposes of Sections 30C, 45V, 45Y, and 48E. A taxpayer may rely on the continuity safe harbor if a facility is placed in service no more than four calendar years after the calendar year when construction began.

Installation of property is deemed to have begun for purposes of Section 179D if a taxpayer generally satisfies principles similar to the physical work test or the 5% safe harbor for determining the beginning of construction.  

Under the physical work test, construction of a facility begins when physical work of a significant nature begins and the taxpayer maintains a continuous program of construction. This test is based on the nature of the work and not costs and has no minimum thresholds. Preliminary activities such as planning or designing a facility, obtaining financing, conducting exploration or surveys, or obtaining licenses or work permits do not qualify as significant physical work even if included in the property’s depreciable basis. Work another person performs for the taxpayer  under a written binding contract may be taken into account.

The 5% safe harbor treats construction of a facility as having begun if a taxpayer pays or incurs 5% or more of the total cost of a facility and thereafter makes continuous efforts to complete the facility. All costs properly included in the depreciable basis of the facility are taken into account under the safe harbor. Costs incurred by a person that has entered into a written binding contract with a taxpayer to manufacture, construct, or produce property for the taxpayer are deemed incurred by the taxpayer.

The continuity requirement is that, for purposes of either the physical work test or the 5% safe harbor, a taxpayer must demonstrate either continuous construction or continuous efforts. Whether a taxpayer meets this requirement is determined by the relevant facts and circumstances. Under the continuity safe harbor, a taxpayer is deemed to satisfy the continuity requirement if a qualified facility is placed in service no more than four calendar years for purposes of Section 45 or Section 48, or six calendar years for Section 45Q, after the calendar year when construction of the qualified facility began.