Dive Brief:
- The Treasury Department released prevailing wage and apprenticeship guidance last Tuesday, finalizing rules proposed last August, and announced that the IRS and Labor Department are working on a memorandum of understanding to “facilitate joint and cooperative education and public outreach” about the requirements.
- Developers who meet the Inflation Reduction Act’s PWA requirements for “construction, alteration or repair of certain clean energy facilities or properties, projects or equipment” can “generally increase the base amount of [each] credit or deduction by five times,” Treasury said in a release.
- “We've seen pretty consistently with Treasury that they really pay attention to public comments and have tried to answer the comments that they get, and I think this was no exception — they listened to what taxpayers needed and tried to respond,” said Hilary Lefko, a partner at Norton Rose Fulbright. “Maybe we didn't get the answer we were hoping for, but at least they tried to address all of our issues. And I'd much rather have an unfavorable rule than an unclear rule.”
Dive Insight:
To qualify for the increases in IRA tax credits and deductions offered to those who meet PWA requirements, developers generally need to “ensure that laborers and mechanics employed in the construction, alteration or repair of the facility or property, project or equipment are paid wages at rates not less than applicable prevailing wage rates, meet certain requirements related to employing qualified apprentices from registered apprenticeship programs, [and] meet specific recordkeeping and reporting requirements,” the IRS said.
The guidance clarifies the “good faith” exception to the apprenticeship requirements, offering developers a route to satisfying the requirements even if apprentices aren’t available to hire. Developers can qualify for the exception if they request apprentices from a registered program and are denied for reasons outside their control or if the program fails to respond to the request within five business days.
If the exception doesn’t apply, the developer can still satisfy the requirements if it makes a penalty payment to the IRS “in an amount equal to the product of $50 multiplied by the total labor hours for which the Labor Hours Requirement or the Participation Requirement was not satisfied with respect to the construction, alteration, or repair work on the qualified facility,” the guidances states.
The renewable energy industry is facing labor shortages, including a lack of registered apprentices, which makes these aspects of the guidance particularly helpful, Lefko said.
“It seems that Treasury got the message that there are labor shortages and that especially some of these apprentice provisions are going to be difficult,” she said.
Lefko also highlighted the additional guidance the Treasury Department provided concerning the “intentional disregard” penalty, an increased fee for developers who the IRS finds have intentionally disregarded the PWA requirements.
“I think that shows that they understand that there's going to be some trouble implementing these rules and getting the necessary laborers,” she said.
The IRS and Labor Department plan to sign their memorandum of understanding by the end of the year, according to the Treasury Department release. The MOU “will facilitate joint and cooperative education and public outreach and development of training content for IRS examination personnel…. [and] formalize a process for DOL to share with the IRS any credible tips or information that DOL receives as to potential noncompliance with the PWA requirements,” it said.
In terms of compliance, Lefko said it was particularly helpful that the IRS clarified that the apprenticeship requirements don’t apply after a facility is placed in service and don’t apply to any work performed before January 2023.
One aspect of the final rules that Lefko said surprised her was a provision clarifying that PWA “rules start to apply once you start to perform construction, alteration or repair under the meaning of the Davis-Bacon rules.” The Davis-Bacon Act is a federal law that sets prevailing wage requirements for public work projects.
“That's a little bit different than when construction starts for tax purposes,” she said. “So I think we're going to start pulling in earlier work than we maybe thought we needed to pull in in the past.”
In the guidance, the IRS said that while “several commenters supported a more expansive incorporation of the DBA, many other commenters stated that the Proposed Regulations took the correct approach regarding incorporation of the DBA.”
There are “very significant differences” between the limited scope of what the DBA regulates and general tax administration, the IRS said. “If Congress intended for the same DBA requirements to apply under the IRA, it would have so provided … The statute provides flexibility for the IRS to incorporate the requirements from the DBA that are appropriate for tax administration purposes.”
Lefko said that in general, she thinks the Treasury Department “is doing a fantastic job getting these regulations out and getting the certainty that taxpayers need” in the context of IRA implementation.
“Any time we get more rules, more certainty, we see the market start to open up,” she said.
