Construction, Alterations, and Repairs

What activities are eligible for the PWAP Bonus Credit?

The PWAP Bonus Credit is available to projects that incur certain costs of construction, alteration, and repairs that are eligible for the PWAP credit. The PWAP rules only apply to the activities that are eligible for the credit. Once a facility is placed in service, maintenance work is not eligible for the PWAP credit.

How is “construction, alteration, or repair” defined?

Construction, alteration, or repair does not include activities that are excluded from the Davis-Bacon Act’s prevailing wage requirements. This means that taxpayers can rely on existing Davis-Bacon Act regulations and guidance. The Davis-Bacon Act applies prevailing wage requirements to “construction, alteration, or repair,” so it is useful to turn to the Davis-Bacon Act definition. Construction, alteration, or repair includes all types of work done on a particular building or work at the site, including the following:

• Altering or remodeling
• Installation (where appropriate) of items manufactured offsite
• Painting and decorating
• Onsite manufacturing or furnishing of materials, articles, supplies or equipment
• Demolition
• Transportation and related activities[12]

How is alteration or repair work defined?

Alteration or repair work is defined in the Final PWAP Regulations to include “restoration or improvement of a facility by modifications to the facility’s components, systems, or materials.”[13] It also includes improvements to “the building or work, either by fixing something that is broken or by improving upon the building or work’s existing condition.”[14] In other words, repairs improve the facility by fixing something that is not working properly, or by improving the facility. Factors that indicate work classifies as “alteration or repair work” may include the following:

• Correction of individual problems or defects as separate and segregable incidents (not continuous or recurring incidents)
• Items of work requiring more time to complete
• The work improves the facility’s structural strength, stability, safety, capacity, efficiency, or usefulness
• Skills necessary for the work are typical of one or more construction trades[15]

What activities are treated as maintenance work?

The PWAP does not apply to maintenance work, which includes regular, ordinary, and necessary work done to maintain a facility’s current condition but does not improve the facility’s existing functionality. Regular inspections, cleaning, and replacing materials are treated as regular, ordinary, and necessary maintenance. Factors that indicate an activity categorizes as “maintenance work” include the following:

• Work is performed continuously/repetitively over time
• Items of work are completed comparatively quickly
• Work does not affect an integral component or system of the facility, but merely maintains it in its existing condition
• Skills necessary for the work are not typical of the construction trades[16]

What is the difference between “maintenance” and “alteration or repair”?

The Final PWAP Regulations provide limited guidance on the definitions of maintenance, alteration, or repair, because the distinctions are factual in nature. We can, however, look at the DOL’s analysis of various activities. The DOL says, for example, that maintenance work is “routinely and regularly performed to keep the building or work functioning in the same condition” so it is not considered to be construction, alteration, or repair.[17]

Is there a transition rule for construction, alteration, or repairs performed before the regulations apply?

Yes. Under a transition rule in the Final PWAP Regulations, work performed before January 29, 2023, is not subject to the prevailing wage and apprenticeship requirements.[18] For construction, alteration, or repairs on or after January 29, 2023, a taxpayer must meet the PWAP requirements (as applicable) to claim an increased credit amount.[19]

Prevailing Wage

What is the “prevailing wage” based on?

The prevailing wage is based on the wage rates as defined by the Davis-Bacon Act and specified by DOL rates set for the specific geographic areas, jobs, and labor classifications. If there are multiple construction sites, the prevailing wage must be determined for each construction site.

How is the prevailing wage determined?

The Davis-Bacon Act and DOL procedures require construction workers on federal and federally assisted projects to be paid a locally prevailing wage based on a basic hourly rate and fringe benefits.[20] The DOL determines what the prevailing wage is, based on “surveys of wages paid to workers in similar roles within a specific area or region, serving as a compensation floor.”[21]

When does a project meet the prevailing wage requirement?

The prevailing wage requirement is met if laborers and mechanics working on the construction, repair, or alteration of a facility are paid wages at rates not less than the prevailing rates available for similar construction, alteration, or repair in the locality in which the qualified facility is located.[22]

If the taxpayer claims the increased PWAP Bonus Credit, is the taxpayer responsible for ensuring that all contractors and subcontractors comply with PWAP requirements?

Yes. Unless an exception applies, the taxpayer is responsible for all laborers and mechanics working on the project, even if they are independent contractors, or if they work for contractors or subcontractors.

Does this IRA definition of being “employed” apply to other tax definitions of employment?

No. The definition of “employed” for purposes of the prevailing wage requirements is generally different and much broader than the definition of employment used elsewhere in the Code, including employment taxes, and reporting and withholding obligations. Although laborers and mechanics who are independent contractors for employment tax purposes may be considered “employed” for purposes of the IRA’s prevailing wage requirements.[23]

Can workers be paid more than the prevailing wage?

Yes. Workers can, of course, be paid more than the prevailing wage. The prevailing wage is basically a compensation floor.

Where can a taxpayer find a general wage determination?

General wage determinations are published by the DOL’s Wage and Hour Division (WHD). General wage determinations are available online at the “System for Award Management” website. The WHD has also published a guide to understanding wage determinations.

What if there is no general wage determination for the geographic area for the facility?

Taxpayers can request a supplemental wage determination from the WHD.

What if the applicable general wage determination does not include all appropriate labor classifications?

Taxpayers can request from the WHD rates for additional labor classifications. Requests can be made any time after a contract has been executed between taxpayer and the contractor. If there is no contract, the request should be made no more than 90 days before construction, alteration, or repair starts.[24]

What if more than one wage determinate applies?

If the facility is in more than one location and the determination does not cover the entire relevant geographic area, the taxpayer must use the applicable wage determination for each geographic area. A taxpayer can request a supplemental wage determination. If there are multiple types of construction labor, multiple applicable wage determinations may apply to the facility or work.[25]

At what point in time is the prevailing wage determined?

The prevailing wage is determined at the time that the contract for construction, alteration, or repair is executed. It is not determined when the activities actually begin. For contracts that are open and not tied to any specific work, however, the prevailing wage must be updated on an annual basis.

Do prevailing rates need to be updated when a contract is modified?

Yes. In general, prevailing rates must be updated when a contract is modified. This requirement does not apply, however, if a contractor or subcontractor is given more time to complete work that is already included in the contract, or the additional work is incidental to work that was included in the contract.

Qualified Apprentices

What is the “labor hours requirement” for qualified apprentices?

Under the labor hours requirement, the construction of a qualified facility should have no fewer than the “applicable percentage” of total labor hours performed by qualified apprentices. The applicable percentage depends on when the project begins construction, with qualified apprentices required to perform between 10 and 20 percent of the total labor hours on a project. For construction that began prior to 2023, the applicable percentage was 10 percent; it is 12.5 percent for construction that began in 2023; and it is set at 15 percent for all periods since December 31, 2024. The labor hours requirement applies to all work that applies to the construction, alteration, or repair of the facility, and the taxpayer does not need to meet the labor hours requirement on a contractor by contractor or trade by trade basis.

What is the “ratio requirement” for qualified apprentices?

Under the ratio requirement, “the taxpayer must ensure that the applicable ratio of apprentices to journeyworkers (as established by the registered apprenticeship program) are met for apprentices working on the facility each day.”[26]

What is the “participation requirement” for qualified apprentices?

Under the participation requirement, any taxpayer, contractor, or subcontractor that employs four or more employees (or independent contractors) performing construction, alteration, or repair services must employ at least one qualified apprentice.[27] An apprentice “must be paid wages at rates not less than the rates specified by the registered apprenticeship program for the apprentice's level of progress, expressed as a percentage of the journeyworker hourly rate specified for the apprentice's classification in the applicable wage.”[28]

How are the apprenticeship requirements met?

The apprenticeship requirements are met by ensuring that (1) an applicable percentage of total labor hours for the construction, alteration, or repair work of a facility is performed by qualified apprentices and (2) each contractor or subcontractor that employs four or more individuals also employs one or more qualified apprentice(s) to perform this work. Once the project is placed in service, the apprenticeship rules no longer apply.

Exceptions to the PWAP Requirements

Are there any exceptions to the PWAP requirements?

Yes. There are three exceptions to avoid the PWAP requirements:

1. Solar and thermal energy projects (that meet the requirements of Sections 45 and 48) that have a maximum net output of less than one Megawatt (as measured in alternating current)[29]
2. Projects meeting the statutory requirements for the eligible credits that began construction before January 29, 2023, may be eligible for the increased credit or deduction amount without needing to meet any of the PWAP requirements
3. If a taxpayer is unable to hire qualified apprentices, a “Good Faith Effort Exception” can apply for up to 365 days (366 days for leap years).[30]  

Explain the Good Faith Effort Exception for failure to meet the apprenticeship requirements

The Good Faith Effort Exception applies if the taxpayer requests qualified apprentices from a registered apprentice program and (1) the request is denied (for reasons other than the taxpayer’s refusal to follow the program’s standards and requirements), or (2) the program does not respond to the taxpayer request for apprentices within five business days. After the 365-day (366 days for leap years) exemption period, the taxpayer must reengage efforts to find qualified apprentices.

What steps must a taxpayer take to qualify for the Good Faith Effort Exception?

To qualify for the Good Faith Effort Exception, the taxpayer must (1) make a formal written request (2) electronically or by registered mail (3) no later than 45 days before the qualified apprentices are requested to start work, and (4) the request must include at least one registered apprenticeship program that has a geographic area of operation that includes the location of the facility that trains qualified apprentices in the occupation(s) needed to perform construction, alteration, or repair with respect to the project facility; and that has a usual and customary business practice of entering into agreements with employers for placement of apprentices in the occupation for which they are training.[31]

What if there is no registered apprenticeship program in the geographic area where the facility is located?

The taxpayer might be found to meet the Good Faith Effort Exception.

Noncompliance Penalties / Curative Measures

Can penalties be assessed for PWAP violations?

Yes. Penalties are assessed if a project does not adhere to the prevailing wage requirements. In any given year, a project can cure its failure by paying each worker an amount equal to the difference between the actual wages paid and the prevailing wage plus interest (with the amount of interest increased by three times for intentional disregard) plus a penalty in the amount of $5,000 for each worker who did not receive the prevailing wage in that taxable year (with the intentional disregard penalty set at $10,000 for each worker).

In addition, projects that do not meet the apprenticeship requirement can qualify for the PWAP bonus credit if the taxpayer pays the IRS a penalty equal to $50 ($500 for intentional disregard) multiplied by the total number of labor hours where the apprenticeship requirement was not met.

What if a taxpayer does not meet the prevailing wage requirement?

After a final determination by the IRS that the PWAP previously had not been met, taxpayers have a specified time period to correct their compliance failures.[32] To cure a compliance failure, a taxpayer must pay any laborer or mechanic that had been paid below the prevailing wage an amount to bringing that person up to prevailing wages plus an interest charge assessed on any back wages.[33] In addition, to making the worker whole, the taxpayer must pay a $5,000 penalty to the IRS for each laborer or mechanic. Intentional failures have additional correction penalties, with the payment to each worker multiplied by three and the penalty amount increased to $10,000.

. . . or meet the apprenticeship labor hour or participation requirements?

A taxpayer that does not meet the labor hour requirement and/or the participation requirement for apprentices can pay a penalty equal to $50 per labor hours for which the labor hour requirement and/or the participation requirements were not met.[34] An intentional disregard increases the penalty to $500 per labor hour.[35]

Can PWAP penalties be avoided?

Yes. PWAP penalties can be avoided in three situations:

1. If a taxpayer pays the laborer or mechanic back wages and interest (that is, a correction payment) within 30 days after becoming aware of the error, or the date on which the increased PWAP credit is claimed.[36]
2. Penalties can be waived if the laborer or the mechanic is either paid wages at rates less than the prevailing wage for fewer than 10 percent of the pay periods in the calendar year, or the amount of the shortfall is less than 2.5 percent below prevailing wage levels.[37]
3. Penalties can be waived if work is done pursuant to a “project labor agreement” (PLA).

Project Labor Agreements

What is a PLA that can allow a project to qualify for a penalty waiver?

A PLA is a pre-hire collective bargaining agreement with one or more labor organizations that establishes terms and conditions of the work. A PLA must meet six requirements to qualify for a penalty waiver:[38]

1. It must be a collective bargaining agreement with one or more labor organizations in which building and construction employees are members.
2. All contractors and subcontractors must be bound through “appropriate specifications in all relevant solicitation provisions and contract documents.”
3. It must include guarantees against job disruptions, such as strikes and lockouts.
4. It must provide effective grievance and dispute resolution procedures that provide workers and unions an independent mechanism for enforcing the PLA requirements.
5. It must provide to pay prevailing wages at rates set in accordance with the Davis-Bacon Act and DOL requirements.
6. It must provide for the use of registered apprentices in accordance with Sections 45(b)(8)(A) through (C).

Recordkeeping

What records must a project maintain to comply with the PWAP Bonus Credit requirements?

Recordkeeping is very important to demonstrate compliance. Taxpayers must keep and preserve sufficient records, in accordance with the general recordkeeping requirements of Section 6001 of the Internal Revenue Code. In general, these records should include books of account, records for work performed by employees, apprentices, contractors and subcontractors to establish that laborers and mechanics are being paid at their prevailing rates.

What additional types of records demonstrate PWAP compliance?

The Final PWAP Regulations provide taxpayers with an expanded list of some types of records that taxpayers must “maintain and preserve robust records that demonstrate compliance with the final PWA rules.”[39] Records that demonstrate compliance (some of which are noted in the Final PWAP Regulations[40]) include the following:

1. Identifying information for each laborer or mechanic.
2. Location and type of the facility.
3. Labor classification applied to each laborer or mechanic.
4. Application of a project labor agreement, if applicable to demonstrate a penalty waiver.
5. The hourly rate that is paid for each labor classification that applies to the project.
6. Records that support provision of fringe benefits.
7. Total number of labor hours worked in each pay period.
8. Total wages paid in each pay period.
9. Deductions from wages and actual wages paid.[41]
10. Records of wages paid to apprentices and records demonstrating compliance with the apprenticeship requirements.
11. The amount and timing of any correction payments.
12. Any failures to pay prevailing wages and efforts to prevent, remedy, or mitigate the failures.
13. Records of any complaints received for PWAP compliance failures for laborers, mechanics, and apprentices.
14. Records demonstrating compliance with the Apprenticeship Good Faith Effort Exception.

How can a taxpayer meet the recordkeeping requirements?

The Final PWAP Regulations provide that a taxpayer can meet the recordkeeping requirements in one of three ways; with unredacted copies being made available to the IRS upon request:

1. The taxpayer can collect and physically retain records received from contractors, or subcontractors, with personally identifiable information redacted to meet privacy laws. (In fact, the Final PWAP regulations clarify that a taxpayer needs to only retain the last four digits of an individual’s Social Security number.)
2. A taxpayer, contractor, and subcontractor can provide relevant records to an appropriately qualified third-party service provider to retain. 
3. A taxpayer, contractor, and subcontractor can retain the relevant records (unredacted) for their own employees.

Can a taxpayer use a third-party service provider to track its PWAP requirements?

Yes. Because a taxpayer is required to substantiate its own tax filing positions, a taxpayer can use—but not rely on—third-party service providers to help manage its PWAP require

[1] The Inflation Reduction Act of 2022, Pub. L. No. 117-169, 136 Stat. 1818 (2022) (IRA), August 16, 2022.

[2] “Inflation Reduction Act FAQs: Clean Energy Tax Credit Prevailing Wage and Apprenticeship (PWA) Requirements,” BlueGreen Alliance, June 2024.

[3] It also applies to an increased deduction amount at Section 179D.

[4] Notice 2022-61, November 11, 2022.

[5] § 45(b)(7)(A); Notice 2022-61.

[6] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” IRA prevailing wage requirements, Q1. IRS, June 18, 2024.

[7] Treas. Reg. § 1.45-7(d)(8).

[8] “Inflation Reduction Act FAQs: Clean Energy Tax Credit Prevailing Wage and Apprenticeship (PWA) Requirements,” BlueGreen Alliance, June 2024., p. 1.

[9] 89 FR 53184, June 25, 2024; Effective date, August 26, 2024. For date of applicability, see §§ 1.30C-3(c), 1.45-6(d), 1.45-7(e), 1.45-8(h), 1.45-12(f), 1.45L-3(c), 1.45Q-6(c), 1.45U-3(c), 1.45V-3(c), 1.45Y-3(c), 1.45Z-3(c), 1.48C-3(b), 1.179D-3(c).

[10] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” IRS, June 18, 2024.

[11] “IRS Fact Sheet. Inflation Reduction Act Prevailing Wage and Apprenticeship Requirements,” https://www.irs.gov/pub/irs-pdf/p5983.pdf

[12] “Davis-Bacon and Related Acts: What is “Construction, Alteration, or Repair?” DOL, WHD, page 5, dol.gov/agencies/whd.

[13] “Davis-Bacon and Related Acts” DOL, page 6; see also Treas. Reg. § 1.45-7(d)(3)

[14] “Davis-Bacon and Related Acts,” DOL, page 6. Interestingly, this definition is different from the definition set out in the PWAP construction exception that applies to projects that began construction before January 30, 2023. For example, demolition and clearing of land might be treated as “construction” for the PWAP requirements but it would not be treated as “construction” for the PWAP construction exception (which requires starting “significant physical work” or meeting a “5 percent safe harbor.”)

[15] “Davis-Bacon and Related Acts,” DOL, page 7.

[16] “Davis-Bacon and Related Acts,” DOL, page 7.

[17] “Davis-Bacon and Related Acts,” DOL, page 6.

[18]“Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” General requirements, Q5. IRS, June 18, 2024.

[19] See answer to the third question in this article, “Which tax credits are eligible to receive PWAP Bonus Credits?”

[20] “Inflation Reduction Act FAQs: Clean Energy Tax Credit Prevailing Wage and Apprenticeship (PWA) Requirements,” BlueGreen Alliance, June 2024., p. 1.

[21] Ibid.

[22] § 45(b)(7)(A); Notice 2022-61.

[23] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” General requirements, Q7, IRS, June 18, 2024; also see Treas. Reg. § 1.48-7(d)(5).

[24] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” Prevailing wage determinations, Q4, IRS, June 18, 2024.

[25]“Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” Prevailing wage determinations, Q5, IRS, June 18, 2024. A taxpayer also is permitted to request a supplemental wage determination with respect to the facility and pay the rates determined by the DOL pursuant to the request.

[26] “Frequently Asked Questions about the Prevailing Wage and Apprenticeship Under the Inflation Reduction Act,” General requirements, Q3, IRS, June 18, 2024.

[27] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” General requirements Q3, IRS, June 18, 2024.

[28] § 1.45-7(b)(7)(i).

[29] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” General requirements, Q4, IRS, June 18, 2024. The under-one-Megawatt exception applies to credits for ITC- and PTC-eligible projects.

[30] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” IRA apprenticeship requirements, Q3, IRS, June 18, 2024.

[31] “Frequently asked questions about the prevailing wage and apprenticeship under the Inflation Reduction Act,” IRA apprenticeship requirements, Q4, IRS, June 18, 2024.

[32] Treas. Reg. § 1.45-7(c)(4).

[33] Interest is at the federal short-term rate plus 6 percent. Treas. Reg. § 1.45-7(c)(1)(i).

[34] Prop. Treas. Reg. § 1.45-8(f)(2)(i).

[35] Prop. Treas. Reg. § 1.45-8(f)(2)(ii)(A)

[36] The taxpayer makes the correction payment by the last day of the first month following the end of the quarter when the taxpayer became aware of the error and (2) the underpayment was at rates less than 10 percent of the pay periods in the calendar year or else the shortfall was less than 5 percent of the amount required to have been paid.

[37] Treas. Reg. § 1.45-7(c)(6).

[38] Summary taken from “Inflation Reduction Act FAQs: Clean Energy Tax Credit Prevailing Wage and Apprenticeship (PWA) Requirements,” BlueGreen Alliance, June 2024., p. 2.

[39] “Inflation Reduction Act FAQs: Clean Energy Tax Credit Prevailing Wage and Apprenticeship (PWA) Requirements,” p. 7. BlueGreen Alliance, June 2024.

[40] 89 FR 53184, June 25, 2024; Effective date, August 26, 2024.

[41] “Prevailing Wage and Registered Apprenticeship Overview,” Publication 5855 (Rev. 6-2024), Department of the Treasury, Internal Revenue Service.