In long-anticipated guidance, the Internal Revenue Service (IRS) introduced final regulations that clarify prevailing wage and apprenticeship requirements for taxpayers seeking the full value of energy production and investment tax credits under the Inflation Reduction Act of 2022 (IRA).

Under the IRA, construction owners can claim tax credits on clean energy construction projects that utilize labor forces which are paid minimum “prevailing” wages and hire qualified apprentices.

Last year, the IRS introduced proposed regulations and related guidance on how taxpayers can document compliance with these wage and apprenticeship requirements. Along with the recently released final regulations, the IRS updated the frequently asked questions and guidance, conforming with changes to the final regulations.

In its news release on June 18, 2024 (IR-2024-168), the IRS emphasized its dedication to helping taxpayers, advisers, and other stakeholders ensure compliance. As part of that 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 the prevailing wage and apprenticeship frequently asked questions.

The prevailing wage and apprenticeship rules will be critical for IRA-covered projects. For the projects that fail to meet the prevailing wage and apprenticeship requirements, the Investment Tax Credit is reduced to one-fifth of the full amount otherwise available to the taxpayer. For example, a taxpayer utilizing the Investment Tax Credit will generally only qualify for 6% (down from 30%) if the project fails to meet prevailing wage and apprenticeship requirements. Further, even if the IRS does not reduce the allowable credit for a taxpayer failing to meet prevailing wage and apprenticeship requirements, the Code and final regulations impose significant penalties for noncompliance.

I. Prevailing Wages

In general, a project owner must pay a prevailing wage 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 a renewable energy project. The prevailing wages are published by the Department of Labor for the geographic area and type (or types) of construction facility that is being built. The published wages must include all labor classifications for the construction, alteration, or repair work to be done on the facility by laborers and mechanics. If there is no prevailing wage publication, the project owner will need to request a supplemental wage determination or wage rate from the Department of Labor. Separately, the regulations also require the project owner to maintain records in order to substantiate prevailing wage requirements, including, among other listed information, (i) basic employee information, (ii) location and type of qualified facility, (iii) hourly rates of wages paid for each applicable labor classification, (iv) total labor hours worked, and (v) total wages 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 on laborer or mechanic duties. The term “employed” is very broad and encompasses both employees and independent contractors who work on the construction, alteration, or repair of a renewable energy project.

II. Apprenticeship Requirements

Generally, the rules require a percentage of all construction, alteration, or repair work performed on a project to be done by qualified apprentices. The amount of work that must be performed by qualified apprentices is measured by the amount of total labor hours performed by apprentices compared to all hours of work performed on the project (the labor hours requirement).

For facilities that begin construction before January 1, 2024, 12.5% of the total labor hours must be performed by qualified apprentices. For facilities that begin construction after December 31, 2023, the percentage increases to 15%. The term “labor hours” is determined by the total number of hours devoted to the construction, alteration, or repair work by any individual employed by the project owner or by any contractor or subcontractor. The Code specifically excludes any hours worked by (i) foremen, (ii) superintendents, (iii) owners, or (iv) persons employed in an executive, administrative, or professional capacity. A “qualified apprentice” is any individual employed by the project owner or any contractor or subcontractor and who is participating in a registered apprenticeship program. The percentages above are also subject to any applicable requirements for apprentice-to-journey-worker ratios set by the Department of Labor or any applicable state apprenticeship agencies (the apprenticeship ratio requirement). Finally, each project owner, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work must employ one or more qualified apprentices to perform such work (the participation requirement).

The final regulations clarified that the apprenticeship requirements apply only to the construction of the renewable energy project, including alteration and repair work performed prior to the project being placed into service, and do not apply to alteration or repair work occurring after the project is placed in service. This was an important and welcomed clarification of the apprenticeship requirement.

III. Tips for Compliance

Because of the significant ramifications of failure to comply with prevailing wage and apprenticeship requirements, the IRS encourages taxpayers to proactively take steps to position their projects for compliance. The IRS listed a few steps that taxpayers may do but would not necessarily be limited to:

• Regularly reviewing payroll records
• Ensuring all contracts require that contractors and their subcontractors adhere to prevailing wage and apprenticeship requirements
• Regularly reviewing the classifications of laborers and mechanics, prevailing wage rates, and percentage of labor hours to be performed by qualified apprentices
• Posting information about prevailing wage rates in a prominent and accessible location or otherwise providing written notice of prevailing wage rates to laborers and mechanics during construction, alteration, and repair work
• Establishing procedures for individuals to report suspected failures to comply with the prevailing wage and apprenticeship requirements without fear of retaliation or adverse action
• Investigating reports of suspected failures to comply with prevailing wage and apprenticeship requirements
• Contacting the Department of Labor’s Office of Apprenticeship or the relevant state apprenticeship agency for assistance in locating registered apprenticeship programs