/>iThe Inflation Reduction Act of 2022 (IRA) incentivizes clean energy jobs by incorporating labor requirements and promoting workforce development within the United States. The IRA introduced proposed regulations (REG-100908-23) and frequently asked questions with guidance on how taxpayers can document compliance with the new wage and apprenticeship requirements to qualify for the full renewable energy tax credits and deductions under the IRA.
The IRA enhances certain clean energy tax incentives if specified prevailing wage and apprenticeship requirements are met. The prevailing wage and apprenticeship rules will be critical for most renewable energy projects. For projects that fail to meet the prevailing wage and apprenticeship requirements, the credit is reduced to one-fifth of the full amount. For example, a taxpayer utilizing the Investment Tax Credit under Internal Revenue Code (the Code) Section 48 will generally only qualify for 6% (down from 30%) if the project fails to meet the prevailing wage and apprenticeship requirements.
I. Prevailing Wages
In general, a project owner must pay a prevailing wage, as published by the Department of Labor (DOL) for the geographic area and type of construction facility, to any 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. 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 DOL and provide certain employee identification information. Separately, the Code also requires the project owner to maintain records in order to substantiate prevailing wage requirements, including, among other listed information, (i) basic employee information, (ii) the location and type of the qualified facility, (iii) hourly rates of wages paid for each applicable labor classification, (iv) total labor hours worked, and (v) total wages paid.
“Laborer” and “mechanic” are defined 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
There are three main apprenticeship requirements of the IRA: (1) labor hours, (2) apprenticeship ratio, and (3) participation.
The Code requires that a percentage of all construction, alteration, or repair work done on a renewable energy project be performed by qualified apprentices, measured by total labor hours (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 any contractor or subcontractor. The Code specifically excludes any hours worked by (1) forepersons, (2) superintendents, (3) owners, or (4) 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-journeyworker ratios set by the DOL or any applicable state apprenticeship agency (the apprenticeship ratio requirement). Finally, each project owner, contractor, or subcontractor that employs more than 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).
