On November 30, 2022, the Department of the Treasury and the Internal Revenue Service published Notice 2022-61 (the “Guidance”) describing how to satisfy certain prevailing wage and apprenticeship requirements (the “PWA Requirements”) for purposes of obtaining the full credit amounts for the Section 45 production tax credit (“PTC”) or the Section 48 investment tax credit (“ITC”). The Guidance also applies to several other tax credits that incorporate prevailing wage requirements, apprenticeship requirements, or both, including Section 45Y clean energy production tax credits, Section 48E clean electricity investment tax credits, Section 45Q carbon sequestration tax credits, Section 45V hydrogen production credits, and Section 30C electric vehicle charging infrastructure tax credits.
As detailed in our prior post covering the key provisions of the Inflation Reduction Act of 2022 (the “Act”), to be eligible for the full ITC or PTC amounts, the taxpayer generally is required to either (A) satisfy the PWA Requirements, or (B) “begin construction” of the project on or before the date that is 59 days after guidance is issued with respect to the PWA Requirements (January 28, 2023). Exceptions apply for certain projects with a maximum net electrical or thermal energy output of less than 1 MW (AC).
To satisfy the prevailing wage requirements, all laborers and mechanics employed by the taxpayer, any contractor, and any subcontractor, must be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the project is located as most recently determined by the Secretary of Labor, both (i) during the construction of the project, and (ii) in the alteration and repair of the project for five years (in the case of the ITC) or ten years (in the case of the PTC) after the project has been placed in service (the “Required PW Period”).
With respect to the prevailing wage requirements, the Guidance requires taxpayers to access www.sam.gov to determine the specific prevailing wage rates required to be paid based on the relevant geographic area for a project, the type of construction, and labor classifications for laborers and mechanics performing the work. In many cases, no such information has been published. If the Secretary of Labor has not published a relevant prevailing wage determination, the Guidance instructs taxpayers to contact the Department of Labor, Wage and Hour Division via email at [email protected] with the type of project, project location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for any proposed classification. The Guidance clarifies that the prevailing wage requirements apply to any individual performing services for the taxpayer, contractor, or subcontractor in exchange for remuneration, meaning that prevailing wages must be paid to all individual laborers and mechanics performing construction, repair, or alteration work, whether they are classified as employees or independent contractors.
Finally, the Guidance also sets forth certain recordkeeping requirements, which generally require the taxpayer to maintain and preserve sufficient records to establish that laborers and mechanics were paid prevailing wages during construction of the project and the Required PW Period. These records include, but are not limited to, identifying the relevant wage determinations, the mechanics and laborers who performed the work, the classifications of work they performed, the hours worked in each classification and the wage rates paid for the work. Taxpayers must keep in mind these recordkeeping requirements when negotiating EPC agreements, build-transfer agreements, O&M agreements, and other project contracts.
To satisfy the apprenticeship requirements for purposes of the full ITC and PTC, the following percentage of total labor hours for construction, alteration or repair work on the qualified project must be performed by qualified apprentices:
Further, taxpayers must comply with the apprentice-to-journeyworker ratios of the Department of Labor or the applicable state, and there must be one apprentice for each taxpayer, contractor, or subcontractor that employs four or more individuals to construct, alter, or repair the project. The Guidance imposes recordkeeping requirements with respect to the apprentices that are similar to those described above for prevailing wages.
The Guidance does not change the good faith exception for requesting qualified apprentices, or the remedial provisions included in the Act in the event that the PWA Requirements are not satisfied.
Beginning of Construction Deadline
The Guidance also triggers the 59-day window during which construction must begin on ITC, PTC, and certain other credit-eligible projects to be eligible for the full credit amounts without needing to satisfy the PWA Requirements. As such, to qualify for the 30% ITC or the full PTC without satisfying the PWA Requirements, construction must begin on or before January 28, 2023 (note that the Guidance states that construction must begin on or before January 29, 2023, but this appears to be one day off).
With respect to beginning of construction guidelines, the Guidance remains loyal to long-standing ITC and PTC guidance for determining when construction begins. To avoid application of the PWA Requirements, taxpayers are entitled to rely on the physical work test and 5% safe harbor described in Notices 2013-29 (with respect to the PTC and ITC in lieu of the PTC) and 2018-59 (with respect to the ITC), and subsequent notices, for establishing when construction of a project begins.
Foley will continue to monitor these developments, including any issuance of additional guidance issued by the IRS with respect to the PWA Requirements and the Act.