The U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) recently released proposed regulations¹ regarding increased credit and deduction amounts available for taxpayers meeting the "prevailing wage and apprenticeship" requirements under the Inflation Reduction Act (IRA).² Increased credit amounts are available under the Internal Revenue Code sections 30C (alternative fuel vehicle refueling property credit), 45 (renewable electricity production credit), 45L (new energy efficient home credit), 45Q (carbon oxide sequestration credit), 45U (zero-emission nuclear power production credit), 45V (clean hydrogen production credit), 45Y (clean electricity production credit for facilities placed in service in 2025 or later), 45Z (clean fuel production credit for facilities placed in service in 2025 or later), 48 (energy credit), 48C (qualifying advanced energy project credit), and 48E (clean electricity investment credit), and an increased deduction amount is available under section 179D (energy efficient commercial buildings deduction).³ The prevailing wage and apprenticeship requirements are significant; with respect to the aforementioned credits, taxpayers may qualify for a credit up to five times the applicable base credit.⁴ For example, the renewable energy investment tax credit increases from six percent to 30 percent of eligible costs if the prevailing wage and apprenticeship requirements are met.⁵  

The application of these rules is critical for companies seeking to maximize the tax incentives for green energy under the IRA.

Prevailing Wage Requirements

The statutory basis for the prevailing wage requirements is section 45(b)(7) which explicitly covers the requirements for the renewable electricity production credit. Other credits either incorporate the rules of section 45(b)(7) explicitly by reference⁶ or follow similar principles.⁷ 

To meet the prevailing wage requirements under section 45(b)(7), the taxpayer must ensure that "laborers and mechanics" employed by the taxpayer (or its contractors or subcontractors) in the "construction" as well as the "alteration or repair" of a facility are paid wages at the prevailing rates determined by the Department of Labor (DOL) in accordance with the Davis-Bacon Act. 

One consideration in the statutory language is the period of time for which the prevailing wage requirements must be satisfied. The clean electricity production tax credit under section 45 may be claimed over 10 years and has no statutory recapture provision if the taxpayer fails to meet the prevailing wage requirement with respect to a subsequent alteration or repair. It appears that once the prevailing wage and apprenticeship requirements are satisfied during the construction period, the requirements become an annual requirement with respect to alterations and repairs.⁸ In contrast, section 48, which provides for an up-front credit based on the qualifying cost, is subject to recapture for a project that does not satisfy the prevailing wage requirements with respect to an alteration or repair of the project for the five-year period beginning on the date the project is originally placed in service.⁹   

The proposed regulations define the applicable type of workers and work. "Laborers" and "mechanics" refer to individuals whose duties are "manual or physical in nature," not "primarily administrative, executive, or clerical" and that cannot be "employed in a bona fide executive, administrative, or professional capacity."¹⁰ "Construction, alteration, or repair" covers "work that improves a facility, adapts it for a different use, or restores functionality as a result of inoperability" but does not include work that is "ordinary and regular in nature that is designed to maintain and preserve existing functionalities of a facility" after it is placed in service.¹¹ There may be administrative concerns when the definition of "repair" in the proposed regulations is not necessarily the same as the definition related to sections 162, 263, and 263A. For example, Plainfield Union Water v. Commissioner distinguished between a deductible repair under section 162 and a capital expenditure under section 263; the standard of "repair" was to "restore" an asset to its original condition before the deterioration occurred.¹² This standard is arguably different than "preserving" existing functionality as provided in the proposed regulations. 

General wage determinations are the wage rates determined by DOL to be prevailing related to a specific geographic area and type of construction.¹³ If general wage determinations are not available, the taxpayer may request to the DOL for supplemental wage determinations and additional classifications and rates. The proposed regulations detail the procedures for making such request, information required from the taxpayer, special rule for wage determinations related to qualified facilities located offshore, wage determination reconsideration, and accepted forms of wage payment.¹⁴ The taxpayer must use the applicable wage determination in effect at the time the construction, alteration, or repair work starts. The taxpayer does not need to use an updated wage determination unless additional work is outside the scope of work and time established for the original project.¹⁵

Apprenticeship Requirements

The statutory basis for the apprenticeship requirements is section 45(b)(8), which explicitly covers the requirements for the renewable electricity production credit. Other credits incorporate the rules of section 45(b)(8) explicitly by reference.¹⁶ The apprenticeship requirements under section 45(b)(8) are threefold and apply with respect to "the construction of any qualified facility[.]"¹⁷

First, the taxpayer must ensure that qualified apprentices perform 12.5 percent of the total labor hours relating to the "construction, alteration, or repair work" for facilities beginning construction in 2023 and 15 percent for facilities beginning construction in 2024 or after (labor hours requirement).¹⁸ "Qualified apprentice" means an individual who is employed by the taxpayer and is participating in a registered apprenticeship program.¹⁹  

Second, the applicable apprentice-to-journeyworker ratio established by the DOL or the applicable state apprenticeship agency needs to be met daily with respect to any work subject to the percentage requirement (apprentice-to-journeyworker ratio requirement).²⁰ "Journeyworker" means an individual who has "attained a level of skill, abilities, and competencies recognized within an industry as having mastered the skills and competencies required for the occupation."²¹  

Lastly, the taxpayer employing four or more individuals to perform construction, alteration, or repair work on the facility must employ at least one qualified apprentice ("participation requirement").²²

Correction and Penalty

The taxpayer failing to satisfy the prevailing wage requirements could be "deemed to have satisfied" the requirements once a correction or penalty payment is made.²³ The correction payment is made to any laborer or mechanic and equals the difference between the wages paid and wages required to be paid, plus interest.²⁴ The penalty amount is $5,000 multiplied by the total number of laborers and mechanics who were paid wages at rates less than the prevailing rates.²⁵ 

For the taxpayer failing to meet the prevailing wage requirements due to intentional disregard, the correction payment is tripled and the penalty payment is doubled.²⁶ The proposed regulations define "intentional disregard" as "knowing" or "willful" conduct.²⁷ The relevant facts and circumstances considered include whether: the failure was part of a pattern of conduct, the taxpayer demonstrated reasonable diligence and promptly cured the failure, the taxpayer paid the penalty in the past, and the taxpayer had good compliance practices (e.g., posting publicly or notifying workers of the prevailing wage rates, adopting contractual provisions requiring contractors to pay workers at the prevailing wage rates, conducting at least quarterly reviews of wages, or establishing procedures for workers to report any wage underpayment).²⁸ The proposed regulations provide that there is a rebuttable presumption against finding intentional disregard if the taxpayer makes the correction or penalty payment before receiving a return examination notice.²⁹ Further, the IRS may exercise their discretion to waive the penalty when the failure was small in amount and occurred only in a few pay periods. The penalty may be waived in only limited circumstances in which (1) the correction payment is made by the earlier of 30 days after the taxpayer became aware of the error or the date the taxpayer claimed the increased credit and (2) the underpayment is not more than 10 percent of all pay periods of the calendar year or the difference between the actual and required wages is less than 2.5 percent.³⁰ The penalty also does not apply if laborers and mechanics are employed under a pre-hire collective bargaining agreement for a specific construction project (qualifying project labor agreement).³¹ 

The taxpayer that does not meet the apprenticeship requirements may still be treated as satisfying the requirements if the taxpayer made a "good faith effort" to comply or paid penalties to Treasury.³² The good faith effort exception applies if the taxpayer requested in writing qualified apprentices from a registered apprenticeship program and the program denied the request or failed to respond to the request within five business days after the date the request was received.³³ A request should mention the dates of employment, occupation or classification, location and type of work, and number of apprentices and work hours.³⁴ The proposed regulations note that the denial of a request does not automatically qualify the taxpayer for the exception: the denial must be made in its entirety and an additional request must be made within 120 days of a previously denied request.³⁵ The penalty amount is equal to $50 multiplied by the total labor hours that are not compliance with the labor hours or participation requirement.³⁶ The multiplier increases to $500 for taxpayers acting with intentional disregard.³⁷ Similar considerations related to the facts and circumstances analysis, rebuttable presumption, and waiver covered above apply. 

Recordkeeping and Reporting

The proposed regulations also address the recordkeeping and reporting requirements. The taxpayer is subject to general recordkeeping requirements that include maintaining books of accounts or records under section 6001.³⁸

The taxpayer is required to establish compliance with the prevailing wage requirements at the time the return claiming the credit is filed.³⁹ Additionally, the taxpayer will be required to maintain and preserve records sufficient to demonstrate compliance with the prevailing wage requirements. These records may include: the location and type of facility, applicable wage determinations, wages paid (including any correction payments) and hours worked for each laborer or mechanic classification, contributions and costs related to bona fide fringe benefits, and total number of labor hours and wages paid for each pay period (including identifying any deductions from wages).⁴⁰

The proposed regulations provide that records sufficient to establish compliance with the apprenticeship requirements "may include" written requests for the employment of apprentices from a registered apprenticeship program, agreements entered into with a registered apprenticeship program, documents reflecting the standards and requirements of a registered apprenticeship program, the total number of labor hours worked by apprentices, and records reflecting the daily ratio of apprentices to journeyworkers.⁴¹

Credit Transfers under Section 6418

All the credits listed above (except for the section 45L new energy efficient home credit) are "eligible credits" for purposes of section 6418, which means that taxpayers entitled to them (excepting certain non-profit and government entities) may elect to transfer the credit to another party for cash consideration, with that other party then treated as the taxpayer for purposes of claiming the credit. While the transferee taxpayer is the person that claims transferred credit on its return, the requirements of section 45 relevant to determining the credit, including the correction and penalty provisions, remain with the eligible taxpayer who determined and transferred the credit.⁴²

Effective Date and Comments

The proposed regulations would be generally applicable to facilities placed in service after the regulations are finalized.⁴³ Comments on the proposed regulations are due by October 30, 2023, and a public hearing is scheduled to be held on November 21, 2023.⁴⁴ 

For more information, please contact:

Andy L. Howlett, ahowlett@milchev.com, 202-626-5821

Marissa J. Lee*

*Former Miller & Chevalier attorney

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¹Treasury and the IRS formally published the regulations in the Federal Register on August 30, 2023. See 88 Fed. Reg. 60018. 
²See Pub. L. 117-169 (Aug. 16, 2022)
³Note that the increased credit provisions for sections 45L and 45U do not contain apprenticeship requirements, only prevailing wage requirements. 
⁴Prop. Treas. § 1.45-6(a). 
⁵Section 48(b)(9).
⁶See, e.g., section 45Y(g)(9).
⁷See, e.g., section 48C(e)(5).
⁸Section 45(b)(7)(A).
⁹Prop. Treas. § 1.45-7(a).
¹⁰Prop. Treas. Reg. § 1.45-7(d)(7). 
¹¹Prop. Treas. Reg. § 1.45-7(d)(2)(i). 
¹²Plainfield-Union Water Co. v. Comm'r, 39 T.C. 333, 337 (1962). The court's finding of deductible repair costs was based on the prior Treas. Reg. § 1.162-4 that stated the following: 

The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as an expense, provided the cost of acquisition or production or the gain or loss basis of the taxpayer's plant, equipment, or other property, as the case may be, is not increased by the amount of such expenditures. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, shall either be capitalized and depreciated in accordance with section 167 or charged against the depreciation reserve if such an account is kept. 

The language was removed in the subsequent regulation enacted in 2012.
¹³Prop. Treas. Reg. § 1.45-7(b)(2).
¹⁴Prop. Treas. Reg. § 1.45-7(b)(3), (4), and (6). 
¹⁵Prop. Treas. Reg. § 1.45-7(b)(5). 
¹⁶See, e.g., section 45Q(h)(4). Note that sections 45L (new energy efficient home credit) and 45U (zero-emission nuclear power production credit) do not have apprenticeships requirement to obtain the enhanced credit, only prevailing wage requirements. 
¹⁷Section 45(b)(8).
¹⁸Prop. Treas. Reg. § 1.45-8(b). It is unclear in the proposed regulations whether this "construction, alteration, or repair work" is limited to the construction phase of the facility, which is implied by the statutory language of section 45(b)(8). On this point we note that section 45(b)(8)(A)(i) refers to "construction, alteration, or repair work" when setting out the percentage requirement, but this is arguably limited by the general language in section 45(b)(8) stating that all the apprenticeship requirements apply (only) to the construction of the facility. 
¹⁹Prop. Treas. Reg. § 1.45-8(f)(3). 
²⁰Prop. Treas. Reg. § 1.45-8(c). The same ambiguity about whether these rules apply after the construction period has ended applicable to the percentage requirement (see footnote 18) applies here as well.
²¹Prop. Treas. Reg. § 1.45-8(f)(1). 
²²Prop. Treas. Reg. § 1.45-8(d). The same ambiguity about whether these rules apply after the construction period has ended applicable to the percentage requirement (see footnote 18) applies here as well. 
²³Section 45(b)(7)(B)(i). 
²⁴Prop. Treas. Reg. § 1.45-7(c)(1)(i). 
²⁵Prop. Treas. Reg. § 1.45-7(c)(1)(ii). 
²⁶Section 45(b)(7)(B)(iii). 
²⁷Prop. Treas. Reg. § 1.45-7(c)(3)(ii). 
²⁸Prop. Treas. Reg. § 1.45-7(c)(3)(iii). 
²⁹Prop. Treas. Reg. § 1.45-7(c)(3)(iv). 
³⁰Prop. Treas. Reg. § 1.45-7(c)(6)(i). 
³¹Prop. Treas. Reg. § 1.45-7(c)(6)(ii). 
³²Section 45(b)(8)(D). 
³³Section 45(b)(8)(D)(ii). 
³⁴Prop. Treas. Reg. § 1.45-8(e)(1)(i)(A). 
³⁵Prop. Treas. Reg. § 1.45-8(e)(1)(i)(B); 88 Fed. Reg. at 60031.
³⁶Prop. Treas. Reg. § 1.45-8(f)(2)(i).
³⁷Prop. Treas. Reg. § 1.45-8(f)(2)(ii).
³⁸Prop. Treas. § 1.45-12(a).
³⁹88 Fed. Reg. at 60035. 
⁴⁰Prop. Treas. § 1.45-12(c); 88 Fed. Reg. at 60051. 
⁴¹Prop. Treas. § 1.45-12(d); 88 Fed. Reg. at 60051.
⁴²Prop. Treas. Reg. § 1.45-7(c)(1)(iv); Prop. Treas. Reg. § 1.45-8(f)(2)(iv).
⁴³Prop. Treas. § 1.45-6(d).
⁴⁴88 Fed. Reg. at 60018.
 

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