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Witnesses Suggest Improvements to Prevailing Wage and Apprenticeship Requirements for Clean Energy Tax Incentives

Published by Peter Lawrence and Rob Bryant on Wednesday, December 27, 2023 - 11:19AM

Concerns expressed by witnesses at a Nov. 21 public hearing hosted by the Internal Revenue Service (IRS) may prompt Treasury to revise its proposed regulations regarding prevailing wage and apprenticeship requirements when final regulations are released  next year.

Comments on these labor requirements were submitted prior to the hearing, and 25 witnesses voiced their concerns. Recordkeeping burdens, concerns about potential abuse and good-faith exemption requests were the main issues presented during this hearing.

What to Know about Prevailing Wage, Apprenticeship Requirements for IRA Clean Energy Tax Incentives

Prevailing wage requirements follow the similar wage regulations under the Davis-Bacon law as determined by the U.S. Department of Labor. The prevailing wage requirements depend on the classification of laborers and mechanics for different types of construction and require that contractors and subcontractors must pay them no less than the prevailing wage rates for corresponding work on similar projects within the same area. Prevailing wage requirements apply to facilities that begin construction on or after January 29, 2023. Apprenticeship requirements state that taxpayers, contractors, or subcontractors that employ four or more workers must also employ one or more apprentices to increase the amount of future skilled laborers in the workforce. To meet apprenticeship requirements, the minimum percentage of total labor hours of construction, alteration or repair work done by apprentices must start at 12.5% for properties that begin construction in 2023. This increases to 15% for construction projects starting in 2024 or later.

The enactment of the IRA last year allowed for increased tax credit rates of clean and renewable energy for both the production tax credit (PTC) and the investment tax credit (ITC), among other incentives. According to a July 2023 estimate from the Committee for a Responsible Federal Budget using data from the Joint Committee on Taxation, the IRA’s projected costs for energy incentives totals $660 billion from 2022 through 2031 and $790 billion through 2033. However, to qualify for bonus rates for many of these tax incentives, developers must follow prevailing wage and apprenticeship (PWA) requirements. For example, the renewable energy ITC for facilities that commenced construction on Jan. 29, 2023, or later and have a nameplate capacity of 1 megawatt (MW) in alternate current (AC) or more is 6% for facilities not meeting these prevailing wage and apprenticeship requirements and 30% for facilities that do.

Below is a list of clean energy tax incentives that the prevailing wage and apprenticeship requirements established by IRA apply to:

Blog Graphic: IRA Prevailing Wage and Apprenticeship

Furthermore, IRA also provided bonus rates for the sect. 45L new energy efficient home credit and the sect. 45U zero emission nuclear PTC if prevailing wage requirements were met, but did not require apprenticeship standards to be met.

Concerns about Recordkeeping Burdens 

During the hearing, Timothy Jacobs of Hunton Andrews Kurth LLP said taxpayer requirements to retain large amounts of sensitive wage information for extended periods of time across multiple projects, contractors, subcontractors and employees have created a great amount of concern, as the taxpayer is usually not the direct employers of laborers and mechanics, which extends the amount of time needed to obtain crucial information. Jacobs said that further guidance should clarify that the apprenticeship rules apply only to the construction period prior, and that there should be clarifications to the meanings of “alteration and repair” to account for the placed-in-service date of a qualified facility.

Nick Panko of CFO Services also spoke about impact of recordkeeping burdens. For example, he said that if an apprentice is not present onsite for even one day, the absence could throw off the required apprenticeship ratio, which could be difficult to resolve. He suggested that the taxpayer should be able to qualify for the bonus tax credit if they satisfy the ratio for 90% of the working days on the job to account for unexpected absences and scheduling conflicts.

Another recordkeeping issue was raised by Barbara De Marigany of Baker Botts LLP who spoke about requirements for the Section 45Q carbon oxide sequestration credit, which must be met with respect to any qualified facility and any carbon capture equipment that commences construction on or after Jan. 29, 2023. She testified that this requirement could be interpreted to mean that PWA requirements must be satisfied with respect to the construction of the facility before it is known or even expected to be a part of a carbon capture project. If so, then taxpayers would have to satisfy PWA requirements to be eligible for the full bonus tax credit amount for engaging in any carbon capture activity. She suggested that taxpayers should be required to submit a sworn labor compliance report monthly to create a proper monitoring system for these regulations.

Kurt Kovarik of Clean Fuels shared similar concerns that the current facilities might fail to receive the full bonus credit even if taxpayers fully comply with the PWA requirements. Because the credit only applies to facilities that began construction after Jan. 29, 2023, facilities that were following the rules of the tax credit before this date do not qualify for it. Kovarik warned this could cause issues with supply chain barriers and permitting, which he said would be unfair as many of these facilities take many years to complete. Kovarik said facilities that plan to go above and beyond current PWA rules might now hesitate to do so until further regulations are provided.

Representing the Solar Energy Industry Association, Ryan Servais called for the passage of amendments regarding labor classification and supplemental wage determination timing and scope. He observed that the proposal has no mechanism for taxpayers, contractors and subcontractors to confirm that they have made the correct labor classification determinations. He also noted that separate entities can request supplemental wage determination just a few days before the beginning of the construction of a facility. Servais warned this potential obstacle could cause construction projects to delay, especially because the prevailing wage determination is the single most important input to determine the cost of labor to construct a solar facility. Third, he said the current regulations apply the prevailing wage determination at the start of construction, but fail to consider the fact that the cost of labor greatly fluctuates throughout the process. Finally, Servais said the proposed rule would require a new wage determination to be adopted from work in facilities changes to include work not within the scope of work with the initial project.

Concerns Over Potential Abuse

Another shared concern among the witnesses was the perceived potential for abuse. Esmerelda Aguilar of Sherman Dunn PC provided some context on the construction industry, saying that it is consistently ranked among the top three for noncompliance with wage, hour, safety and health laws. She said that this is because construction contracts are typically awarded to the lowest bidder, leading to competition for razor-thin profit margins. She said that companies respond to these pressures by using illegal tactics to cut costs to get ahead of their competitors. Michael Roles of Climate Jobs Rhode Island said that contractors and subcontractors often skirt labor laws by setting up out-of-state limited liability projects to undertake construction and then dissolving them upon completion. This allows contractors and subcontractors to avoid consequences for wage theft and work misclassification. He said that further front-end compliance mechanisms are needed because the proposed compliance and enforcement frameworks only operate once the taxpayer files for the increased credit. By this point, the construction work is already completed and the workers and apprentices have all moved on.

The Need for Good-Faith Exception Clarifications 

According to the IRS, the good-faith exception allows taxpayers to satisfy the apprenticeship requirements if they have requested apprentices from a registered apprentice program and either:

  1. the request was denied for reasons other than the taxpayer, contractor, or subcontractor’s refusal to comply with the program’s standards and requirements, or
  2. the program failed to respond within five business days of receiving a request.

The good faith effort exception also states that if a request was not responded to or denied, then the taxpayer must submit additional requests to a registered apprenticeship program after 120 days to continue to be eligible for the good faith exception. 

Deborah Kobes of the Urban Institute testified that additional clarification is need regarding the good faith exception, saying the language of the exception is ambiguous about the expectations for making a request to the apprenticeship program because many non-joint or non-union programs do not have enough access to supply of apprenticeship programs. She said the IRS should address this uncertainty more specifically without placing the burden on developers. Kobes also noted that the exception only requires a taxpayer to request apprentices from a single program, which could have limited capacity. She suggested that requests should be made of multiple programs with comparable efforts. Third, Kobes said that regulations only require taxpayers to request apprentices from a group program despite there being many individual program sponsors in the industry. 

Taxpayers and contractors could use or adapt many existing programs without burden on the registration process. To solve this, Kobes suggested the IRS could consider limiting the good-faith exceptions to two 120-day periods. Kobes also called for the IRS to consider expanding the role of the Office of Apprenticeship and state apprenticeship agencies in ensuring good-faith efforts, which would provide resources to the agencies in utilizing their local landscapes, broker connections and technical knowledge. Lastly, Kobes remarked the proposed regulations describe many documentation requirements for the good faith exception, but it’s unclear at the time of filing what must be provided to qualify. 

The good faith exception is unlikely to be useful or practical for most nonunion contractors, according to Michael Altman of Associated Builders and Contractors, because union contractors can request apprentices from local union halls to assign to projects, but nonunion contractors must enroll their own employees through trade associations or established in-house Registered Apprenticeship Program. 

Other Concerns 

In addition to the other issues raised, Michael Evans of the Coalition for Energy Efficient Jobs & Investment testified regarding how the labor requirements might affect the Section 179D deduction for energy efficient commercial building property. He said that the designer is not involved with the installation of the project, has no contractual relationship with the contractors and subcontractors, and is putting in no manual labor. Currently, Section 179D allocates a deduction to a design professional, implying that the designer is deemed to be the taxpayer who is responsible for assuring that contractors and subcontractors pay prevailing wages and meet apprenticeship requirements.

Earl Pomeroy, James Gaffney and John McNerney of the Mechanical Contractors Association of America also talked about the need for compliance testing of prevailing wage and apprenticeship requirements from outside of the project. This was suggested to ensure that the U.S. Department of Labor and the IRS are fully pursuing and achieving the statutory and policy aims of the IRA. Finally, Charles Zdebski of Cozen O’Connor law firm said he was concerned about the fact that revealing payroll information would disclose industry secrets. 

Moving Forward 

The issues raised by the witnesses regarding the prevailing wage and apprenticeship requirements may prompt Treasury to revise the proposed regulations when final regulations are released, likely in 2024. Novogradac’s Renewable Energy Working Group (RE Working Group) provides insight into guidance released around the clean energy provisions in the IRA. The RE Working Group is led by renewable and clean energy industry experts and provides a platform for members–which include nonprofit and for-profit developers, tax equity investors, private equity interests and lenders–to discuss industry issues and come to a consensus on how best to address these issues and engage the IRS and Treasury. To gain more information about the working group and to become a member, use this link

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