Among other things, the final regulations:
- clarify the start date for PWA requirements;
- further distinguish the meanings of “repair” and “maintenance” for prevailing wage purposes;
- tie general wage determinations to the effective date of a construction contract;
- confirm that apprenticeship requirements do not apply after a project is placed in service;
- extend the period for which the “good faith exception” from apprenticeship applies to a maximum of 365 days (or 366 in the case of a leap year); and
- creates a variable approach for recordkeeping, including through the use of a third party.
The final regulations generally apply to projects placed in service in taxable years ending after June 25, 2024 and that also begin construction after June 25, 2024—taxpayers can apply the regulations to earlier projects provided they apply them consistently and in their entirety.
Below is a brief summary of the PWA requirements followed by a more detailed summary of the key updates in the final regulations as well as our initial observations. (For a more detailed summary of the PWA requirements and prior proposed regulations, see our prior article: Navigating Treasury's proposed regulations on prevailing wage and apprenticeship for clean energy projects.)
Background on prevailing wage and apprenticeship requirements
The tax credit rate for most eligible assets is increased by 5x if the underlying project meets the PWA requirements, has a maximum net output of less than 1 MWac, or begins construction before January 29, 2023.[1]
To satisfy the prevailing wage requirement, the taxpayer owning the project must ensure that all laborers and mechanics employed by it or any contractor or subcontractor in the construction, alteration or repair of the project are paid wages at the prevailing rates for similar work in the location of the project site.
To satisfy the apprenticeship requirements, the taxpayer owning the project must ensure that: (i) at least the “applicable percentage” of total labor hours of the construction, alteration, or repair of the project are performed by qualified apprentices from a registered apprenticeship program;[2] (ii) the project site maintains daily compliance with the ratio of apprentices to journeyworkers proscribed by the Department of Labor or the applicable State apprenticeship agency, and the registered apprenticeship program; and (iii) each contractor or subcontractor employing four or more individuals in the construction, alteration, or repair of the project employs at least one qualified apprentice.
Taxpayers claiming or transferring an increased credit amount based on a project having satisfied the PWA requirements must maintain and preserve payroll and other records provided in the final regulations.
If a project fails to satisfy the PWA requirements, its owner may make certain cure payments to come back into compliance and maintain an increased tax credit rate.
The final regulations: prevailing wage requirement
Start Date
The final regulations confirm that PWA requirements commence when “construction, alteration, or repair” begins (consistent with the Davis Bacon Act) as opposed to when construction begins for tax purposes under the physical work test or five percent test. The rules also clarify that any construction, alteration, or repair activities prior to January 29, 2023 are altogether excepted from the PWA requirements.
- Observation: Aside from clarifying a point of taxpayer confusion, this is significant because certain activities that are treated as “construction, alteration, or repair” under the Davis Bacon Act would not meet the physical work test. For example, the demolition and removal of an existing structure would be treated as “construction, alteration, or repair,” but would be excluded for physical work test purposes as a preliminary activity.
Repair vs. Maintenance
The final regulations further distinguish work that qualifies as a “repair”, which is subject to prevailing wage requirements, from “maintenance”, which is not. Repair work normally includes improvements to a facility, either by fixing something that is not functioning properly or by improving upon the facility’s existing condition. Maintenance is designed to maintain and preserve existing functionalities of a facility after it is placed in service. The distinction is ultimately based on the facts.
- Observation: The final regulations remove an example from the proposed regulations in which an inverter replacement would be considered repair work subject to the prevailing wage requirements. The example was removed in response to comments suggesting that inverter replacement may actually be a regular occurrence (i.e., akin to maintenance) at a solar farm.
Timing of General Wage Determination
The applicable general wage determination for a project is now the one in effect at the time the taxpayer executes the construction contract for the project and remains effective for any related contracts with subcontractors. If there is no contract, then the applicable general wage determination is the one in effect when construction of the project starts.
The taxpayer must update the applicable general wage determination if the construction contract for the project is modified to (i) include substantial construction, alteration, or repair work not within the original scope, or (ii) extend the contract for an additional time period not originally obligated (including an option to extend the term of the contract). However, simply giving a contractor additional time to complete its original commitment, or modifying the contract to include merely incidental construction, alteration, or repair, does not require an updated general wage determination.
After a project is placed in service, the applicable general wage determination for alteration or repair of the project is the one in effect at the time the taxpayer executes the contract for the alteration or repair. The applicable prevailing wage rates must be updated annually if the contract for the alteration or repair is for an indefinite period not tied to the completion of any specific work.
- Observation: Allowing taxpayers to rely on the prevailing wage rates as of the contract execution date adds greater certainty on project costs and should largely eliminate the need for post-execution change orders to address prevailing wage requirements.
Corrective Payments
Taxpayers now have until the end of the month following the close of the calendar quarter when the underpayment occurred to make corrective payments to underpaid laborers or mechanics and therefore be entitled to a waiver of the USD5,000 penalty per underpaid worker.
- Observation: The proposed regulations provided waiver of the penalty if the taxpayer made the correction payments within 30 days of becoming aware of the underpayment. The expansion to quarterly review of PWA compliance greatly simplifies the compliance burden to waive the underpayment penalty.
Intentional Disregard
Payment of the underpayment penalty prior to receiving a notice of examination from the IRS entitles the taxpayer to a rebuttable presumption that it did not intentionally disregard the PWA requirements. The IRS may rebut this presumption based on the facts and circumstances.
- Observation: The final regulations expand the factors that the IRS will consider in determining whether a taxpayer intentionally disregarded the prevailing wage requirement. It ultimately remains a fact-based test.
The final regulations: apprenticeship requirements
Labor Hours Requirement
Required percentage of apprentice labor hours is calculated on a “per qualified facility basis” by aggregating all hours worked by laborers, mechanics, and qualified apprentices during the construction of the project and dividing that total by the hours worked by qualified apprentices.
- Observation: The final regulations do not provide rules that would group assets together for purposes of establishing an exception from the PWA requirements. Investment tax credit rules that would group assets together into a single “energy project” were addressed in proposed regulations issued in November 2023, and will likely be further addressed in subsequent guidance following public comment.
Apprentice to Journeyworker Ratio Requirement
A taxpayer must apply the ratio of apprentices to journeyworkers proscribed by the Department of Labor or State apprenticeship agency for the project location if different from the geographic area in which the apprenticeship program is registered.
Participation Requirement
The Participation Requirement applies to any taxpayer, contractor, or subcontractor that employs four or more individuals over the entire course of the construction, regardless of whether such individuals are employed at the same location or at the same time.
Good Faith Effort Exception
If the registered apprenticeship program either denies or fails to respond within five business days to a taxpayer’s request for apprentices, then the taxpayer is now eligible for the good faith effort exception for the duration of the request, up to one year. Projects may also be entitled to the good faith effort exception if there are no relevant registered apprenticeship programs in the geographic area of the project.
- Observation: The extended period of the good faith effort exception significantly reduces the compliance burden from the 120-day period provided in the proposed regulations.
Apprenticeship Penalty
To cure a failure to satisfy the apprenticeship requirements, a taxpayer must pay a penalty for both the labor hours requirement and the participation requirement of USD50 (or USD500 if the IRS determines intentional disregard), multiplied by the total labor hours for which each requirement is not met.
- Observation: The final regulations expanded the factors that the IRS will consider in determining whether a taxpayer intentionally disregarded the apprenticeship requirements to include actions taken with respect to monitoring and investigating the application for and employment of qualified apprentices.
The final regulations: recordkeeping
A taxpayer may satisfy its recordkeeping obligations by:
- Collecting and physically retaining relevant records from every contractor and subcontractor;
- Providing relevant records to a third-party vendor to physically retain on behalf of the taxpayer; or
- Having the taxpayer, contractors, and subcontractors each physically retain the relevant unredacted records for their own employees.
Taxpayers must also maintain records with respect to determining any cure payments for failures to satisfy the PWA requirements.
Footnotes
1. The relevant tax credits include: alternative fuel vehicle refueling property credit under section 30C, the production tax credit under section 45, the energy efficiency home credit under section 45L, the carbon sequestration tax credit under section 45Q, the nuclear power production tax credit under section 45U, the hydrogen tax credit under section 45V, the clean energy production tax credit under section 45Y, the clean fuel production tax credit under section 45Z, the investment tax credit under section 48, the advanced energy project tax credit under section 48C, the clean electricity investment tax credit under section 48E, and the energy efficient commercial buildings deduction under section 179D.
2. The “applicable percentage” is 10% for projects beginning construction before 2023, 12.5% for projects beginning construction in 2023, and 15% thereafter.
