President Joe Biden signed the Inflation Reduction Act (IRA) into law on Aug. 16, 2022. The massive legislative package revises policy on taxes, healthcare, agriculture and energy. In particular, the IRA modifies and expands existing credits and creates new tax credits for a variety of renewable energy and carbon capture industries and projects. In many cases, these provisions provide a "bonus credit" if certain labor rules are met. These labor rules contain both prevailing wage and apprenticeship rules. Under the statute, these labor rules go into effect 60 days after the U.S. Department of Treasury and Internal Revenue Service (IRS) issue guidance.


A full description of the IRA can be found in a previous Holland & Knight alert, "The Inflation Reduction Act: Summary of the Budget Reconciliation Act," published on Aug. 8, 2022. Background on the labor rules as they related to the tax incentives can be found in a previous Holland & Knight alert, "The Inflation Reduction Act's Labor Rules for Energy Tax Credits and Carbon Capture," published on Sept. 29, 2022.

This Holland & Knight alert focuses on the guidance recently issued by the Treasury Department and the IRS.

Treasury and IRS Guidance

In Notice 2022-61, released on Nov. 29, 2022, the Treasury Department and IRS provided taxpayers with the awaited prevailing wage and apprenticeship guidance. Notably, the guidance officially starts the 60-day clock. If the construction of a facility begins upon expiration of the 60 days – that is, on or after Jan. 29, 2023 – and the facility's maximum net output is greater than 1 megawatt, alternating current (MWac), the prevailing wage and apprenticeship requirement must be satisfied in order for the taxpayer to receive the "bonus" credit under Sections 30C, 45, 45Q, 45V, 45Y, 48, 48C and 48E, as well as an increased deduction under Section 179D.

Prevailing Wage Requirement

Under the IRA, to meet the prevailing wage requirement, laborers and mechanics employed by the taxpayer, contractors and subcontractors in the construction, alteration and repair of a facility must be paid wages not less than prevailing rates for construction, alteration or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor.

If any laborer or mechanic was paid wages at a rate below the prevailing rate, the taxpayer can cure any underpayment by:

  1. making a payment to such laborer or mechanic equal to the amount of overpayment plus interest, and
  2. paying a penalty equal to $5,000 ($10,000 penalty in the case of intentional disregard) for each laborer and mechanic who were underpaid in the year

Notice 2022-61 defines "laborer or mechanic" by reference to 29 CFR 5.2(m) as including at least workers whose duties are "manual or physical in nature (including those workers who use tools or who are performing the work of a trade), as distinguished from mental or managerial." Thus, the term "laborer or mechanic" includes apprentices, trainees, helpers and, in the case of contracts subject to the Contract Work Hours and Safety Standards Act (CWHSSA), watchmen or guards. The term does not apply to workers whose duties are primarily administrative, executive or clerical rather than manual.

The Notice provides that "construction, alteration, or repair" as defined under 29 CFR 5.2(j) means all types of work done on a particular building or work at the site thereof, including work at a facility which is deemed a part of the site of the work, including:

  • altering, remodeling, installation (where appropriate) on the site of the work of items fabricated off-site
  • painting and decorating
  • manufacturing or furnishing of materials, articles, supplies or equipment on the site of the building or work
  • transportation between the site of the work and a facility that is dedicated to the construction of the building or work and deemed a part of the site of the work and
  • transportation of portion(s) of the building or work between a site where a significant portion of such building or work is constructed and the physical place or places where the building or work will remain

The transportation of materials or supplies to or from the site of the work by employees of the construction contractor or a construction subcontractor is not "construction, prosecution, completion, or repair."

The "site of work" is defined as the physical place or places where the building or work called for in the contract will remain and any other site where a significant portion of the building or work is constructed, provided that the site is established specifically for the performance of the contract or project. Job headquarters, tool yards, batch plants, borrow pits, etc., are part of the site of the work if they are dedicated exclusively, or nearly so, to performance of the contract or project and if they are adjacent or virtually adjacent to the site of the work. The site of work does not include 1) permanent home offices, 2) branch plant establishments, 3) fabrication plants, tool yards, etc., of a contractor or subcontractor whose location and continuance in operation are determined wholly without regard to a particular federal or federally assisted contract or project, or 4) fabrication plants, batch plants, borrow pits, job headquarters, tool yards, etc., of a commercial or material supplier, which are established by a supplier of materials for the project before opening of bids and not on the site of the work (even if the operations for a period of time may be dedicated exclusively, or nearly so, to the performance of a contract).

Procedures for Prevailing Wage Requirement Satisfaction

Notice 2022-61 provides that a taxpayer will satisfy the prevailing wage requirement with respect to any laborer or mechanic employed in the construction, alteration or repair of a facility, property, project or equipment by the taxpayer or any contractor or subcontractor of the taxpayer by using either:

  • Published Prevailing Wage Rates. If the Secretary of Labor has published a prevailing wage determination for the 1) geographic area and 2) type of construction applicable to the facility (including all labor classifications for the construction, alteration or repair work that will be done on the facility by laborers or mechanics), then that wage determination is the prevailing rate for the laborers or mechanics who perform work on the facility.
  • Unpublished Prevailing Wage Rates. If the Secretary of Labor has not published a prevailing wage determination for the geographic area and type of construction for the facility or one or more labor classifications for the construction, alteration or repair work that will be done on the facility by laborers or mechanics is not listed, then the taxpayer must email the U.S. Department of Labor and provide the type of facility, facility location, proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and any rationale for the proposed classifications.

The prevailing rate for qualified apprentices hired through a registered apprenticeship program may be less than the corresponding prevailing rate for journeyworkers of the same classification.

Recordkeeping

Notice 2022-61 also requires the taxpayer to maintain and preserve sufficient records, including books of account or records for work performed by contractors or subcontractors of the taxpayer, to establish that such laborers and mechanics were paid prevailing wages.

Apprenticeship Requirement

The apprenticeship requirement is comprised of three separate components, all of which must be met.

  1. Apprenticeship Labor Hour Requirement. With respect to the construction of any qualified facility, a certain percentage of total labor hours of the construction, alteration or repair work (including such work performed by any contractor or subcontractor) with respect to such facility must be performed by a qualified apprentice. The total labor hours does not include any hours worked by foremen, superintendents, owners or persons employed in a bona fide executive, administrative or professional capacity. The percentage is 10 percent for facilities that begin construction before 2023, 12.5 percent for facilities that begin construction before 2024, and 15 percent for facilities that begin construction after 2023.
  2. Apprenticeship Ratio Requirement. The facility must comply with any apprentice-to-journeyworker ratios of the Labor Department or the applicable state apprenticeship agency.
  3. Apprenticeship Participation Requirement. Each taxpayer, contractor or subcontractor who employs four or more individuals to perform construction, alteration or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work.

If the taxpayer fails to meet any of these components, the taxpayer can cure such failure by paying a penalty equal to $50 per labor hour ($500 in the case of intentional disregard) for the year in which the apprenticeship requirement was not satisfied.

Procedures for Apprenticeship Requirement Satisfaction

Under the "good faith effort exception," a taxpayer is deemed to satisfy the apprenticeship requirement if the taxpayer has requested qualified apprentices from a registered apprenticeship program and:

  1. the request is denied (provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors engaged in the performance of construction, alteration or repair work with respect to such qualified facility to comply with the established standards and requirements of the registered apprenticeship program) or
  2. the registered apprenticeship program fails to respond to such request within five business days after the date on the registered apprenticeship program received the request

Recordkeeping

Notice 2022-61 requires the taxpayer to maintain and preserve sufficient books and records establishing the taxpayer's request of qualified apprentices from a registered apprenticeship program and the program's denial of such request or non-response to such request, as applicable. The taxpayer must also maintain books of account or records for contractors or subcontractors to establish that the Apprenticeship Labor Hour and the Apprenticeship Participation Requirements have been satisfied.