For some clean energy credits and deductions, the Inflation Reduction Act of 2022 (IRA) implemented a mechanism to increase a base credit or deduction amount by five times (hereafter referred to as the “increased credit”) if certain prevailing wage and apprenticeship (PWA) requirements are met. Since the introduction of the PWA requirements, taxpayers have been awaiting guidance to know exactly what they need to do to obtain this increased benefit. Although still requesting comment on certain points, the proposed regulations issued on August 29, 2023 provide some key information that should help taxpayers claim and substantiate their increased credit amounts moving forward. While not a comprehensive list of the clarifications enclosed in the proposed regulations, here are a few of the most impactful points to know:
Penalty, Interest, & Correction Payments
- A “cure” for not meeting the PWA requirements is now available via correction and penalty payments, which if made within the guidelines, would allow for the increased credit.
- The obligation to meet the PWA requirements (or the resulting “cure”) falls with the “eligible taxpayer”—or the transferor—if the Section 6418 transfer election is made.
- It is now possible to obtain a penalty waiver, assuming certain requirements are met.
- Guidance surrounding increased penalties and interest, along with the facts and circumstances determinants of intentional disregard of the PWA requirements (assuming the increased credit is claimed), are now available.
General Guidance
- If work is conducted on a secondary site “established specifically for, or dedicated exclusively for a specific period of time to” the project, PWA requirements are based on the geographic area of the secondary site.
- Apprentices must be paid the wage set forth in their qualified apprenticeship program. Registered apprentices in “excess” of the applicable ratio (apprentices-to-journeyworkers) must be paid the full prevailing wage rate.
- Good faith exemption details regarding the acknowledgement of requests and follow-up requests.
- Clarifications of the PWA requirements’ dependency and departure from the Davis-Bacon Act of 1931.
- Maintenance is not included within the PWA requirements.
Documentation & Recordkeeping
- Processes and information to be included for requesting supplemental wage determinations or additional classifications and wage rates are now available.
- Processes and information to be included in the request for an apprentice are now available. This substantiation is also critical to claiming the good faith exception, if applicable.
- Recordkeeping requirements for PWA are now available.
Penalty, Interest, & Corrective Payments
A “cure” is now available for taxpayers who did not meet the PWA requirements but still wish to claim the increased credit or deduction amount.
Apprenticeship Cure: Within the apprenticeship requirement, penalty payments would be required for both the labor hour and participation sub-requirements if not originally met. Assuming no intentional disregard, the penalty rate for both requirements is $50 per labor hour for which the taxpayer, subcontractor, or contractor failed to meet each respective requirement. This amount jumps to $500 per labor hour (per requirement) if intentional disregard is present, although the proposed regulations established a rebuttable presumption if the taxpayer makes the $50/hour penalty payment before receipt of a notice of examination. Penalties are on a by-contractor, subcontractor, or taxpayer basis. Therefore, if there were three subcontractors on the job, two of which did not meet the labor hour requirement, then the labor hours for those individuals employed by the qualifying third subcontractor would not be considered in the calculation of the penalty. The proposed regulation also explains in greater detail how to determine the labor hours to be included in this calculation.
Prevailing Wage Cure: Corrective, interest, and penalty payments are all necessary (if made before 180 days after the IRS determination notice) to claim the increased credit if prevailing wage requirements were not met.
- The correction payment is equal to the sum of a) the shortfall between wages required and the actual amount paid and b) the interest payment. These payments can be made “any time after initial payments made and in advance of filing the return to avoid additional interest at elevated rates.”
- Interest is equal to the Section 6621 underpayment rate but substituting six percentage points instead of the normal three percentage points.
- The penalty payment is equal to $5,000 per underpaid laborer. The earliest this would be paid is at the filing of the tax return claiming the increased credit. If employed under a certain project labor agreement, these penalty provisions do not apply (assuming the correction payment is made prior to the filing of the tax return claiming the increased credit).
- If failure to satisfy the PWA requirements is due to intentional disregard, the correction payment is tripled, and the penalty payment is doubled per laborer.
If the taxpayer meets the due diligence requirements and still cannot locate the laborer, the taxpayer must pay the correction payment to the state.
Burden of Cure—Transferor: One of the more notable additions brought forth by the proposed regulations was that these correction and penalty payments would fall to the transferor (the “eligible taxpayer”) and not the transferee. This obligation is only in effect at the “earlier of the filing of the eligible taxpayer’s return for the taxable year for which the specified credit portion is determined with respect to the eligible taxpayer, or the filing of the return of the transferee taxpayer for the year in which the specified credit portion is taken into account.”
Penalty Waiver: The penalty payment requirement may be waived if the correction payment is made “by the earlier of 1) 30 days after the taxpayer became aware of the error or 2) the date on which the increased credit is claimed.” In addition, each laborer must not be underpaid for more than 10% of all pay periods, or the shortfall in wages must not comprise more than 2.5% of the prevailing wage requirement.
Intentional Disregard: As stated above, if it is found that not meeting the PWA requirements is due to intentional disregard, the resulting correction payment increases substantially. Therefore, the proposed regulations lay out facts and circumstances that weigh against an intentional disregard determination. These facts and circumstances include:
- Preserve records sufficient to document the failure and the actions they took to prevent
- Mitigate or remedy the failure
- Steps taken to determine the correct applicable wage rates and classifications
- Records demonstrating the taxpayer regularly reviewed payroll practices, including requirements to pay prevailing wages in contracts with contractors
- Posting prevailing wage rates in a prominent place on the job site or otherwise notifying employees of the rates
- Reviewing the wages paid minimally on a quarterly basis
- Contract terms include prevailing wage payment by contractors or subcontractors
- Previous penalties and patterns of conduct also are considered
There is a rebuttable presumption against a finding of intentional disregard if the correction and penalty payments are made prior to receiving a notice of exam.
General Guidance
Secondary Site: Often, work applicable to a project occurs on a secondary site. If this secondary site work is significant, and if the secondary site is either dedicated exclusively to the taxpayer’s project or established specifically for it, then work conducted at this secondary site must meet PWA requirements. Significant work “means one or more entire portion(s) or module(s) of the facility, such as a completed room or structure, with minimal construction work remaining other than the installation and/or final assembly of the portions or modules at the place where the facility will be placed in service and remain.” The applicable rate for this secondary site depends on the geographic location of the site and is not influenced by the rates at the primary site.
Apprenticeship Wage Rate: Apprentices should be paid the rates within the written apprenticeship agreement that includes the wages, conditions, terms of their apprentice employment, and training. However, if the taxpayer employs apprentices in excess of the required amount per the ratio requirement, then those excess apprentices should be paid the full prevailing wage, i.e., they should be treated as though they were standard employees. These ratios apply daily, so this ratio should be carefully monitored and documented each day during the construction period.
Good Faith Exception: The apprenticeship requirement is deemed satisfied if the taxpayer meets the good faith exception. The good faith exception is met if the taxpayer has requested apprentices from a registered apprenticeship program and such request has been denied, or the registered apprenticeship program fails to respond within five business days after receipt of the request. Therefore, an automated receipt email would preempt taxpayers from using this exception. Further, if taxpayers are denied their apprenticeship request, they must submit an additional request within 120 days of the previously denied request. If taxpayers are partially denied after either request, but not fully denied, then they are not eligible for the exception. Therefore, requests to multiple qualified apprentice programs may be required.
Interplay with the Davis-Bacon Act (DBA): While the proposed regulations point to the DBA as guidelines for certain pieces of the PWA requirements, they depart from the DBA for other pieces.
The PWA requirements conform to these rules from the DBA:
- General wage determinations, as provided on the approved DOL website (currently https://sam.gov/content/home)
- Process for submitting supplemental wage determinations similar to the DBA
- Definition and treatment of a secondary construction site (as previously discussed)
The PWA requirements do not incorporate these rules from DBA:
- …provisions required to be included in contracts
- Reporting of certified [weekly] payroll records by contractors to contracting agencies
- Enforcement processes available to the DOL and the contracting agencies to address noncompliance
- The $2,000 monetary coverage threshold
Maintenance: The proposed regulations clarified the difference between maintenance and repairs for applying the PWA requirements. Maintenance is defined as: “ordinary and regular in nature and designed to maintain existing functionality of a facility as opposed to an isolated or infrequent repair of a facility to restore specific functionality or adapt it for a different or improved use.” Maintenance work is not subject to PWA requirements.
Documentation & Recordkeeping
Supplemental Wage Determinations: If there is not a published wage determination on the DOL website for the taxpayer’s location and construction type, taxpayers must request a supplemental wage determination for their clean energy project from the Wage and Hour Division of the DOL. The proposed regulations outline the process and submittal requirements for obtaining this supplemental wage rate. Importantly, the proposed regulations specify that the request should be made no later than 90 days prior to the start of construction. Contact your FORVIS advisor for more information.
At times, taxpayers may need to begin construction prior to the receipt of their supplemental wage determination. This does not exempt the taxpayer from the PWA requirements but instead would require a retroactive application of the supplemental wage determination once received. If the request was made prior to the start of construction, the increased credit may be claimed as long as a correction payment is made within 30 days of receiving the determination, and the supplemental wage determination is used moving forward.
Offshore facilities can use wage determinations for the geographic location closest to the offshore site.
Apprenticeship Request: Specific guidance addressing the process for requesting apprentices, what should be included in this request, and what would be needed for the good faith exception are included in the proposed regulations. Reach out to your FORVIS advisor for further guidance on requesting apprentices in accordance with the PWA requirements.
Recordkeeping Requirements: Given the dollar value impact of the PWA, it is imperative to comply with the recordkeeping requirements outlined in the proposed regulations when claiming the increased credit. A listing of records and documentation that must be maintained is now available.
FORVIS is working to develop a solution to help clients conform to these recordkeeping requirements. More information coming soon! For more information, reach out to a professional at FORVIS.