The Department of the Treasury today published Internal Revenue Service Notice 2022-61, Prevailing Wage and Apprenticeship Initial Guidance under Section 45(b)(6)(B)(ii) and Other Substantially Similar Provisions (the Notice). The Notice provides anticipated guidance related to prevailing wage and apprenticeship requirements applicable to the production tax credit (PTC) and the investment tax credit (ITC) that were added as part of the Inflation Reduction Act of 2022 (the IRA). The Notice starts the 60-day time period to begin construction of a project so that the prevailing wage and apprenticeship requirements do not apply and provides clarity regarding the beginning-of-construction rules.
Exception to Prevailing Wage and Apprenticeship Requirements—Beginning of Construction
Under changes made by the IRA, the PTC and the ITC for a project with an output of 1 MWAC or more each was reduced to one fifth of the otherwise available amount unless the facility or project satisfies certain prevailing wage and apprenticeship requirements. A facility or project is not required to satisfy those requirements, however, if construction of the facility or project begins before the date that is 60 days after the Treasury Department issues guidance related to the requirements (the 60-Day Period). The Notice makes clear that it is intended to constitute the guidance that starts the 60-Day Period. Thus, a taxpayer must begin construction of a qualified facility or project before January 29, 2023, to take advantage of the exception to the prevailing wage and apprenticeship requirements and still qualify for the full amount of the PTC or ITC.
The IRS has previously issued several notices setting forth rules for determining when construction of a facility or project is considered to have begun for purposes of the PTC and ITC. The Notice makes clear that the rules set forth in those prior notices will continue to apply for purposes of the PTC and ITC, including for purposes of beginning construction before the end of the 60-Day Period. The Notice also extends the beginning of construction rules applicable to the PTC to also apply for purposes of certain tax credits that were modified or added by the IRA, including the alternative fuel vehicle refueling property credit, the clean hydrogen production credit, the clean electricity production credit, and the clean electricity investment credit.
Prevailing Wage Requirement
The prevailing wage provision generally requires that during the construction and for a 10-year (in the case of the PTC) or 5-year (in the case of the ITC) period after a qualified facility or project has been placed in service, laborers and mechanics employed by the owner or any contractor or subcontractor providing construction, alteration, or repair work must be paid wages at rates not less than the prevailing wage for such work in the locality in which the facility or project is located.
The Notice provides that a taxpayer satisfies the prevailing wage requirement by (A) paying workers the applicable prevailing wage and (B) maintaining and preserving sufficient records.
Regarding the first requirement, the Notice provides that the determination of the prevailing wage for workers in a locality is based on prevailing wage determinations published by the Secretary of Labor for the geographic area and type or types of construction applicable to the facility or project. If the Secretary of Labor has not published an applicable prevailing wage determination for such geographic area or applicable labor classification, a taxpayer may rely on procedures established by the Secretary of Labor to determine the applicable prevailing wage, including requesting a wage determination or wage rate by contacting the Department of Labor, Wage and Hour Division via email and providing certain information.
With respect to the recordkeeping requirement, the Notice provides limited detail for exactly how these requirements are intended to be satisfied, noting simply that “sufficient records” including books of account or records for work performed by contractors or subcontractors, to establish that workers were paid prevailing wage rates.
Apprenticeship Requirement
The apprenticeship provision generally requires that in the construction of a qualified facility or project, not less than the “applicable percentage” of total labor hours, including work performed by contractors and subcontractors, related to the construction, alteration, or repair of such facility or project must be performed by qualified apprentices. For purposes of the PTC and ITC, the applicable percentage is 10% if construction begins before January 1, 2023 (although a qualified facility or project would not be subject to the apprenticeship requirement if construction before the end of the 60-Day Period), 12.5% if construction begins in 2023, and 15% if construction begins after 2023. A taxpayer must also satisfy any applicable “apprentice-to-journeyworker ratios” required by the Department of Labor or applicable state apprenticeship agency. There is a good faith effort exception to the apprenticeship requirement pursuant to which a taxpayer will be deemed to have complied with the apprenticeship requirement.
The Notice provides very little additional guidance related to the apprenticeship requirement. A taxpayer satisfies the apprenticeship requirement by (A) satisfying the “applicable percentage” apprentice requirement, (B) satisfying any other applicable Department of Labor or applicable state apprenticeship agency requirements, and (C) complying with general recordkeeping requirements, including maintaining books of account or records for contractors or subcontractors, in sufficient form to establish that the above requirements were satisfied. Likewise, if a taxpayer relies on the good faith effort exception, the taxpayer must maintain sufficient books and records establishing the taxpayer’s request for qualified apprentices from a registered apprenticeship program and the program’s denial or non-response to such request.
Defined Terms
For purposes of the both the prevailing wage and the apprenticeship requirements a taxpayer, contractor, or subcontractor are considered to “employ” an individual that provides services for purposes of these rules regardless of whether the individual would be characterized as an employee or an independent contractor for other federal tax purposes. Other critical terms, including “construction, alteration, or repair,” “wage,” “laborer or mechanic,” “journeyworker,” and “apprentice-to-journeyworker ratio,” are defined by reference to relevant Department of Labor regulations.
The greatest impact of the Notice appears to be the beginning of the 60-day Period. Limited guidance is provided regarding exactly how the prevailing wage or apprenticeship requirements must be satisfied, including many of the issues raised in comments submitted to the Treasury Department before the Notice was issued. It is likely that additional guidance will be issued in the future to clarify some of these issues. In the meantime, we anticipate that many developers will make best efforts to begin construction of projects before January 29, 2023.