What’s New - Inflation Reduction Act Final PWA Regulations Published

Alert

26 July 2024

10 min read

On June 18, 2024, the Internal Revenue Service (IRS) published its Final Regulations on the Inflation Reduction Act Prevailing Wage requirements ("Final Regulations"). While the Final Regulations generally adhere to the prior Proposed Regulations and Guidance, some notable changes were made to final prevailing wage, apprenticeship, and recordkeeping requirements. Understanding how these changes will impact existing and contemplated projects is critical to safeguard tax credits sought under Internal Revenue Code Section 45 (renewable electricity production), 45Q (carbon capture), 45V (clean hydrogen production) and 45Z (clean fuel production).

Inflation Reduction Act and Prevailing Wage Requirements

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA).¹ The IRA intended to confront the "existential threat of the climate crisis and set forth a new era of American innovation and ingenuity" in order to "lower consumer costs and drive the global clean energy economy forward."² As a part of the IRA, companies may qualify for increased credit or deduction of clean energy tax incentives.³ Companies must meet certain requirements under the Prevailing Wage and Apprenticeship section of the Act (PWA). PWA requirements apply to clean energy tax credits such as those under Code 45 (renewable electricity production), 45Q (carbon capture), and 45V and 45Z (clean hydrogen production and fuel production, respectfully).

The IRS and Department of Treasury released a series of Guidelines, notices, proposed regulations, and fact sheets pertaining to the PWA over the course of two years. Of note are Notice 2022-61 (hereinafter 2022 Guidance) and Proposed Regulations of 2023, as well as the Final Regulations of 2024 pertaining to the PWA.

Compliance with the PWA requirements is a condition to receive a five-time multiplier to the base amount of an applicable clean energy tax credit. Generally, according to the 2022 Guidelines, to qualify for tax credits under the IRA, taxpayers need to:

Satisfy the Prevailing Wage Rate Requirements for 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"; and
The taxpayer must "maintain and preserve" sufficient records, such as, books of accounts or records of work performed by contractors or subcontractors. These records are to establish that said laborers and mechanics were paid wages not less than the prevailing rates.⁴

On November 29, 2022, the IRS published guidance on its Proposed Regulations of the Prevailing Wage and Apprenticeship provisions of the Inflation Reduction Act.⁵ On June 18, 2024, the IRS published Final Regulations on the Prevailing Wage and Apprenticeship provisions of the Inflation Reduction Act. In addition to the Final Regulations, the IRS released additional guidance in 2024 (2024 Guidance) pertaining to the prevailing wage, apprenticeship, and record keeping final regulations. Guidance was produced in the form of a Fact Sheet, an updated Publication 5855, and a Frequently Asked Questions website. The Final regulations generally apply to facilities constructed after June 25, 2024.

Below is a comparison between the Proposed Regulations and the Final Regulations. In general, the Final Regulations follow the language of the 2022 Guidance and Proposed Regulations. The Final Regulations, however, do not include regulations pertaining to Sections 48 or 48E.

Changes to Prevailing Wage Requirements

Timing of Wage Requirements: Both the 2022 Guidance and the Final Regulations state that the wage rate is set by the U.S. Department of Labor. Where the Proposed Regulations set the applicable wage rate as the one in effect when "the construction, alteration, or repair of the facility begins,"⁶ the Final Regulations state that the applicable wage rate "is the general wage determination in effect for the specified type of construction in the geographic area at the time a contract for the construction, alteration, or repair of the facility is executed by the taxpayer and the contractor." §1.45-7(b)(2). If there is no contract, the wage "is the general wage determination in effect for the specified type of construction in the geographic area when the construction, alteration, or repair of the facility starts."

Native American Tribes: The Final Regulations contain language for wage determination applicable to Indian Tribal governments, which is not seen in the Proposed Regulations. §1.45-7(a)(3).

Transition Relief: The Final Regulations create an exception for taxpayers with respect to activities “that would be considered construction, alteration, or repair of the qualified facility and that occurred prior to January 29, 2023.” §1.45-7(a)(2).

Scope of the PWA requirements: The Final Regulations add language indicating the applicability of the PWA where an alteration or repair of a facility occurred during the 10-year period after the facility was placed in service. However, if there is no alteration or repair occurring during the taxable years, the taxpayer is deemed to satisfy the Prevailing Wage requirements.

Required information for a supplemental wage determination: In addition to the list provided in the Proposed Regulations, the Final Regulations add one additional required information:

"The date the taxpayer (or the taxpayer's designee, assignee, or agent) expects to enter into a contract with a contractor for which a supplemental wage determination is needed or the date of execution of the contract with a contractor for which a prevailing wage rate for an additional classification is needed." §1.45-7(b)(3)(ii)(D)(5).

Issuance of supplemental wage determinations: The Final Regulations set a new effective timeline for supplemental wage determinations. The supplemental wage determinations are now effective for 180 calendar days from the date the determinations were issued. If the supplemental wage determination is not incorporated into the contract within the stated 180 calendar says, a new supplemental wage determination will need to be requested. §1.45-7(b)(3)(iii).

Special rule for laborers and mechanics who cannot be located: The Final Regulations allow a taxpayer to be deemed to make correction payments to underpaid laborer or mechanic workers who cannot be located if the taxpayer can establish that the correction payments were made. One can establish the payments were made by demonstrating compliance with the appliable State unclaimed property law, as well as Federal and State withholding and information reporting requirements. §1.45-7(b)(7)(c)(i)(B)(v).

Intentional Disregard: The Final Regulations include the below additional factors to determine whether a failure to satisfy the PWA is due to intentional disregard:

Whether laborers and mechanics were informed by the taxpayer, contractor, or subcontractor that to claim tax benefits, wages must meet prevailing wage rates (see §1.45-7(c)(3)(B)(iii)(I)).
Whether laborers and mechanics received written notice of their rights under the Taxpayer First Act, section 7623(d) (see §1.45-7(c)(3)(B)(iii)(K)).
Whether laborers and mechanics were provided with paystubs or access to payroll records detailing their pay per period, including hourly rates and deductions (see §1.45-7(c)(3)(B)(iii)(L)).
Whether reports of retaliation or adverse actions relating to complaints about prevailing wage violations, tax issues, or workplace standard violation were investigated or otherwise addressed (see §1.45-7(c)(3)(B)(iii)(M)).
Whether the taxpayer, contractor, or subcontractor engaged contractors debarred for underpayment of local, state, or federal prevailing wages (see §1.45-7(c)(3)(B)(iii)(N)).
Whether the taxpayer maintained sufficient records under recordkeeping compliance to demonstrate compliance (see §1.45-7(c)(3)(B)(iii)(O)).

Transition Waiver: The Final Regulations create a transition period for work started prior to January 29, 2023. Penalty payments required under paragraph (c)(1)(ii) to cure failures to satisfying the PWA are waived with respect to a laborer or mechanic who performed work in construction, alteration, or repair on or after January 19, 2023, and before June 26, 2024. Such a waiver is available if said laborer or mechanic relied on the 2022 Guidance, or the Proposed Regulations to determine when activities became subject to the PWA requirements, and correction payments were made. §1.45-7(c)(6)(B)(ii)(F)(iii).

Curing failures to pay appropriate wages: The Final Regulations modify the Proposed Regulations by stating that self-correction of failure to pay wages must be made by the last day of the first month following the end of the calendar quarter in which the failure to pay occurred. §1.45-7(c)(i)(6).

Changes to Apprenticeship Requirements

Transition Relief: The Final Regulations excepts taxpayers from the Apprenticeship Requirements for any activities that would be considered construction, alteration, or repair of the qualified facility and that occurred prior to January 29, 2023. §1.45-8(a)(2).

Labor Hours Requirement: The Final Regulations add a calculation for the total labor hours qualified apprentices must meet. It is calculated by "aggregating all hours worked by all laborers and mechanics (including the hours of qualified apprentices) during construction of the facility and dividing the total hours work by all laborers and mechanics by the hours of the qualified apprentices." §1.45-8 (a)(2)(b).

Intentional Disregard: In addition to the factors outlined in the Proposed Regulations, the Final Regulations include a few additional factors to decipher whether an action is classified as intentional disregard. They include:

Ensuring contractors and subcontractors forward requests to registered apprenticeship programs to the taxpayer within five business days of receipt (see §1.45-8(f)(ii)(C)(6)).
Developing and implementing a plan to utilize qualified apprentices in the construction, alteration, or repair of the qualified facility (see §1.45-8(f)(ii)(C)(8)).
Regularly following up with registered apprenticeship programs regarding requests for qualified apprentices (see §1.45-8(f)(ii)(C)(9)).
Contacting the Department of Labor's Office of Apprenticeship or relevant State apprenticeship agency for assistance in locating registered apprenticeship programs (see §1.45-8(f)(ii)(C)(10)).
Establishing procedures allowing individuals to report suspected failures to comply with Apprenticeship Requirements without retaliation, investigating such reports, and implementing internal controls to prevent non-compliance (see §1.45-8(f)(ii)(C)(11) and §1.45-8(f)(ii)(C)(12)).
Maintaining and preserving records sufficient to demonstrate compliance with apprenticeship requirements for the relevant tax year (see §1.45-8(f)(ii)(C)(13)).

Good Faith Exception: A taxpayer is deemed to fall under the good faith exception if there is no apprenticeship program in the geographic area when attempting to satisfy the request for apprenticeship programs under subsection §1.45-8(f)(1)(A).

Changes to Recordkeeping Rules

Additional records that are sufficient to demonstrate compliance with PWA §1.45-12 (c): The Final Regulations include the following additional documents that satisfy the record keeping requirements in Section 45(b)(7) and §1.45-7:

Form WH-347
Records to document any failures to pay prevailing wages and the actions taken to prevent, mitigate, or remedy the failure.
Records related to any complaints received by the taxpayer, contractor, or subcontractor that the taxpayer, contractor, or subcontractor was paying wages less than the applicable prevailing wage rate for work performed by laborers and mechanics with respect to the qualified facility.

The Final Regulations also include the following additional documents that satisfy the record keeping requirements in section 45(b)(8) and §1.45-8 in addition to those listed in the Proposed Regulations:

Records demonstrating compliance with the Good Faith Exception in §1.45-8(f)(1);
The amount and timing of any penalty payments and documentation reflecting the calculation of the penalty payments;
Records to document any failures to satisfy the apprenticeship requirements under section 45(b)(8) and §1.45-8 and the actions taken to prevent, mitigate, or remedy the failure; and
Records related to any complaints received by the taxpayer, contractor, or subcontractor that the taxpayer, contractor, or subcontractor was not satisfying the apprenticeship requirements.

Satisfaction of recordkeeping requirements §1.45-12(e)(1): The Final Regulations provide the following ways a taxpayer can satisfy the record keeping requirements:

Taxpayers may collect and physically retain relevant records from every contractor and subcontractor;
Taxpayers, contractors, and subcontractors may provide relevant records to a third-party vendor to physically retain on behalf of the taxpayer; or
Taxpayers, contractors, and subcontractors may each physically retain the relevant unredacted records for their own employees.

Conclusion

Navigating the Final Regulations on Prevailing Wage and Apprenticeship Requirements under the Inflation Reduction Act is crucial for companies seeking to secure or maximize clean energy tax incentives. The Final Regulations underscore the importance of compliance with updated wage determinations, apprenticeship utilization plans, and enhanced recordkeeping standards. As these rules take effect for facilities constructed after June 25, 2024, companies should take steps now to adapt to new provisions while leveraging transition relief where applicable. Understanding and implementing these changes will be pivotal in maintaining eligibility for tax credits under Internal Revenue Code Sections 45, 45Q, 45V, and 45Z, thereby supporting ongoing and future clean energy projects.

₁_{Inflation Reduction Act Guidebook, THE WHITE HOUSE}_{(last visited July 15, 2024).
2 Id.
3}_{Prevailing wage and apprenticeship requirements, INTERNAL REVENUE SERV}_{., (last visited July 16, 2024).
4 Notice 2022-61, Prevailing Wage and Apprenticeship Initial Guidance under Section 45(b)(6)(B)(iii) and Other Substantially Similar Provisions.
5}_{Treasury and IRS announce guidance on wage and apprenticeship requirements for enhanced credits/deductions, INTERNAL REVENUE SERV}_{.
6 Proposed Rule §1.45-7 (b)(2).}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}