Managing compliance with IRA credit prevailing wage and apprenticeship requirements

The Inflation Reduction Act of 2022 (IRA) enhanced the tax benefits available to businesses that undertake certain renewable energy projects. The tax credits created or expanded under the new law to support renewable energy initiatives include an option to significantly increase the tax benefit by meeting certain prevailing wage and apprenticeship (PWA) requirements. These credits include the Section 30C Alternative Fuel Vehicle Refueling Property Credit (for EV chargers); the Section 48 investment tax credit/Section 48E clean electricity investment credit (ITC); and the Section 45 production tax credit/Section 45Y clean electricity production credit (PTC); among others.

Outlays that qualify under the ITC or EV charger credit earn a base credit of 6% of their cost basis, while renewable energy production in 2025 earns a base credit of 0.5 cents per kWH for the PTC. Projects that meet the PWA requirements qualify for a multiplier on either credit, increasing the value of the EV charger and ITC by 24% of the cost basis and the 2025 PTC to 2.25 cents per kWh.

The PWA credit multipliers can generate significant tax savings, but they require taxpayers to invest considerable effort in complying with the rules, documenting that compliance, and reporting it on their tax returns. Attempts to claim the credit multipliers without adequate documentation of adherence to both the prevailing wage and apprenticeship requirements can result in assessment of penalties and interest that can mount quickly during a period of noncompliance. Taxpayers who intend to claim the enhanced credits need to understand the extra effort required during every phase of the project to qualify for the benefit, document compliance (sometimes across multiple contractors), and accurately report it on the appropriate returns. PWA compliance can be a very complicated process that leads many businesses to rely on outside help for support.

Manage prevailing wage and apprenticeship requirements at the planning stage

A taxpayer who claims the prevailing wage and apprenticeship tax credit enhancements under the IRA rules must certify compliance with the PWA requirements across all laborers or mechanics employed by the taxpayer, contractors, and subcontractors working on a qualified project. Specifically, the rules require:

• Apprentices from a qualified program must complete a specific percentage (currently 15%) of labor hours on the project.
• Project laborers and mechanics must be paid a “prevailing wage” determined by the Department of Labor for the type of work performed and the location where it will be performed. Prevailing wage information can be found at SAM.gov. The requirement applies to workers who perform manual or physical tasks (including those using tools or working in physical trades), apprentices, helpers, and forepersons who spend more than 20% of their workweek on laborer or mechanic tasks. In some cases, these classifications can be fairly straightforward, but others can be relatively complex and require coordination between the taxpayer, contractors, and subcontractors to determine which workers are covered under the prevailing wage requirements.
  • Apprentice wages are set by the registered apprenticeship program and usually expressed as a percentage of the journeyworker’s hourly rate.
  • The applicable wage is based on the date the prime contract is executed and, while the rates reported at SAM.gov may fluctuate, it usually won’t need to be modified unless there’s a significant scope change in the project. In the absence of a formal contract, the wage determination is based on the date construction starts. The prevailing wage must be paid for any alteration or repair work on the property throughout the 5–10-year recapture period, but apprentice requirements don’t apply during this time.

The key to supporting claims for the PWA-enhanced IRA renewable energy credits is proper documentation of compliance with PWA requirements. To support the wage determination, taxpayers must be able to show:

• Identifying information for each laborer/mechanic.
• Project location and type of construction.
• Labor classification for each laborer/mechanic.
• Hourly rates of wages paid, including benefits.
• Details for contributions to fringe benefit programs.
• Total number of hours worked by each laborer/mechanic per pay period.
• Total wages paid to each laborer/mechanic per pay period.
• Records to support payment of apprentice wages at rates less than applicable prevailing wage rates.
• Amount, timing, and calculation support for correction and penalty payments.
• Records to document failures to pay prevailing wages and efforts to prevent, mitigate, and remedy the failure.
• Records related to any complaints received that requirements weren’t met.

To demonstrate compliance with apprenticeship requirements, the taxpayer’s records should include:

• Written requests for the employment of apprentices.
• Copies of agreements with registered apprenticeship programs with respect to the facility.
• Documentation of the applicable apprentice-to-journeyworker ratio prescribed by all registered apprenticeship programs.
• Total number of labor hours worked by each qualified apprentice.
• Documentation supporting daily compliance with the apprentice-to-journeyworker ratio.
• Good-faith effort exception request support, including denials.
• Amount, timing, and calculation support for penalty payments.
• Records to document any failures to meet requirements and efforts to prevent, mitigate, and remedy the failure.
• Records related to complaints received that requirements weren’t met.

In order to facilitate the collection of the substantial information required and track the dynamic requirements of the apprentice hours requirement, advance planning and coordination between the various parties involved (i.e., the taxpayer, contractors, subcontractors, and consultants and service providers employed by all parties) is paramount. To minimize penalties and cure payments required, establishing a plan for reporting, monitoring, and correcting prevailing wage payments and apprentice hours is a critical component of a successful credit claim.

Challenges identifying prevailing wage rates

Prevailing wages are based on worker classifications, and there are a wide variety of those available at SAM.gov. Different rates apply in different counties and for classifications such as heavy/highway construction, building, and residential work. Additionally, laborers or mechanics may perform work within multiple labor classes, and the definition of the labor class may differ from their typical job title. In many cases, contractors’ affiliation with trade unions leads to a misconception of compliance, since similar terminology related to prevailing wages is used in labor negotiations and other programs dictating prevailing wages for a labor class, project type, or in a certain location. While there are similarities between programs, they aren’t always the same, thus prevailing wages as prescribed by the Department of Labor (DOL) for the county and construction type must be referenced and adhered to, even if there are other requirements for other programs that overlap. The taxpayer needs to know the work classes of all the contractors’ and subcontractors’ laborers and mechanics and align them with the federal prevailing wage rates/labor classes set by the DOL to make sure that the correct prevailing wages are paid.

In some cases, a wage determination may not exist for a type of laborer that will be working on the energy project. When this happens, the taxpayer may need to submit a supplemental wage determination request to the DOL. These determinations take time — a lead time of up to 90 days may be required for supplemental wage determination requests — leading to some uncertainty about the prevailing wage rate for some workers during the early stages of the work. In the event the determination shows a higher prevailing wage than the workers have been paid, the taxpayer may need to utilize the cure payment process discussed below.

The good news with the prevailing wage rates applicable to an energy project is that the rates are set at the time the prime contract is executed and won’t change unless the scope or work on the project changes. An extension of the timeline to complete the originally contracted work won’t constitute a scope change requiring a change of applicable prevailing wage rates.

Challenges meeting apprenticeship requirements

The apprenticeship requirements include:

• A labor hour threshold that requires a certain percentage of the total labor hours on the project must be performed by qualified apprentices.
• An apprentice to journeyworker ratio set forth by the DOL or the applicable state apprenticeship agency that applies to the ratio of apprentices to journeyworkers on the site on a daily basis.
• A participation requirement stating that the taxpayer and its contractors and subcontractors must meet the apprenticeship thresholds if they employ four or more individuals that perform work on the qualified energy property throughout the duration of the project.

A “good-faith” exception is available if apprentice hours requested from registered apprenticeship agencies aren’t fulfilled. To receive the exception, the taxpayer must request apprentices from at least one registered apprenticeship agency no later than 45 days before the apprentices are required to start work and either receive a response denying the request or receive no response. Apprentice hours requested but not fulfilled can be counted toward the 15% apprentice hours requirement. Maintaining records of correspondence with the registered apprenticeship programs is required to support the inclusion of these hours in the calculation of the percentage of apprentice hours.

One of the most challenging aspects of the apprenticeship requirements relates to the apprentice-to-journeyworker ratio. On any specific day that the ratio isn’t met, the excess apprentices are reclassified as journeyworkers for that day, which impacts the overall percentage of labor hours. This may affect compliance with both the prevailing wage and apprenticeship requirements because:

• The planned apprentice hours for that day are no longer considered apprentice hours and they no longer count toward meeting the apprentice hour threshold.
• The apprentices must be paid the prevailing wages for journeyworkers in their labor class for that day.

If this problem occurs infrequently, it may not have a significant impact on a taxpayer’s qualification for the PWA multipliers. If the project’s planned apprentice hours sufficiently exceed the 15% requirement, and there are more experienced apprentices on the project that are paid at or above the prevailing wage for a journeyworker, it’s even possible there will be no impact at all. However, an accumulation of out-of-ratio days may generate significant risks in meeting the PWA requirements related to apprentice hours or pay rates, especially if the apprentices on the project are early in their program or the planned apprentice hours are close to the minimum percentage.

A best practice for monitoring the moving target of apprentice hours and the related daily ratio is to regularly monitor apprentice hours against budgeted/planned hours. Some projects won’t include apprentices for every portion of the project, further complicating the task of measuring whether the project is on track to meet the 15% of hours requirement. While compliance with the 15% of hours requirement can’t be confirmed until all hours are complete, monitoring against an estimate allows a level of comfort that the project is on track to meet the apprentice hour requirement, or can serve to notify the taxpayer that the apprentice hours are less than anticipated in sufficient time to collaborate with contractors and subcontractors to hire additional apprentices.

The critical nature of planning, communication, and tracking for prevailing wage and apprenticeship

In order to manage all moving parts among the various parties involved in a renewable energy project, taxpayers looking to claim the full value of the prevailing wage and apprenticeship multipliers for the IRA tax credits should ensure that their contracts with contractors and subcontractors spell out responsibilities for tracking and reporting critical compliance data. Further, taxpayers and their service providers should work with contractors and subcontractors to establish processes for reporting payroll data and maintain regular communication about compliance. Contract language can be helpful in defining reporting requirements for contractors and subcontractors, and it can provide support for claims that the PWA rules weren’t intentionally disregarded. The goal for the contract provisions and subsequent reporting coordination should be to build a system that demonstrates compliance on a regular basis, identifies as quickly as possible situations where the project has fallen out of compliance, and remedies any lack of compliance during the performance phase of the contract rather than making curative payments after the close of the project.

As is surely evident, especially on large, long-ranging projects, there is a lot of information to gather and compliance metrics to track over a potentially long period of time. While each contractor and subcontractor needs to designate a party responsible for providing the necessary PWA data to the taxpayer or their representative, the taxpayer should also designate someone who’s responsible for aggregating this information and tracking it at the project level. Many taxpayers may find it helpful to engage a third party to assist with this process. Additionally, there are several software products on the market to assist with this process by providing a centralized platform to gather PWA data from all parties and synthesize reporting to flag instances of noncompliance, facilitate the calculation of penalty and cure payments, and provide summary reports needed for recordkeeping to submit with the tax credit filing as well as for substantiation of PWA compliance in the event of a future IRS exam.

Cure payments and noncompliance penalties for prevailing wage and apprenticeship

Taxpayers who fall out of compliance with the PWA requirements can initiate cure payments to remain qualified for the higher IRA renewable energy credits. If the prevailing wage requirement hasn’t been met, the taxpayer needs to pay the workers the difference between the prevailing wage amount and the amount they were initially paid, plus interest compounded daily from the time of the underpayment to the time that the correction payment is made.

Cure payments for failures to meet the apprenticeship requirement vary based on which component(s) of the requirement the taxpayer fell short on. If the project failed to meet the labor hours component, the taxpayer owes $50 for each hour short of the total required apprentice hours. If the taxpayer, a contractor, or a subcontractor failed to meet the participation requirement, the cure payment is calculated by dividing the total hours performed by the party that didn’t meet the requirement by the number of laborers and mechanics from that taxpayer/contractor/subcontractor who worked on the project and multiply that amount by $50.

The rules also provide for noncompliance penalties if mistakes aren’t cured in a timely manner. Taxpayers could be assessed $5,000 for each laborer and mechanic who wasn’t paid a prevailing wage. A waiver is provided if cure payments are made by the last day of the first month that follows the end of the calendar quarter and:

• The laborer/mechanic isn’t paid less than prevailing wages for more than 10% of all pay periods in the calendar year.
• The difference between the amount paid and the amount required to be paid isn’t greater than 5% of the amount required to be paid.

Taxpayers often find that they can make cure payments in a timely manner and qualify for the waivers, but problems frequently arise when subcontractors are on site for a limited time and may be included in only one or two payrolls. Failure to track and pay these short-term contractors can disqualify the taxpayer from the waiver provisions, as a single payroll may exceed 10% of a particular workers’ pay periods on the project and make the $5,000 per laborer penalty unavoidable.

Penalties for noncompliance increase in severity if a taxpayer is determined to have intentionally disregarded the prevailing wage and apprenticeship requirements while claiming the enhanced credits. The prevailing wage cure increases to three times the back pay (plus interest), the penalty per laborer/mechanic doubles to $10,000, and the cost of each apprentice-hour out of compliance jumps from $50 to $500. Taxpayers who intend to claim the enhanced credits based on PWA requirements need to take steps to protect against a determination of intentional disregard, such as:

• Avoiding a pattern of conduct that shows a systemic issue, including taking corrective action once an instance of noncompliance is identified to prevent the same problem from occurring in another quarter.
• Promptly curing instances of noncompliance.
• Engaging an independent third party to conduct a review.
• Providing employees with access to paystubs and methods to report underpayments.
• Including contract provisions that require contractors and subcontractors to meet the PWA requirements.
• Regularly following up with apprenticeship programs regarding requests.
• Maintaining detailed accurate records.

Penalty payments are made to the IRS and are reported via Form 4255, which is also used in the event of recapture of the credit.

Three steps to comply with prevailing wage and apprenticeship requirements

Clearly, taxpayers must monitor and document compliance with many variables to support a claim for the prevailing wage and apprenticeship multipliers to the IRA energy credits. In order to make the case for eligibility, a taxpayer should follow these steps:

1. Understand specific requirements for the applicable IRA credit and communicate those requirements to all contractors and subcontractors. This requires action upfront when executing agreements with contractors and subcontractors who will participate in the project. It includes creating a plan for apprentice hours and submitting requests as needed, obtaining wage determinations from SAM.gov, and confirming wage rates and apprentice participation with all involved parties.
2. Monitor compliance during the project. Establish a tracking plan and clearly delegate responsibilities among contractors and subcontractors. Determine a reporting and review cadence that’s communicated to all parties in kickoff meetings. Make corrective payments and adjustments to apprentice hours as soon as deficiencies are identified.
3. Maintain thorough and accurate documentation. Detailed records of compliance with PWA requirements and timely actions to cure noncompliance are critical to simplify tax reporting and to prove active regard for the rules in the event of an examination.

Attempting to support a claim for the PWA enhancements to IRA energy credits once a project is complete — without planning for them from the start — will be a complex and error-prone endeavor. It’s extremely difficult to reconstruct the details after the fact, and it’s almost certain that the project will have been out of compliance for some period that will result in the payment of penalties and interest that will reduce the value of the credits. The keys to a successful claim for the PWA multipliers in the IRA energy credits are diligent planning upfront, constant monitoring of compliance and swift corrective actions throughout, and thoroughly documented accurate reporting upon completion.