The Internal Revenue Service (IRS) and Department of the Treasury (Treasury) issued proposed regulations and addressed frequently asked questions (FAQs) about the prevailing wage and apprenticeship under the Inflation Reduction Act (IRA), covering the procedures used to determine whether prevailing wages are paid and whether the appropriate number of apprentices are hired. The regulations include clarifications of the required calculations of prevailing wage and apprenticeship, along with guidance on the record keeping requirement.
The IRA provides for increased amounts of credits or deductions available for qualifying projects under certain code sections. Generally, qualifying projects are eligible for the increased credit or deduction amount if the projects satisfy one of three requirements:
Qualifying under the PWA requirements, the 1 MW exception, or the BOC exception will typically result in the amount of credit or deduction otherwise determined being increased by a multiple of five. These increased amounts are available for the credits for:
An increased deduction amount is available under section 179D. Increased credit amounts are available in connection with new energy-efficient homes (section 45L) and zero-emission nuclear power production (section 45U) for taxpayers satisfying prevailing wage requirements, qualifying for the 1 MW exception, or qualifying for the BOC exception. To obtain the increased credit amounts under sections 45L and 45U, the apprenticeship requirements do not have to be satisfied.
The proposed regulations are specifically under section 45, however, the principles apply to all code sections that feature the prevailing wage and apprenticeship requirements.
To satisfy the prevailing wage requirements, all laborers and mechanics employed by the taxpayer or any contractor or subcontractor in the construction of a facility, or with regards to any alteration or repair of such facility during the credit recapture period, must be paid wages at rates not less than the prevailing rates for construction, alteration or repair of a similar character in the locality in which such facility is located. The prevailing rates are determined by the Secretary of Labor.
The rates that must be paid are those in effect at the time the construction, alteration or repair begins. The U.S. Department of Labor (DOL) will publish general wage determinations on its website. Taxpayers must ensure that laborers and mechanics employed on the project are paid not less than the general wage determination, if any. If there is no applicable general wage determination, then the taxpayer, contractor or subcontractor can request a supplemental wage determination. This request should be made 90 days before the beginning of construction or alteration work, or as soon as possible if it cannot be reasonably determined prior to the start of the work that the request will be necessary. The regulations provide details on how to request a supplemental wage determination from the DOL and lists items that should be included in the request.
A party requesting a supplemental wage determination may seek reconsideration and review of the supplemental wage determination by the administrator of the Wage and Hour Division. General wage determinations published on the DOL-approved website contain no expiration date and remain valid until revised, superseded or canceled.
The regulations also provide guidance on what apprentices must be paid. In some circumstances, apprentices may be paid less than the prevailing wage, but must be paid at least the pay rate specified by the registered apprenticeship program. There are times when an apprentice must be paid prevailing wage, such as when:
There are requirements to have a certain number of journeyworkers present on a project to supervise apprentices. Any apprentice performing work on the job site in excess of the ratio permitted under the registered program or the ratio applicable to the geographic area of the facility must be paid not less than the prevailing wage. These ratios are discussed further in the “Apprenticeship” section below.
If a taxpayer does not pay prevailing wages to all applicable employees, the taxpayer has the ability to cure the failure. To do so, the taxpayer must make a correction and penalty payment.
The correction payment is made to the laborers. The laborers must be paid the difference between the prevailing wage for that laborer and the amount that laborer was paid, plus interest on the underpayment amount. The interest rate applied to the underpayment is variable, equaling the federal short-term rate plus 6%.
The penalty payment is made to the IRS and is generally $5,000 times the total number of laborers underpaid. This penalty is for any employee not paid a prevailing wage for any period of time during a calendar year. The penalty also applies separately to each calendar year of the project. For example, if a laborer is not paid a prevailing wage in two separate calendar years, then the penalty payment equals $10,000 for that employee.
If a taxpayer is not claiming the increased credit amount or increased deduction there is no requirement that prevailing wages be paid during construction or alteration of the project. The obligation generally exists when the taxpayer files a tax return claiming the credit or taking the deduction using the five times multiplier. If the taxpayer transfers the credit to an eligible taxpayer, the obligation to satisfy prevailing wage become binding on the earlier of; the date the eligible taxpayer files a tax return claiming the credit, or the date the transferee taxpayer files a tax return claiming the transferred credit. Any obligation to cure a prevailing wage failure stays with the selling taxpayer. If the IRS determines prevailing wage was not applied and adjusts the amount of the credit, the transferee taxpayer will be subject to recapture on the amount of credit they claimed, plus a possible penalty.
The ability for a taxpayer to make correction and penalty payments is available for a limited period of time. A taxpayer has 180 days from when the IRS makes a final determination and sends a notice to make the correction and penalty payments.
The penalty payment is not subject to IRS deficiency procedures. Generally, IRS deficiency procedures are a process the IRS must take before they can collect a tax liability from a taxpayer. This means a taxpayer must make a penalty payment within 180 days of receiving a notice from the IRS or they cannot rely on the cure provisions for failure to pay prevailing wage. Any determination by the IRS that the taxpayer is not eligible for the five times multiplier on the credit is subject to deficiency procedures.
If a taxpayer intentionally disregards the requirement to pay prevailing wages, the correction payment otherwise due is multiplied by three and the penalty payment is increased to $10,000 per employee. The regulations define intentional disregard and provide a presumption.
The regulations clarify that intentional disregard is determined via a facts and circumstances test and applies if the failure to pay prevailing wage is knowing and willful. The regulations list factors that will be considered when making the facts and circumstances determination. If a taxpayer makes the correction and penalty payments before receiving a notification from the IRS, then there is a presumption that the failure to pay prevailing wages was not subject to intentional disregard.
The regulations also provide for a possible waiver of the penalty payment. The penalty payment will be waived if the taxpayer makes the correction payment by the earlier of 30 days after the taxpayer became aware of the underpayment or the date the return on which the increased credit is claimed is filed, and either (1) any laborer is not paid less than the prevailing wage for more than 10% of all pay periods of the calendar year, or (2) the correction payment amount is not greater than 2.5% of the prevailing wage.
The regulations provide another exception to the penalty payment. The penalty payment will not apply if the work is done pursuant to a pre-hire collective bargaining agreement.
Under the apprenticeship labor hours requirement, the taxpayer must ensure that not less than the applicable percentage of the total labor hours of the construction or alteration work is performed by qualified apprentices. For work beginning construction before Jan. 1, 2023, the applicable percentage is 10%; for work beginning construction during 2023, 12.5%; work beginning construction after 2023,15%.
In order to satisfy the apprenticeship test, a taxpayer must also satisfy the apprentice-to-journeyworker ratio requirement and the participation requirement. The regulations clarify that the apprentice-to-journeyworker ratio requirement means that the number of apprentices to journeyworkers cannot exceed the ratio established by the DOL, any applicable state apprenticeship agency, or the registered apprenticeship program. The preamble to the regulations clarifies that these requirements are in place to make sure apprentices are properly trained on work sites.
The participation requirement is that any taxpayer, contractor, or subcontractor employing four or more individuals must employ one or more qualified apprentices as long at this complies with the apprentice-to-journeyworker requirement. This ratio must be satisfied for each day during the construction, alteration or repair of the qualified facility for which apprentice labor hours are claimed.
There are two exceptions in which a taxpayer that fails the apprenticeship requirements will still be deemed to satisfy the apprenticeship requirements. First is the good faith exception and second is the payment of a penalty.
Under the good faith exception, a taxpayer will not fail the apprenticeship requirements if they request qualified apprentices and they do not receive a response, or the request is denied. A request for qualified apprentices must be made in writing to at least one registered apprenticeship program which has a geographic area of operation that includes the location of the facility. The request must be sent electronically or by registered mail. The regulations set forth specific content that must be in the request.
If a request is denied or no response is received, the taxpayer will satisfy the good faith exception for a period of 120 days from the date the request is submitted. After 120 days, the taxpayer must submit another request for qualified apprentices. If the registered apprenticeship program responds and provides some of the apprentices and denies a portion of the request, then the good faith exception applies only to the apprentices denied and only for 120 days.
The second exception to the apprenticeship requirement is the penalty payment. Generally, the penalty equals $50 multiplied by the total number of labor hours by which the requirements have failed to be satisfied.
The total labor hours subject to a penalty are calculated by looking at the shortfall in hours needed to satisfy the labor hour requirement and separately at the shortfall in hours needed to satisfy the participation requirement. The shortfall in hours needed to satisfy the labor hour requirement equals the total labor needed to satisfy the labor hour requirement minus the total labor hours worked by qualified apprentices. The shortfall in hours needed to satisfy the participation requirement equals the total number of labor hours worked by all individuals who failed to meet the participation requirement divided by the number of individuals employed. The regulations provide an example that clarifies the shortfall in hours for the participation requirement. In the example, a contractor employs five laborers, none of which is a qualified apprentice. Therefore, this contractor fails the participation requirement because they should have hired at least one qualified apprentice. The total hours worked by this contractor’s five laborers is 17,000. The total hours divided by the number of laborers (17,000 / 5 = 3,400) is the hours used in the penalty calculation for failing the participation requirement. In the example, a penalty of $170,000 was due (3,400 x $50).
The penalty amount per hour is increased from $50 to $500 if the failure to satisfy the apprenticeship requirement is due to intentional disregard. The regulations define intentional disregard as knowing or willful and determined based on facts and circumstances. The regulations provide a list of factors that are relevant in making the facts and circumstances determination. The regulations also provide a safe harbor, whereby if a taxpayer makes the penalty payment before receiving a notice from the IRS, then the failure to satisfy the apprenticeship requirements is presumed not to be due to intentional disregard.
Another exception is that the penalty payment is not required if the construction work on a qualified facility is done pursuant to a qualifying project labor agreement. A qualifying project labor agreement is defined as a pre-hire collective bargaining agreement with one or more labor organizations that establishes the terms and conditions of employment for a specific construction project.
If a taxpayer transfers the credit to another taxpayer, the obligation to make a penalty payment for failure to satisfy the apprenticeship requirements stays with the taxpayer transferring the credits. Like with the prevailing wage requirement, the requirement to satisfy the apprenticeship requirements does not exist unless the taxpayer is claiming the increased credit amount. The requirement to make any applicable penalty payment is binding upon the earlier of when a taxpayer files a tax return claiming the credit or the transferee taxpayer files a tax return claiming the transferred credit, whichever is earlier.
The regulations provide that a taxpayer must retain records sufficient to establish compliance with the prevailing wage and apprenticeship requirements in order to claim the increased credit. The regulations provide that at a minimum the taxpayer must maintain payroll records for each laborer and mechanic, including apprentices. The regulations provide a list of suggested items to maintain as part of the records.
If a credit is sold to an unrelated third party by a taxpayer, then the requirement to maintain the records stays with the taxpayer that transferred the credits.
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