This article has been updated to reflect an amendment made by the IRS to Notice 2022-61, which provides that to automatically satisfy the prevailing wage and apprenticeship requirements, construction or installation of a qualifying project must begin prior to Jan. 29, 2023. The Notice as originally issued indicated a date of Jan. 30, 2023.
In late November, the IRS issued Notice 2022-61 (Notice), providing guidance on the prevailing wage and apprenticeship requirements that must be met for taxpayers to qualify for the increased amount of various clean energy credits available under the Inflation Reduction Act (IRA). See our 2022 year-end tax letter article for additional details.
Published Nov. 30, 2022, the Notice also starts the 60-day period within which a taxpayer can begin construction of a qualifying clean energy project and be deemed to automatically meet the aforementioned requirements, and thus be eligible for the additional credit amounts. To automatically satisfy the prevailing wage and apprenticeship requirements, construction or installation must begin prior to Jan. 29, 2023.
The Notice provides safe harbors for determining the start dates of (1) construction of a qualified facility, and (2) the installation of certain property eligible for the Internal Revenue Code (IRC) section 179D deduction.
Lastly, the Notice announces anticipated proposed regulations and further guidance on the prevailing wage and apprenticeship requirements.
Prevailing wage requirement
- With respect to any qualified facility or energy-efficient commercial building property (EECBP), the taxpayer must ensure any laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) both in the construction of the facility and the alteration or repair of the facility are paid the prevailing wages established by the Department of Labor (DOL) for construction, alteration or repair of a similar character in the locality in which the facility or building property is located.
- The Notice directs taxpayers to wage determinations to find the prevailing wages for the applicable work being performed for the taxpayer (or contractor or subcontractor) in the facility’s locale. In the event wages for the type of work performed or the geography in which it is performed are not listed, the taxpayer must contact the DOL to propose or request a wage determination or rate using procedures provided for by the Notice.
- A taxpayer that begins construction of a qualified facility on or after Jan. 29, 2023, will be deemed to meet the prevailing wage requirement if it pays wages as described above and maintains records of having paid those wages in accordance with the general recordkeeping requirements under the IRC. Broadly, the records should be sufficient to establish the wages paid have met the rates as provided for by the DOL and maintained “so long as the contents thereof may become material in the administration of any internal revenue law.”
- With respect to any qualified facility, or EECBP, the taxpayer must ensure an applicable percentage of total labor hours for construction, alteration or repair work (to include work performed by a contractor or subcontractor) is performed by qualified apprentices.
A qualified apprentice is an individual employed by the taxpayer (or contractor or subcontractor) who is participating in a registered apprenticeship program.
The applicable percentage is 10% for construction that begins before 2023, 12.5% for construction that begins during 2023 and 15% for construction that begins after 2023.
This requirement is further subject to any applicable requirements for DOL or applicable state apprenticeship agency apprentice-to-journey worker ratios.
A taxpayer, contractor or subcontractor who employs four or more individuals to perform the work described above must employ one or more qualified apprentices to perform such work.
- A taxpayer that begins construction of a qualified facility on or after Jan. 29, 2023, will be deemed to meet the apprenticeship requirement if it satisfies the requirements described above and maintains records supporting the satisfaction of those requirements in accordance with the general recordkeeping requirements under the IRC.
60-day period for beginning construction
- To automatically satisfy the prevailing wage and apprenticeship requirements, construction of a qualified facility or installation of EECBP must begin prior to Jan. 29, 2023.
Determining start date for construction of a qualified facility or installation of EECBP
- Broadly, the Notice leverages previous IRS guidance issued under the preexisting energy credit regime in establishing construction or installation has begun under the IRA. Specifically, it repurposes two safe harbors:
Physical work test – construction or installation is deemed to begin when “physical work of a significant nature” begins, so long as the taxpayer “maintains a continuous program of construction.” There is no fixed minimum amount of work or monetary or percentage threshold to clear, but preliminary activities (i.e., planning, designing, securing financing, researching, etc.) cannot be considered in meeting this safe harbor.
5% safe harbor – construction or installation is deemed to have begun if the taxpayer pays or incurs 5% or more of the facility’s or EECBP’s total cost, and the taxpayer “makes continuous efforts to advance towards completion of the facility.”
Credits to which the Notice applies
- Meeting the prevailing wages and apprenticeship requirements will result in additional amounts of the credits for alternative fuel vehicle refueling property, carbon sequestration credit, clean hydrogen, clean electricity production, clean fuel production, advanced energy projects and clean energy investment, and an additional amount of the section 179D deduction.
- Meeting the prevailing wages requirement will additionally result in increased amounts of the new energy-efficient home and zero-emission nuclear power production credits.
To learn more about how the IRA’s clean energy provisions may impact your tax situation, please visit our Inflation Reduction Act Resource Center and contact your Baker Tilly advisor.