Treasury Releases Important New Proposed Regulations On Prevailing Wage And Apprenticeship Requirements For Clean Energy Tax Incentives

• Published date: 27 September 2023
• Subject Matter: Real Estate and Construction, Tax, Energy and Natural Resources, Energy Law, Oil, Gas & Electricity, Construction & Planning, Tax Authorities, Renewables, Water
• Law Firm: Miller & Chevalier Chartered
• Author: Mr Andrew (Andy) L. Howlett and Marissa J. Lee

The U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) recently released proposed regulations¹ regarding increased credit and deduction amounts available for taxpayers meeting the "prevailing wage and apprenticeship" requirements under the Inflation Reduction Act (IRA).² Increased credit amounts are available under the Internal Revenue Code sections 30C (alternative fuel vehicle refueling property credit), 45 (renewable electricity production credit), 45L (new energy efficient home credit), 45Q (carbon oxide sequestration credit), 45U (zero-emission nuclear power production credit), 45V (clean hydrogen production credit), 45Y (clean electricity production credit for facilities placed in service in 2025 or later), 45Z (clean fuel production credit for facilities placed in service in 2025 or later), 48 (energy credit), 48C (qualifying advanced energy project credit), and 48E (clean electricity investment credit), and an increased deduction amount is are available under section 179D (energy efficient commercial buildings deduction).³ The prevailing wage and apprenticeship requirements are significant; with respect to the aforementioned credits, taxpayers may qualify for a credit up to five times the applicable base credit.⁴ For example, the renewable energy investment tax credit increases from six percent to 30 percent of eligible costs if the prevailing wage and apprenticeship requirements are met.⁵

The application of these rules is critical for companies seeking to maximize the tax incentives for green energy under the IRA.

Prevailing Wage Requirements

The statutory basis for the prevailing wage requirements is section 45(b)(7) which explicitly covers the requirements for the renewable electricity production credit. Other credits either incorporate the rules of section 45(b)(7) explicitly by reference⁶ or follow similar principles.⁷

To meet the prevailing wage requirements under section 45(b)(7), the taxpayer must ensure that "laborers and mechanics" employed by the taxpayer (or its contractors or subcontractors) in the "construction" as well as the "alteration or repair" of a facility are paid wages at the prevailing rates determined by the Department of Labor (DOL) in accordance with the Davis-Bacon Act.

One consideration in the statutory language is the period of time for which the prevailing wage requirements must be satisfied. The clean electricity production tax credit under section 45 may be claimed over 10 years and has no statutory recapture provision if the taxpayer fails to meet the prevailing wage requirement with respect to a subsequent alteration or repair. It appears that once the prevailing wage and apprenticeship requirements are satisfied during the construction period, the requirements become an annual requirement with respect to alterations and repairs.⁸ In contrast, section 48, which provides for an up-front credit based on the qualifying cost, is subject to recapture for a project that does not satisfy the prevailing wage requirements with respect to an alteration or repair of the project for the five-year period beginning on the date the project is originally placed in service.⁹

The proposed regulations define the applicable type of workers and work. "Laborers" and "mechanics" refer to individuals whose duties are "manual or physical in nature," not "primarily administrative, executive, or clerical" and that cannot be "employed in a bona fide executive, administrative, or professional capacity."¹⁰ "Construction, alteration, or repair" covers "work that improves a facility, adapts it for a different use, or restores functionality as a...