How to Meet Prevailing Wage and Apprenticeship Requirements for IRA Tax Credit Eligibility
There is a significant focus on increasing capacity for access to all types of energy, with a particular emphasis on renewable energy because of the incentives resulting from the federal income tax credits enacted under the Inflation Reduction Act of 2022 (IRA). In order to maximize these tax credits, organizations must meet certain prevailing wage and apprenticeship requirements in order to be eligible to multiply the base amount of their tax incentive by five. This significant additional value has many organizations undertaking projects that will meet these requirements. As we’ve indicated previously and according to the U.S. Treasury
To receive increased credit and deduction amounts under the IRA, organizations must:
- Pay workers the local prevailing wage, defined in accordance with Department of Labor standards, for work on facility construction, as well as for alterations and repairs in a five-to-twelve-year period, depending on the credit, after a facility is placed in service.
- Hire a sufficient proportion of workers from registered apprenticeship programs, including hiring these qualified apprentices for at least 10% of the labor hours spent on facility construction, alteration, or repair work (rising to 12.5% for facilities where construction begins in 2023 and 15% in 2024 and later years)
The prevailing wage and apprenticeship provisions apply to:
- the Alternative Fuel Refueling Property Credit (30C)
- the Production Tax Credit (45, 45Y)
- the Credit for Carbon Oxide Sequestration (45Q)
- the Credit for Production of Clean Hydrogen (45V)
- the Clean Fuel Production Credit (45Z)
- the Investment Tax Credit (48, 48E)
- the Advanced Energy Project Credit (48C)
- the Energy Efficient Commercial Buildings Deduction (179D)
In addition, the prevailing wage provision will apply to:
- the New Energy Efficient Home Credit (45L)
- the Zero-Emission Nuclear Power Production Credit (45U)
We recently attended the Solar + Wind Finance & Investment Summit to meet with many of the organizations that are undertaking projects and those professional services organizations that are supporting them. Given some of the issues that were raised in our discussions, we wanted to take some time to provide additional information that could be helpful as you are looking for the most effective tools to support your PWA efforts.
Q: I have a project that is nearing completion or already complete, and believe it meets the appropriate tax credit requirements and we captured the associated payroll information, is it possible to do an analysis on all of that data to ensure PWA compliance?
A: YES – Software like InSight IQ can accommodate bulk upload of that information for ready analysis of the data to determine if the payrolls on the project were compliant and if not, which were not compliant and what, if any, fees, penalties or interest may need to be made.
Q: Is there a way to automate the calculation of any additional payments required for payrolls that aren’t compliant?
A: YES – working with a software solution like InSight, the amount of additional pay that is owed an employee can be calculated based on the appropriate wage classifications and fees, interest or penalties can also be calculated.
Q: We just need to make sure we have the current Letter of Determination for the location where our project is taking place, right?
A: NO – it is not sufficient just to have a current Letter of Determination, there are additional factors that also need to be considered, such as when the financing for the project was completed, or when certain services were being undertaken. Software and AI can be very helpful, but the PWA complexities can often require that you have a software organization or team that understands the various PWA elements, as well as the characteristics of your projects to provide the right data to ensure your success.
Q: We’re capturing the payroll data from our contractors and just entering it all into spreadsheets and doing the calculations manually shouldn’t that be sufficient?
A: MAYBE – it is possible to capture the PWA information and attempt to undertake the analysis manually, however, there are a number of factors to consider. First, the consistency of the data being provided by your contractors. Second, the ability to apply the appropriate wage classifications for the right jobs in your spreadsheet. Third, inputting data manually increase the likelihood of user error on large projects. Fourth, this can be very labor intensive and either requires significant in-house resources, or expensive consulting resources.
If you have other questions we’re happy to set up time for a quick call to discuss them with you. There can be complexities and challenges to addressing the PWA requirements, but with the right partner(s) you can put in place an effective, reliable and scalable solution to reduce your risks and improve your ROI. There is good information available to help you better understand your requirements, and potential solutions to make you successful. Following are a couple that we’ve come across that could be helpful.
https://www.cruxclimate.com/insights/transferable-tax-credits
https://www.irs.gov/pub/irs-pdf/p5855.pdf
Finally, you’re not alone in this journey; if you need guidance, reach out to us. Our team is here to help you navigate through this new terrain.
