In our last articles on the Inflation Reduction Act’s (“IRA”) ITC and PTC we took a high-level look at what it takes to benefit from the bonified regimes.
In this article we are going to look at what is needed to increase the base PTC rate of 0.5 cents x kWh per Tax Year to the bonified (Base rate + meeting labor requirements) of 2.6 cents x kWh per Tax Year or from 6% to 30% in case of the ITC.
Remember, if your project’s maximum output is less than 1 MW AC, OR you started construction before January 29, 2023, you have already qualified for the bonified (2.6 cents x kWh per Tax Year) production or 30% investment tax credit. Congratulations!
However, if the project’s output is greater than 1 MW AC or you are yet to begin construction, read on.
1) Let’s start with a bit of context:
Where do these labor requirements come from?
1) Prevailing Wage Requirement (“PWR”)
This mandate is based on the Davis-Bacon Act (1931) requirements and has been a mainstay of most federal construction contracts since then.
The IRA requires that all workers whose work is physical in nature (“laborers and mechanics”) and not managerial or supervisory, employed by anyone in connection with the construction, repair or alteration of the project or facility must be paid a fair wage and bona fide benefits for the work they do, for the type of construction and where (in the USA) the work is being performed.
Taxpayers can validate that they are paying fair wages by visiting www.sam.gov or by contacting the Department of Labor at IRAprevailingwage@dol.gov to get further guidance.
2) Apprenticeship Requirements (“AR”)
The Fitzgerald Act (1937) established the (national) registered apprenticeship program that allowed the Department of Labor to issue regulations to aid and protect apprentices.
The IRA requires that the percentage of apprentice to journey person hours of 12.5% for 2023 & 15% for 2024 (and beyond) of the total construction, alteration, or repair labor hours performed, must come from qualified apprentices registered with national or state apprenticeship programs or agencies.
Taxpayers need in this case to provide “Good Faith Efforts” and if they are not able to meet the requirement they need to document them to benefit from the Good Faith Effort Exception to be able to demonstrate that they have requested apprentices but have been denied or did not get a response to their request.
2. Who has jurisdiction? The DoL is conspicuous by its absence
As mentioned above, the fair wage and apprenticeship mandates that are part of the IRA have been established and maintained for quite a long time by the Department of Labor. In fact, any federal construction contract over $2,000 will have had these requirements applied to the contract and enforced by the Department of Labor.
However, the IRA and its requirements are under the jurisdiction of the Treasury Department which means that the oversight is currently up to them.
Our view is that processes already established in one part of the government will be leveraged in the IRA. This means that you, the taxpayer, must emulate the established processes and protocols used by the Department of Labor to flow down of the PWR & AR to your contractors and their subcontractors.
The DOL providing fair wage guidance and email address to aid in clarifying these is a clear indication of this.
3. What needs to be done by taxpayers?
Proactivity is the name of the game for both requirements! The Taxpayer must get out in front of things and;
Create contractual language that;
Clearly identifies the expectations for compliance, record keeping and oversight,
Ensures these expectations are flown down to all tiers involved, and
Identifies appropriate penalties for failure to comply.
For PWR:
Select appropriate Wage Determinations,
Identify job classifications,
Establish competent reliable record keeping protocols, and
Plan for the implementation and costs.
For the AR
Determining which trades and classifications will be employed,
Locate the appropriate federal or state apprenticeship program,
Initiate dialogue with them,
Establish competent reliable record keeping protocols, and
Plan for the implementation and costs.
Once these are in place the Taxpayer must rigorously monitor and enforce the compliance scheme throughout, not only during construction, but the full life of the project as these also apply for repairs!
4. Where is there help? The DoL is providing limited guidance. Much more is needed.
The responsible agency for the IRA is the Inland Revenue Service (IRS) Treasury who have provided a set of initial guidelines (notice 2022-61 from November 30, 2022) where the IRS has expanded on the provisions in the relevant sections of the affected Codes. It further provides guidance on establishing Beginning of Construction and the Five Percent Safe Harbor, Continuity Requirements and Continuity Safe Harbors. More regulations and guidelines are anticipated.
The Department of Labor has proactively begun offering guidance to assist in the implementation of the IRA’s requirements. https://www.dol.gov/agencies/whd/IRA
In the same vein the Apprenticeship USA has recognized that the Taxpayer is going to need help navigating the requirements and too have offered some guidance. https://www.apprenticeship.gov/inflation-reduction-act-apprenticeship-resources
As with all related matters surrounding the IRA we are learning more and more as we move forward in the year. In any case a diligent, proactive process will help taxpayers demonstrate to the IRS that they mean to comply and not circumvent any of the rules.
So start today!
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