In detail

Scope of PWA requirements

Beginning of construction for PWA exception

In general, to qualify for the PWA bonus, the taxpayer, contractors, and subcontractors must pay workers employed in constructing, repairing, or altering a facility the prevailing wages for similar work in the area and hire workers from certain apprenticeship programs. However, taxpayers are eligible for the bonus without meeting the general requirements in two situations--either a facility’s net output is less than one megawatt or construction began before January 29, 2023.

To reduce complexity and provide clarity, the final regulations provide that the PWA requirements do not apply to any work occurring before January 29, 2023. This rule also applies to the Section 45L, 45U, 45Z, and 48C credits, to which the January 23, 2023, exception otherwise does not apply.

Beginning of construction, repair, or alteration for application of PWA requirements

The proposed regulations adopted definitions from the Davis-Bacon Act (DBA) and implementing regulations, which govern government construction contracts, in defining construction, repair, and alteration for purposes of determining when the activity begins and the PWA requirements apply. However, Notice 2022-61 and the preamble to the proposed regulations allowed taxpayers to apply rules in Notices 2013-29, 2018-59, and 2020-11 for determining when construction begins.

Observation: These IRS notices provide rules for determining when construction begins that apply for general tax purposes in a number of contexts.

The final regulations incorporate the DBA definitions of construction, repair, and alteration and do not allow reliance on the IRS notices. However, the penalty payment is waived for taxpayers that applied Notice 2022-61 or the proposed regulations for wages paid between January 29, 2023, and June 25, 2024, if they make the required correction payments to affected workers. Taxpayers may continue to apply Notice 2022-61 in determining when construction begins for the apprenticeship labor hours requirement and the January 29, 2023, exception.

Observation: Taxpayers must consider when construction began for two purposes relating to the PWA bonus: (1) is the taxpayer is eligible for the January 29, 2023, exception and (2) when must the taxpayer begin to pay prevailing wages and comply with the apprenticeship labor hour requirements. Taxpayers may apply the IRS notices to determine whether construction began before January 29, 2023, and thus if the PWA bonus requirements apply.  However, if taxpayers are subject to the PWA requirements, they may apply the IRS notices or the DBA for purposes of when the labor hour requirement applies, but must apply the DBA rules to determine when they must begin to pay prevailing wages. The general tax rules of the IRS notices also may determine when construction begins for energy credit issues other than the PWA bonus, for example when the Section 48 credit sunsets and taxpayers may claim only the Section 48E credit for investment in clean electricity facilities.

Repair vs. maintenance

The final regulations expand on the proposed rules distinguishing repair from maintenance work by describing repair work as an activity that fixes nonfunctioning property; corrects individual problems or defects; or improves a facility’s condition, structural strength, stability, safety, capacity, efficiency, or usefulness. In contrast, maintenance keeps a facility in its current condition, does not improve its condition or function, and is routinely scheduled and continuous or recurring.

Application to property or activities

The final regulations clarify that the PWA requirements apply only to construction, repair, or alteration of the portion of a project that is creditable under the relevant credit. The preamble to the final regulations describes, for each credit, the property for which the PWA requirements apply to construction, repair, or alteration, for example, a qualified project for Section 30C or the qualified facility and the facility’s carbon capture equipment for Section 45Q.

Observation: The final regulations clarify that the PWA requirements apply only to the construction, repair, or alteration of the qualified facility or property as defined for each credit. Taxpayers may have to identify work that involves a qualified facility or property and track the workers who must meet the PWA requirements. 

Apprenticeship requirements

General requirements

To satisfy the apprenticeship requirement, (1) for construction of a facility, no fewer than an applicable percentage of total labor hours of construction, alteration, or repair must be performed by qualified apprentices (labor hours requirement), (2) if four or more workers are employed, at least one must be a qualified apprentice (participation requirement), and (3) a required apprentice-to-journeyworker ratio must be maintained (ratio requirement).

The final regulations interpret the statutory language applying the labor hour requirements “with respect to the construction of any qualified facility” to require taxpayers to comply with the apprenticeship requirements only for construction, alteration, or repair work performed before a facility is placed in service.

The final regulations clarify that (1) a taxpayer determines the applicable percentage of labor hours worked by qualified apprentices by aggregating labor hours of all workers and not on a trade-by-trade basis, including hours worked by employees of contractors with fewer than four employees, from the beginning of construction until the facility is placed in service, (2) the participation requirement applies if four individuals are employed at any time and in any location during construction, and (3) the ratio is determined by the location of the work or, if there is no ratio in that location, the program standard..

Good faith effort exception

A taxpayer is treated as satisfying the apprenticeship requirement if the taxpayer has made a good faith effort to comply by requesting apprentices from a registered program that has (1) denied the request, unless the denial is the result of the taxpayer’s or contractor’s intentional disregard of the standards or requirements of the program or (2) failed to respond within five business days.

To qualify for the exception, the proposed regulations required a taxpayer to request qualified apprentices from at least one registered apprenticeship program operating in the location of the facility or that reasonably could be expected to provide apprentices to that location and include certain specified information. A taxpayer that received a denial or partial denial would have to submit a new request within 120 days. Acknowledgement of the request was deemed a response.

The final regulations modify the proposed regulations to (1) specify additional information to be included in the request, (2) delete that a request must be submitted to a program that can be expected to provide apprentices, (3) provide that, if there is no registered program in the facility location, a taxpayer is deemed to satisfy the exception for the apprentices the taxpayer would have requested, (4) require an initial request to be made at least 45 days, and a later request at least 14 days, before an apprentice is to begin work, (5) require an additional request after a denial in 365 instead of 120 days, (6) clarify that a later request may be to a different program, (7) define a response as a substantive written reply and not merely an acknowledgment, (8) clarify that a partial denial does not reduce the number of required labor hours but any labor hours that qualify for the exception count as performed by qualified apprentices, (9) define “established standards and requirements” as DOL-required standards or as established by the program and not contrary to DOL guidance, and (10) require the taxpayer to submit a request to another apprenticeship program if an apprenticeship program sponsored by the taxpayer denies a request.

Corrections and penalties

A taxpayer that did not pay prevailing wage rates may claim the bonus by paying workers the difference between the prevailing wage rates and the amount paid, plus interest, and a penalty of $5,000 for each underpaid worker. For intentional disregard of the requirements, the taxpayer must pay workers three times the amount of the underpayment and a penalty of $10,000 times the number of underpaid workers. 

A taxpayer that has failed to satisfy the apprenticeship requirements may claim the credit bonus by paying a penalty of $50 ($500 for intentional disregard) times the number of non-complying labor hours.

Intentional disregard

The proposed and final regulations define “intentional disregard” of the PWA requirements as a knowing or willful failure to comply. A determination is based on the facts and circumstances. The final regulations adopt and elaborate on circumstances identified in the proposed regulations as relevant factors, for example by providing additional detail on how reviews should be conducted and adding factors such as providing additional information to employees, investigating complaints of adverse action against employees who reported violations, seeking assistance from a government agency in hiring qualified apprentices, and adopting an apprentice utilization plan.

Waivers

The proposed regulations allow the IRS to waive penalties for minor or limited failures to comply with the PWA requirements. A penalty for failing to pay prevailing wages is waived if (1) the taxpayer makes the required correction payment by the earlier of 30 days after the taxpayer became aware of the error or the filing date of the tax return claiming the credit bonus and (2) either the noncomplying wages were paid for no more than 10% of a worker’s pay periods or the difference in the amount paid and the amount required to be paid was no more than 2.5%.

The final regulations revise the correction payment timing rule to require a taxpayer to make corrections by the last day of the first month after the end of the calendar quarter of the failure, not after the taxpayer becomes aware of the failure. The 2.5% underpayment rule is modified to underpayments that do not exceed 5% of the required amount.

Recordkeeping

The proposed and final regulations describe detailed recordkeeping requirements. The final regulations provide that records may contain only the last four digits of a Social Security number and allow taxpayers to satisfy the recordkeeping requirements by (1) collecting and physically retaining records from contractor/subcontractors, (2) using a third-party vendor to collect and physically retain the records, or (3) allowing contractors and subcontractors to  retain records for their own employees. Records obtained from contractors may have personally identifiable information redacted to comply with privacy laws but unredacted records must be provided to the IRS upon request.