January 3, 2023
There are several new clean energy tax incentives available to construction companies in 2023 thanks to the Inflation Reduction Act. To qualify for the highest savings possible, taxpayers need to meet new prevailing wage and apprenticeship requirements. Unfortunately, the necessary guidance to allow compliance had not yet been issued. The good news is the IRS recently issued Notice 2022-61, which provides important guidance for builders, contractors, and developers, to understand how to meet the new rules. This is especially important since these requirements take effect for projects that begin on, or after, January 30, 2023. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.
The Inflation Reduction Act, signed into law in August 2022, created and expanded several clean energy tax incentives. Most have higher credit amounts, but to qualify, the taxpayer must meet more stringent labor requirements.
Labor requirements apply to new construction and in some cases, alterations, or repairs. Higher tax incentives are available for construction projects that focus on energy efficiency, renewable energy, energy production, and other qualifying energy efficient facilities. Power plants, manufacturing and industrial facilities, commercial buildings, refueling and fuel production plants, and energy efficient residential dwellings can also qualify.
The new labor rules apply to general contractors and subcontractors on the construction, alteration, or repair work of a qualified facility. Prevailing wage must be paid to all project laborers, contractors, and subcontractors from the construction beginning date to five years after the facility is placed in service. Laborers and mechanics that fall under the labor requirements are employees who mostly perform manual or physical labor in trades or jobs like electricians, ironworkers, equipment operators, truck drivers, and general laborers. Even independent contractors who fall under these occupations must be paid the prevailing wage. Architects, engineers, administrators, and executives are exempt.
Applicable wage rates can be obtained from the Department of Labor (DOL) and vary depending on worker classification and location. The taxpayer is responsible for the wage rate determination; if it’s unavailable, the taxpayer must request a determination from the DOL. If the project involves more than one location, it’s possible that more than one wage determination will apply.
Prevailing wage is the combination of an hourly rate plus fringe benefits to meet the DOL’s minimum wage requirements. Fringe benefits include life insurance, health insurance, pension plans, vacation pay, holiday pay, or paid sick leave. Different states have their own rules for prevailing wages, so taxpayers need to meet the IRS requirements and the locality where the project is built.
Registered apprentices can be paid less than the prevailing wage, but fringe benefits may still apply. It depends on the apprenticeship agreement. If it states that a lower fringe benefit rate compared to the DOL wage determination can be applied, the taxpayer may use that amount. If it doesn’t mention anything, the taxpayer must pay the apprentice the full fringe benefit amount.
If a project employs four or more people, at least one employee must be a registered apprentice to meet new requirements. Minimum apprenticeship hours for the project depend on when construction begins, as outlined below.
If the taxpayer requests a qualified apprentice from a registered apprenticeship program but is either denied or the program fails to respond to the request after five business days of having received it, the apprenticeship requirement may be waived.
Common mistakes that taxpayers make in meeting labor requirements include:
To meet labor requirements, taxpayers must ensure that all applicable workers are paid correctly and on time. Payroll must be certified and submitted weekly. Additionally, documentation should include a record of all hours worked, how wage rates were determined, communications related to registered apprentices, calculations for wages and hours worked, and more.
There are two methods to determine the beginning construction date for purposes of the new requirements: the Physical Work Test or the Five Percent Safe Harbor.
Under the Physical Work Test, construction begins when a significant amount of work begins and is maintained continuously. It’s based on the nature of the work, not the total cost, and there are no minimums. Both on- and off-site work can be considered to meet the Physical Work Test. Preliminary activities, like planning, designing, financing, exploring, researching, permitting, licensing, surveying, and other studies, are not included.
The other method, construction begins when the taxpayer pays or incurs at least five percent of the facility’s total cost and then continues to make regular progress. All costs that go toward the facility’s depreciation are considered. Costs of goods or materials produced or manufactured by a third-party can be considered for the Five Percent Safe Harbor test.
In either case, the project must make continuous progress to completion. The Continuity Safe Harbor allows for the continuous completion requirement if the facility is placed in service no more than four calendar years after construction began, or no more than six years for the facility that houses carbon capture equipment (for the 45Q tax credit).
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The recently issued guidance provides important information for Atlanta contractors interested in receiving the highest available tax benefit. Given the complexity of the rules, it is important to consult with a qualified tax advisor to ensure appropriate requirements are met. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.