May 1, 2023 | CEBN Team
Note: This blog post is intended for educational purposes only and should not be considered tax guidance. You may consider consulting tax counsel when navigating tax matters.
The Inflation Reduction Act (IRA) is a historic climate law with many incentives for clean energy. CEBN is answering frequently asked questions from small businesses, organizations, and individuals who are interested in taking advantage of these incentives and deploying clean energy. In this article, we will provide an overview of the labor requirements for bonus tax credits.
Most of the tax credits in the IRA have a “base” credit amount and a “bonus” amount. Labor requirements are among the factors impacting whether projects qualify for an additional bonus amount that is five times the value of the base amount. For example, the Clean Electricity ITC base value is 6% of the total project cost and the bonus value is 30%.
Labor requirements include (1) prevailing wage requirements for construction workers and (2) apprenticeship requirements, which specify a certain percent of construction must be done by apprentices. Meeting these requirements unlocks the higher tax credit rates for the majority of clean energy tax credits.
The IRS issued guidance on November 29, 2022 on these requirements, which means that the requirements went into effect for projects started after January 29, 2023.
What are the prevailing wage requirements?
The goal of having prevailing wage requirements is that workers on a government-funded construction project (including one which uses tax credits) will be paid wages comparable to similar projects in the area.
To access bonus rates to the IRA credits, all laborers and mechanics must be paid prevailing wage for project construction, alteration, and repair. Wage includes the hourly rate and any fringe benefits. This refers to workers performing manual or physical work, including independent contractors.
The specific wage depends on labor classifications, location, and type of construction. To determine the prevailing wage for your project, search on sam.gov using the process outlined here. Records must be kept proving that prevailing wage was paid in order to qualify for the increased tax credit levels.
You may see the term “Davis-Bacon and Related Acts,” which refers to the 1950 law that established prevailing wage. The Department of Labor (DOL) also proposed updated regulations of Davis-Bacon in 2022. The IRS has used some of the David-Bacon concepts and definitions in the implementation of the IRA.
What are the apprenticeship requirements?
Apprenticeship requirements seek to incentivize training and establish a strong workforce pipeline through apprenticeships.
To access bonus credit rates, projects must have a certain amount of labor hours of construction performed by qualified apprentices. The amount, which is determined as a percentage of the labor done, is as follows:
Contractors or subcontractors employing over 4 people must employ at least 1 qualified apprentice. In addition, there is a “good faith effort” exception in the case that an employer requests apprentices from a registration program and the request is ignored or denied.
Which tax credits are affected by labor requirements?
Labor requirements are specified for the following tax credits and apply once maximum net output exceeds 1MW (AC):
Just prevailing wage (not apprenticeship):
No prevailing wage or apprenticeship bonus credit:
Learn more with the IRS’s FAQs on prevailing wage and apprenticeship requirements, and visit Apprenticeship.gov to connect with apprenticeship programs in your area.
Plus, CEBN is providing insights into the Inflation Reduction Act. Check out our FAQ post, which is updated periodically as important provisions and programs of the IRA are announced.
