In a landmark move to address the climate crisis while bolstering economic growth, President Biden signed the Inflation Reduction Act (IRA) 2022 into law on Aug. 16, 2022. This sweeping legislation and historic investment in clean energy introduces new provisions that have significant implications for utility-scale and Commercial and Industrial (C&I) solar developers and Engineering, Procurement, and Construction (EPC) firms with projects exceeding 1 MWac.
To encourage the development of a skilled workforce, the IRA modified and extended the Investment Tax Credit (ITC) of up to 30% for qualifying investments in solar, energy storage, and other renewable energy projects. Key to unlocking increased tax benefits under this act are compliance with prevailing wage and apprenticeship requirements, as outlined in the Internal Revenue Service's (IRS) Aug. 29, 2023 Notice of Proposed Rulemaking (NPRM) and the U.S. Department of the Treasury’s Fact Sheet, released Oct. 20, 2023.
Below, we explore what this means for the surging U.S. solar workforce and those signing their checks.
Understanding Prevailing Wages under the Inflation Reduction Act
The IRA departs from norms by extending prevailing wage requirements beyond projects covered by the Davis-Bacon Act or those funded by public tax dollars. The IRA's prevailing wage provisions apply to various clean energy projects relying on incentives, including but not limited to the ITC, a major contributor to the solar industry’s growth for over a decade.
Taxpayers must pay laborers and mechanics the prevailing wage, including fringe benefits, to ensure compliance with these new requirements based on specific job classifications and geographic regions. These standards apply not only to construction but also to alterations and repairs within a five-to-twelve-year period, depending on the particular credit associated with the project.
The U.S. Department of Labor (DOL) determines prevailing wage rates, which can be accessed through general wage determinations on the System for Award Management (SAM) website. Taxpayers must maintain meticulous records, including wage determinations, worker classifications, hours worked, and wage rates, to demonstrate adherence to prevailing wage provisions, as per IRS Notice 2022-61.
Project Labor Agreements (PLAs) offer a strategic tool for ensuring compliance with prevailing wage requirements. These agreements, negotiated between contractors and unions, set employment terms and conditions for construction projects. The proposed regulations specify that taxpayers can be exempted from penalty payments for prevailing wage violations if workers are subject to a compliant PLA.
Corrections and Penalties: A Rigorous Framework
Notably, compliance is mandatory for facilities that began construction on or after January 29, 2023. The NPRM establishes a framework for corrections and penalties to address noncompliance. Taxpayers may make correction payments to workers before filing tax returns, averting interest accrual on underpayments. The penalty payment to the IRS becomes eligible only upon filing, with deadlines aligned to the tax return submission. Remember, intentional disregard of prevailing wage requirements incurs steep penalties, with correction payments to workers tripling and penalty payments doubling.
Understanding Apprenticeship Requirements
In addition to the prevailing wage, the IRA introduces apprenticeship requirements for those seeking tax credits. As defined by the IRA, an apprentice is an individual participating in a registered apprenticeship program typically paid lower rates than prevailing wages.
The proposed regulations outline three core apprenticeship requirements:
Ratio Requirement: To ensure workplace safety, the responsible party must ensure the apprenticeship-to-journey-worker ratio is satisfied daily. Additionally, it requires apprentices to be paid at the local prevailing wage for any dates where this ratio is not met on the worksite.
Labor Hours Requirement: Mandates that 12.5% of total labor hours be performed by qualified apprentices on facility construction, alteration, or repair work for facilities that began construction in 2023, rising to 15% in 2024 and thereafter.
Participation Requirement: Requires contractors with four or more workers on-site to engage apprentices to prevent exploitation by only hiring apprentices.
The IRA brings transformative changes to the clean energy landscape, requiring meticulous attention from utility-scale and C&I solar developers and EPCs. But compliance with prevailing wage and apprenticeship requirements is not only a legal mandate, it’s also a pathway to increased tax benefits. As the proposed regulations undergo public review and comment, industry stakeholders must stay abreast of developments to navigate this evolving regulatory landscape effectively.
Want to stay up to date on further developments as these regulations progress toward finalization? Sign up for our newsletter for the latest solar industry news, insights, and strategies.
Ed. note: The information provided in this article does not constitute tax or legal advice, and readers should consult with licensed professionals on these matters.
Smart Energy Solutions
delivered straight to your inbox