Treasury Issues Initial Inflation Reduction Act Labor Guidance
In a surprising release, on November 29, 2022, the Department of Treasury (the “Treasury”) and the Internal Revenue Service (the “Service”) issued Notice 2022-61 (the “Notice”),1 providing initial guidance on the prevailing wage and apprenticeship requirements (the “Labor Requirements”) impacting a broad swath of clean energy tax credits included in the Inflation Reduction Act of 2022 (the “IRA”) (i.e., sections 45, 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, 48E, and 179D of the Internal Revenue Code of 1986, as amended (the “Code”)).2
As background, the IRA created a revised credit structure for many of the aforementioned clean energy tax credits whereby taxpayers would generally only be eligible for the full credit amount with respect to a project or facility if (i) the Labor Requirements were satisfied, (ii) the project or facility is less than 1 MW (ac), or (iii) construction of the project or facility began prior to the date that is 60 days after guidance on the Labor Requirements is published. Our prior coverage of the IRA can be found [here] and [here] and further coverage and details can be found [here].3
The Notice specifically provides that it is “guidance” which starts the 60-day clock described in clause (iii) above (the “60-Day Beginning of Construction Period”). As the Notice was published in the Federal Register on November 30, 2022, taxpayers have until January 29, 2023 to “begin construction” of clean energy projects or facilities to be exempt from the Labor Requirements.
While Treasury had previously indicated that the Labor Requirement guidance should come out by the end of the year, this seemed like an optimistic timeline, and many in the clean energy industry expected that guidance would not be published before the end of the year at the earliest, and more likely would be published early next year.4 This timing would have given taxpayers additional time to “begin construction” and be exempt from the Labor Requirements or, at the very least, implement strategies and internal procedures to comply with the Labor Requirements.
While there was undoubtedly pressure on Treasury and the Service to issue the Notice as soon as possible, starting the 60-Day Beginning of Construction Period on this timeline will likely result in few taxpayers having the ability to begin construction within such period. The clean energy industry has already been hurting from supply chain constraints, competition for high quality contractors, and construction delays, and this Notice could add further pressure in the near term.
Of course, this may have been the intended result, consistent with public policy. Publication of the Notice in such short order indicates the importance the White House and Treasury place on the Labor Requirements and serves as a clear message that the White House wants clean energy sponsors and developers to pay prevailing wages and utilize qualified apprentices in an effort to promote job growth and development of a skilled domestic workforce. However, the accelerated timing of the Notice may have unintended consequences — taxpayers may not have the capability to install all the necessary internal procedures or revise their construction contracts in time to comply with the Labor Requirements.
Taxpayers may be frustrated to find that the Notice may cause them to be subject to the Labor Requirements, but leaves many open questions as to their application. As described further below, the Notice does not flesh out the novel concepts introduced by the IRA; in many cases, the Notice simply refers to other legislation with similarly obtuse language. Adding fuel to the fire, the Notice indicates that additional guidance may be coming out in regulatory or other form — compounding taxpayer uncertainty and unwariness, as taxpayers will have to comply with the Labor Requirements before additional guidance is published.
A summary of certain notable topics covered in the Notice is below:
- Beginning of Construction Requirements: Unsurprisingly, taxpayers may rely on prior guidance in establishing beginning of construction for purposes of the Labor Requirements.
- While this is an obvious clarification, for some wary taxpayers it may alleviate concerns on this issue.
- Prevailing Wage
- The Notice states that taxpayers may rely on the prevailing wage determinations published on sam.gov.
- Additionally, the Notice provides an avenue for taxpayers to request prevailing wage determinations for job classifications not covered in existing prevailing wage determinations — if a prevailing wage determination for the geographic area and type of construction activity is not published on sam.gov, taxpayers may contact the Department of Labor, Wage and Hour Division via email at IRAprevailingwage@dol.gov to request a prevailing wage determination for the unlisted classification and may propose a labor classification and prevailing wage rate. However, the Notice provides no indication on how long that process may take or whether taxpayers may appeal any determination.
- The same email address above may be used for general taxpayer questions on prevailing wage determinations.
- The Notice also confirms that prevailing wages for qualified apprentices may be less than those for journeyworkers.
- “Wages” for this purpose are defined by reference to Davis-Bacon rules as including the basic hourly rate of pay plus fringe benefits, such as health benefits; retirement plan contributions; compensation for injuries or illness resulting from occupational activity; unemployment benefits; life insurance; disability insurance; vacation or holiday pay; defraying costs of apprenticeship or other similar programs; or other bona fide fringe benefits (but do not include benefits required by other Federal, state, or local law).
- “Construction, alteration, or repair” to which the prevailing wage requirement applies is also defined by reference to Davis-Bacon, as “construction, prosecution, completion, or repair,” which covers all types of work done on a particular building or work at the site thereof, including without limitation: altering, remodeling, installation, painting and decorating, manufacturing or furnishing of materials, articles, supplies or equipment on the site of the building or work, and certain types of transportation.
- This is one area where the Notice leaves more questions asked than answered, as it does not provide guidance applicable to renewable or clean energy facilities which are subject to the Labor Requirements, but instead simply cross references statutory language which does not neatly apply and, on its face, seems overly inclusive. In particular, the Notice does not give guidance with respect to the distinction between “repair” and “routine maintenance,” an area where prior guidance for general construction projects may not be easily applicable to renewable and clean energy facilities.
- Apprenticeship Requirements: The Notice provides that registered apprenticeship programs can be located at apprenticeship.gov/partner-finder and www.apprenticeship.gov/about-us/state-offices. These websites provide a search feature for taxpayers to locate apprenticeship programs based on location, occupation, and industry.
- As it relates to the good faith exception to the apprenticeship requirements, the Notice states that a taxpayer will be considered to have used good faith efforts if it requested an apprentice in accordance with “usual and customary business practices for registered apprenticeship programs in a particular industry.” Unfortunately, no information is offered as to what might be considered “usual and customary” and, since the use of apprentices in the clean energy industry is a novel requirement, what is usual and customary in the industry may not be well established. Further, the Notice does not provide guidance on circumstances in which a taxpayer would be considered to have intentionally disregarded the requirement, which would subject taxpayers to additional penalties in the event of a violation.
- Recordkeeping Requirements: The Notice cross references general record keeping rules in section 6001 of the Code for purposes of both the prevailing wage and apprenticeship requirements.
- With respect to the prevailing wage requirements, the Notice provides that taxpayers maintain and preserve “sufficient records, including books of account or records for work performed by contractors or subcontractors.”
- With respect to the apprenticeship requirements (including the good faith exception), the Notice requires that taxpayers maintain books of account or records for contractors or subcontractors of the taxpayer, as applicable, in “sufficient form.”
- The Notice does not provide guidance on what would be considered “sufficient” for purposes of the recordkeeping requirements. But, it should be assumed from the Notice (and the DOL FAQs) that taxpayers are required to obtain and maintain records from contractors and subcontractors and that those records must contain at least the names of the laborers and mechanics who performed work (and the type/classification of work performed), the wage rate for each of those laborers and mechanics, the hours worked in each classification, the number of labor hours worked by apprentices on that project, and the total labor hours worked on a project.
1 The Notice was published in the Federal Register on November 30, 2022.
2 The Department of Labor has also released a set of frequently asked questions on the prevailing wage and apprenticeship requirements (the “DOL FAQs”). The DOL FAQs contain a number of useful clarifications and explanations on how the Labor Requirements might apply; however, the Notice does not include all the same information or cross references as the DOL FAQs, so it is not clear to what extent taxpayers may rely on them.
3 There are more nuanced mechanics and requirements for certain tax credits (e.g., section 45Z of the Code); this alert focuses on the general requirements applicable to sections 45 and 48 of the Code.
4 Importantly, in early October 2022, Treasury released Notice 2022-51, 2022-43 IRB 331 (10/05/2022), requesting taxpayer comment on the Labor Requirements, along with a number of other notices requesting taxpayer comment on a myriad of other topics covered by the IRA (and released even more requests for taxpayer comment in early November 2022). We understand Treasury received, and is still receiving, thousands of comments from taxpayers — which will require a herculean effort to wade through. It does not appear that the Notice addresses many of the topics on which taxpayer comment was requested with respect to the Labor Requirements or otherwise.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.