One of the main objectives of the Prevailing Wage and Apprenticeship (PWA) requirements in the Inflation Reduction Act (IRA) is to foster the growth of good-paying jobs in the energy sector in the United States. The IRA mandates that for taxpayers to qualify for the full range of clean energy tax incentives, they must adhere to PWA standards during the construction of projects. This ensures that laborers and mechanics are paid a prevailing wage, and an adequate number of apprentices are employed from registered apprenticeship programs. These standards aim to promote high-quality jobs and robust training opportunities, which are critical for building a skilled workforce to support the expanding clean energy industry.
To qualify for increased credit or deduction amounts of certain clean energy tax incentives, taxpayers generally need to:
- Pay laborers and mechanics employed in construction, alteration or repair no less than applicable prevailing wage rates.
- Employ apprentices from registered apprenticeship programs for a certain number of hours
Overwhelmed by the jargon? No worries, I’ll break down the nuances of Prevailing Wages and Apprenticeship requirements for clean energy projects.
Prevailing Wages:
The Department of Labor sets prevailing wage rates for various labor classifications in specified geographic areas. For instance, an electrician in Austin, Texas, might have a different prevailing wage than one in Portland, Oregon. If there’s no general wage determination available, taxpayers can seek a supplemental wage determination from the DOL. By meeting prevailing wage and apprenticeship requirements under the Inflation Reduction Act of 2022, taxpayers can increase the base amounts of these incentives by 5 times.
Apprenticeship Requirements:
The apprenticeship requirement for each taxpayer, whether a contractor or subcontractor of the project, encompasses the following three principal requirements
Labor Hours Requirement:
Under the labor hours requirement of the IRA, it’s essential for taxpayers to ensure a significant portion of labor is carried out by apprentices. Specifically, depending on the project’s start date, either 12.5% or 15% of all labor hours dedicated to construction or repair must be executed by qualified apprentices from registered programs. For projects commencing construction in 2023, the IRA requires 12.5% of total labor hours to be completed by qualified apprentices. This requirement escalates to 15% for projects starting in 2024 or later. This guarantees a substantial, hands-on role for apprentices in these projects, providing them with invaluable practical experience in the field.
Ratio Requirement:
The IRA mandates a ratio requirement for taxpayers to meet the designated apprentice-to-journey-worker ratios, as defined by registered apprenticeship programs. This ensures apprentices working on a facility daily receive the mentorship and guidance necessary for effective learning and quality workmanship, contributing to a well-trained workforce for the future of the energy sector.
Participation Requirement:
The participation requirement of the IRA stipulates that any entity involved in a project—be it a taxpayer, contractor, or subcontractor—employing four or more laborers or mechanics must also hire at least one qualified apprentice. This rule ensures the integration of new talent into every significant project, fostering a learning environment and contributing to the development of a skilled workforce in the energy sector.
There are limited exceptions where taxpayers may be eligible to claim the 5-times increase without meeting prevailing wage and apprenticeship requirements:
- Certain small facilities that produce clean energy under 1 megawatt
- Facilities that began construction before Jan. 29, 2023
The table below offers a comprehensive look at how tax credits for diverse clean energy projects fluctuate based on adherence to PWA (Prevailing Wage and Apprenticeship) standards.
Documentation:
Taxpayers looking to benefit from enhanced tax incentives under the prevailing wage and apprenticeship requirements must adhere to stringent recordkeeping protocols. This includes detailed documentation of the employment terms for laborers, mechanics, and apprentices—spanning from hourly rates and hours worked to wage deductions and actual wages paid and extending to similar records for contractors and subcontractors. Such meticulous recordkeeping is vital for compliance and to substantiate the claim for increased tax credits.
Note:
- Taxpayers not meeting the prevailing wage and apprenticeship standards can still claim increased tax incentives by making correction and penalty payments. For prevailing wage discrepancies, taxpayers must compensate affected workers with back pay plus interest and may incur IRS penalties. For apprenticeship shortfalls, a penalty payment to the IRS is required. If non-compliance is intentional, more severe penalties apply.
- Penalties related to failing to meet prevailing wage and apprenticeship requirements might be waived for taxpayers who employ workers under a project labor agreement that fulfills specific criteria.
I trust this post has provided clarity on the mechanics of prevailing wages and apprenticeship requirements and how meeting these criteria can amplify tax incentives and positively influence the labor market.
