Inflation Reduction Act: Opportunity for Increased Energy Tax Credits

The Inflation Reduction Act’s lucrative energy tax credits are even more beneficial for companies willing to meet the prevailing wage and apprenticeship (PWA) requirements.

By satisfying these requirements, you can increase the available credit or deduction to five times the base amount (for example, a 30% credit for energy property rather than a 6% credit). It’s a major benefit and one worth exploring if you’re interested in cashing in on even more credits.

The PWA benefits were designed to encourage adopting worker-centric practices, including project labor agreements. Understanding the rules and how your organization can qualify is a critical step towards capturing the full value of these credits.

Which Inflation Reduction Act (IRA) energy tax credits qualify?

The PWA benefits apply to:

• The energy-efficient commercial buildings deduction under Section 179D (credit repealed for property whose construction begins after June 30, 2026)
• The alternative fuel refueling property credit under Section 30C (credit repealed for property placed in service after June 30, 2026)
• The production tax credit under Section 45
• The new energy efficient home credit under Section 45L (credit repealed for property acquired after June 30, 2026)
• The credit for carbon oxide sequestration under Section 45Q
• The zero-emission nuclear power production credit under Section 45U (prevailing wage only)
• The credit for production of clean hydrogen under Section 45V (credit repealed for property whose construction begins after December 31, 2027)
• The clean electricity production credit under Section 45Y
• The clean fuel production credit under Section 45Z
• The investment tax credit under Section 48
• The advanced energy project credit under Section 48C
• The clean electricity investment credit under Section 48E

The IRA’s prevailing wage and apprenticeship rules

To receive the increased tax credit or deduction, taxpayers — including project developers — are generally required to:

• Pay prevailing wages
• Employ apprentices
• Require all contractors and subcontractors meet the rules
• Keep adequate book and records to document eligibility

Taxpayers must maintain and preserve records proving compliance with the applicable requirements. At a minimum, these records should include payroll records for each laborer and mechanic, including each qualified apprentice.

How is prevailing wage defined for the Inflation Reduction Act?

The IRA’s prevailing wage rules include:

• Laborers and mechanics employed by the taxpayer, contractor, or subcontractor in the construction, alteration, or repair of a facility must be paid the prevailing wage rates (or more) in the geographic area where the facility is located.
• Laborers and mechanics must be paid prevailing wage rates during the facility’s construction and alteration and repair work for up to a 10-year period following the date the facility was placed in service.
• All laborers and mechanics working on a qualified facility must be paid consistently with the regular payroll practices of the taxpayer, contractor, or subcontractor.
• The Department of Labor determines the applicable prevailing wage rates for each classification of laborers and mechanics in a prescribed geographic area for a particular type of construction.

IRA prevailing wage penalties and remedies

If a taxpayer fails to meet the prevailing wage requirements, they can correct it by paying workers back wages and interest owed and paying a penalty to the IRS.

The penalty structure is intended to create incentives for real-time compliance with the PWA requirements. The penalty is $5,000 per year for every laborer and mechanic who was not paid the prevailing rate. If the taxpayer intentionally disregarded the requirement, the penalty increases to $10,000 per employee.

If there’s a project labor agreement, the penalties are waived if the employee has been made whole.

If the IRS determines prevailing wage requirements aren’t met, the taxpayer has 180 days to make the correction and penalty payments. If the taxpayer fails to do so, they will not be assessed a penalty but instead will be denied the increased credit or deduction.

By satisfying these requirements, you can increase the available credit or deduction to five times the base amount (for example, a 30% credit for energy property rather than a 6% credit).

The IRA’s apprenticeship requirements

The Inflation Reduction Act’s apprenticeship requirements impose certain rules regarding labor hours, apprentice-to-journey worker ratios, and participation by qualified apprentices. They include:

• For projects beginning in 2024 and after, 15% of the hours must be performed by qualified apprentices
• For contractors or subcontractors with four or more workers on site (in total) throughout the entire project, they must employ at least one apprentice or qualify for a good faith exception
• All contractors and subcontractors must meet their applicable apprentice-to-journey worker ratios on a daily basis

IRA apprenticeship rules penalties and exceptions

If a taxpayer fails to satisfy the labor-hours or the participation requirement, they can pay an IRS apprenticeship cure provision penalty. The penalty is $50 multiplied by the total labor hours the requirements were not met. If the taxpayer intentionally disregarded the requirement, the penalty increases to $500 per hour.

Taxpayers can qualify for an exception in certain circumstances, including if a developer contacts an apprenticeship program and is denied the request or does not hear back. Additionally, if project construction began before January 29, 2023, taxpayers do not need to meet the PWA requirements to qualify for the increased credit.

The rules for contractors and subcontractors

The taxpayer is solely responsible for the PWA requirements. They must see that all relevant laborers and mechanics are paid at least the prevailing rate and that the apprenticeship requirements are satisfied, even if laborers and mechanics are the employees of a contractor or subcontractor.

Additionally, the taxpayer — and not the contractor or subcontractor — is responsible for recordkeeping and correction and penalty provisions, along with any apprenticeship exceptions.

Small project exception for energy tax credits

Small projects qualifying under the so-called one-megawatt exception (for facilities with a maximum net output of less than one megawatt as measured in alternating current) are eligible for the increased credit amount without having to meet the PWA requirements. The electrical generating unit’s nameplate capacity determines the exception.

How CLA can help with Inflation Reduction Act energy tax credits

The energy credits rules are complex — the PWA regulations alone are 323 pages — but these credits can provide significant tax saving opportunities. CLA’s energy tax services team is working with hundreds of organizations on navigating and capturing the IRA benefits. Contact us to learn how you might benefit.

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