General Requirements of the Inflation Reduction Act

The General Requirements of the Inflation Reduction Act outline key provisions and criteria that businesses must meet to qualify for the various tax incentives and benefits aimed at promoting clean energy and sustainability.

What credits or deductions may be increased if prevailing wage and apprenticeship requirements are satisfied?

The IRA makes several clean energy tax incentives available to taxpayers that satisfy certain prevailing wage and apprenticeship requirements. In general, a taxpayer that meets the prevailing wage and apprenticeship requirements with respect to a qualified facility, project, property, or equipment, as applicable (referred to generally in these FAQs as a facility) will multiply the base amount of the tax incentive (credit or deduction) by five.

What are the prevailing wage requirements of the IRA?

The prevailing wage requirements of the IRA provide that taxpayers must ensure that all laborers and mechanics employed by the taxpayer (or any contractor or subcontractor) on the construction, alteration, or repair of a qualified facility are paid wages at rates that are not less than the prevailing rates determined by the Department of Labor in accordance with subchapter IV of chapter 31 of title 40 of the U.S. Code (the Davis-Bacon Act) for the type of work performed in the geographic area of the facility.

What are the apprenticeship requirements of the IRA?

The apprenticeship requirements of the IRA include three components — a labor hours requirement, a ratio requirement, and a participation requirement. Under the labor hours requirement, the taxpayer must ensure that a minimum percentage of the total labor hours performed on the construction, alteration, or repair of a facility are performed by qualified apprentices from a registered apprenticeship program. The applicable percentage is 10% for construction beginning before 2023, 12.5% for construction beginning in 2023, and 15% for construction beginning in 2024 or after. Under the ratio requirement, the taxpayer must ensure that the applicable ratio of apprentices to journeyworkers established by the registered apprenticeship program are met for apprentices working on the facility each day. Under the participation requirement, any taxpayer, contractor, or subcontractor that employs 4 or more individuals at any time during the course of the construction, alteration, or repair of the facility must hire at least one qualified apprentice.

The apprenticeship requirements only apply with respect to construction, alteration, or repair of a facility that occurs prior to the facility being placed in service. There are no apprenticeship requirements with respect to alterations or repairs after a facility is placed in service.

Are there expectations to the prevailing wage and apprenticeship requirements enacted as part of the IRA?

Yes, there are two statutory provisions that provide for increased credit or deduction amounts without satisfying the prevailing wage and apprenticeship requirements. They are the one-megawatt exception and the beginning of construction exception.

1. Under the one megawatt exception in section 45 a qualified facility that has a maximum net output of less than one megawatt of (as measured in alternating current) is eligible for the increased credit amount without satisfying the prevailing wage and apprenticeship requirements. Similar exceptions apply for a qualified facility with a maximum net output of less than one megawatt (as measured in alternating current) under sections 45Y and 48E, an energy project with a maximum net output of less than one megawatt of electrical (as measured in alternating current) or thermal energy under section 48, and energy storage technology with a capacity of less than one megawatt under section 48E.

2. Under the beginning of construction exception for the credits under sections 30C, 45, 45Q, 45V, 45Y, 48, 48E, and the deduction under 179D, a taxpayer that begins construction or installation of a facility before January 29, 2023, may be eligible for the increased credit or deduction amount without needing to satisfy the prevailing wage and apprenticeship requirements.

When do the prevailing wage and apprenticeship requirements begin to apply with respect to the construction, alteration, or repair of a facility?

Under a transition rule in the final regulations, any work performed before January 29, 2023, is not subject to the prevailing wage and apprenticeship requirements, regardless of whether there is a beginning of construction exception for the applicable credit or deduction. Under this transition rule, taxpayers must only satisfy the prevailing wage and apprenticeship requirements (as applicable) for construction, alteration, or repair work occurring on or after January 29, 2023. The transition rule does not alter the beginning of construction exception. Taxpayers claiming an increased credit amount under sections 30C, 45, 45Q, 45V, 45Y, 48, 48E, or an increased deduction amount under section 179D are excepted from the prevailing wage and apprenticeship requirements if the taxpayer began construction or installation of a facility before January 29, 2023.

What does construction, alteration, or repair mean for purposes of the IRA prevailing wage and apprenticeship requirements?

The term construction, alteration, or repair generally means those activities that are considered “construction, prosecution, completion, or repair” as defined by the Davis Bacon Act and U.S. Department of Labor (DOL) guidance thereunder and that are performed with respect to a facility. Repair work normally includes an activity that improves the facility, either by fixing something that is not functioning properly or by improving upon the facility’s existing condition; involves the correction of individual problems or defects as separate and segregable incidents and is not continuous or recurring; or improves the facility’s structural strength, stability, safety, capacity, efficiency, or usefulness.

Construction, alteration, or repair work does not include maintenance work after a facility is placed in service. Maintenance is work that is ordinary and regular in nature and designed to maintain existing functionalities of a facility such as regular inspections of the facility, regular cleaning and janitorial work, regular replacement of materials with limited lifespans such as filters and light bulbs, and the regular calibration of equipment. Generally, work that improves the current condition or function of a facility is considered an alteration or repair and not maintenance work.

Who is considered employed for purposes of the IRA prevailing wage requirements?

For purposes of the prevailing wage requirements, a laborer or mechanic is considered employed by the taxpayer, contractor, or subcontractor if the individual performs the duties of a laborer or mechanic for the taxpayer, contractor, or subcontractor regardless of whether the individual would be characterized as an employee or an independent contractor for other Federal tax purposes. The definition of employed for purposes of the prevailing wage requirements is generally different and broader than the definition used elsewhere in the Code, for example with respect to employment taxes, as well as the associated reporting and withholding obligations. Laborers and mechanics who are independent contractors for employment tax purposes may be considered employed for purposes of the IRA prevailing wage requirements.

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