On August 29, 2023, the IRS issued Reg-100908-23 to provide details on claiming bonus deductions or credits for energy efficiency (as outlined in the IRA bill) that require proof of prevailing wages and apprenticeship hours.
This newly issued guidance focuses on:
- Rules for implementing prevailing wage
- How to remedy when a project fails to meet these requirements
- The recordkeeping and reporting requirements to claim these incentives
This guidance applies to numerous incentives outlined in the IRA bill, but we will focus specifically on energy efficiency incentives such as 179D deductions and 45L tax credits, both of which Engineered Tax Services helps taxpayers claim.
Key Insights on Prevailing Wage (PW):
- Prevailing wages include both wages and fringe benefits.
- PW rates are determined based on the Davis Bacon Act.
- The taxpayer claiming the credits is solely responsible for tracking and reporting that all PW and apprenticeship rules are met—unlessthe credits are transferred, in which case the transferring party is responsible.
- PW rates in effect at the time of construction or repairs would apply.
- PW rates are published at https://www.sam.gov.
- For unique projects or geographic areas with no PW data, a rate determination must be requested from the Department of Labor.
- If PW is not met, the taxpayer can pay the employee the difference between what they were paid and PW, plus interest, plus a $5,000 penalty per person.
In order to meet apprenticeship requirements, taxpayers must comply with three rules:
- The applicable percentage of labor hours (a percentage of 10-15% labor hours worked by apprentices as compared to total labor hours) must be met.
- Ratio requirements must be met between apprentices and journey persons.
- A participation requirement of four employees to every one apprentice must be met.
It is important to note that apprentices must be assigned by a qualified apprenticeship program.
This recent IRS guidance also provides clarification of the good faith exceptions that apply if an apprentice request is denied.
The bonus deduction for 179D, which increases from $0.50-$1.00 per square foot to $2.50-$5.00 per square foot, can be claimed only if prevailing wages have been paid and documented for all laborers. Additionally, the appropriate number of qualified apprentices must have worked on these projects. These rules apply to projects that began construction after January 29, 2023.
For 45L credits applying to multi-family projects, the base credit of $500 can increase to either $2,500 or $5,000, depending on the level of energy efficiency achieved and whether prevailing wage requirements were met. Note that apprenticeship requirements are not applicable for residential and multi-family projects.
For more information on these regulations, please visit our website for direct links.