A Contractors’ Guide to Tax Credits & Energy Incentives

Contractors equipped to help clean energy project owners seize opportunities presented by the Inflation Reduction Act (IRA) will be in high demand.

Clean energy projects are ramping up as organizations prioritize energy-efficient buildings to meet environmental, social and governance (ESG) goals and take advantage of tax benefits provided under the 2022 Inflation Reduction Act, the largest energy incentive in U.S. history. What some might not realize, however, is that clean energy projects that comply with prevailing wage and apprenticeship (PW&A) requirements under the IRA are eligible for a five-times (5x) enhanced credit.

The scope of eligible energy properties spans a wide range such as wind, solar, geothermal, combined heat and power, energy storage, electric vehicles, charging stations and renewable fuels. Likewise, eligibility for tax credits extends beyond traditional energy production or manufacturing facilities, constituting a broad array of projects and, in a significant departure from previous tax credit programs, the IRA benefits private and public sector projects. Private sector owners can leverage tax credits as a direct offset to federal tax liabilities for eligible energy properties. Nontaxable entities, such as local governments and not-for-profit organizations, can receive direct payments from the IRS. This transformative change has unlocked new opportunities for entities that were previously unable to capitalize on tax credit incentives.

While credits are limited to project owners, contractors and subcontractors who understand and adhere to the IRA PW&A requirements have a significant competitive advantage in securing contracts and should educate themselves on the parameters and nuances.

PW&A is the most powerful bonus credit under the IRA. At a high level, to receive the enhanced PW&A credit, organizations are required to pay all skilled trade workers the federal prevailing wage, a combination of hourly pay and benefits, and employ qualified apprentices during construction. To put the significance of the 5x multiplier into perspective, consider a $5.4 million eligible property: This property could either receive a base credit of $324,000 or a $1.62 million credit if it meets the project PW&A requirements.

What Contractors Need to Know About PW&A

While PW&A guidelines may seem similar to Davis-Bacon at first glance, they are, in fact, quite different and extremely complex. The IRA operates independently of labor laws such as Davis-Bacon, albeit with alignment on certain foundational principles. Davis-Bacon provides a framework for definitions of both laborer and mechanic and how wage determinations are established; however, the rules and regulations under the IRA diverge significantly. Notably, taxpayers assume a pivotal role as agents, responsible for establishing wage determinations, initiating construction and maintaining meticulous records based on long-standing tax guidance.

Within the IRA, PW&A compliance entails navigating three tiers of apprenticeship requirements and taxpayer penalties for noncompliance, including post-construction alterations or repairs. Proactive management of compliance requires projects to have efforts in place prior to construction to establish a plan and educate all contractors and subcontractors. During the construction phase, it’s important to monitor and cure noncompliance, to minimize penalties paid to the Treasury, and avoid maximum penalties of intentional disregard, all of which are paid by the credit seeker.

To receive an allocation of this tax credit, a project will need to continually evaluate compliance of prevailing wage, apprenticeship and penalties, and adhere to stringent recordkeeping requirements throughout the recapture period of five to 10 years. The burden of recordkeeping and potential IRS audits further underscores the criticality of taxpayer responsibility.

Prevailing Wage

To meet IRA PW&A requirements, projects are required to follow the federal prevailing wages and maintain and preserve sufficient records to demonstrate prevailing wages were paid. By definition, prevailing wage is the combined hourly rate of wages and benefits paid to workers in a specific labor classification, on a specific type of construction in the geographic area where the construction is performed, as determined by the secretary of labor.

Prevailing wage rates are locked in at the start of construction unless a substantial change of scope occurs. Wage determination requests should ideally be made within 90 days before construction starts.

Apprenticeship Requirements

PW&A has three distinct apprenticeship requirements: labor hour requirement, participation requirement and ratio requirement. At a project level, there is a labor hour requirement in which a certain percentage of work (10% to 15%) must be completed by qualified apprentices enrolled in a registered apprentice program (RAP). The percentage requirement is determined by the construction start date.

At a contractor level, there is a participation requirement that stipulates that any contractor who employs four or more individuals at any point during the project must employ at least one qualified apprentice to avoid penalties. There are three options for contractors to meet the participation requirement: enroll an employee in a group RAP, create your own RAP or request a good-faith exception, which comes with its own set of stringent rules.

At a daily level, there is a ratio requirement that stipulates that each day an apprentice is working on the project, the applicable apprentice-to-journey-worker ratio must be met. Careful planning is required to ensure the project is adequately staffed in compliance with the ratio. If an apprentice ratio is violated, the excess apprentice hours must be paid at full prevailing wage, and the apprentice hours do not count toward the labor hour requirement.

Contractors must maintain and preserve sufficient records to prove that apprentice labor hour, participation and ratio requirements were met, or risk noncompliance or intentional disregard PW&A penalties. Waivers for prevailing wage penalties exist but come with specific requirements, including paying a correction payment within 30 days from when the taxpayer is aware of the error, again emphasizing the need for diligence in compliance monitoring and recordkeeping.

Turning Challenges Into Opportunities

The apprenticeship requirement presents challenges for many contractors because apprenticeship is not the standard for training in all geographic areas of the country. Contractors who do not employ apprentices are not prohibited from working on IRA eligible projects, but they must request an apprentice from a RAP to demonstrate a good-faith-effort exemption. If your company participates in a registered apprenticeship program, this is an important qualifier and one to actively promote.

Every contractor is capable of meeting the prevailing wage requirement if they are using the proper wage determination sheet, which should be provided by the credit seeker. However, many contractors and developers do not have experience working on Davis-Bacon projects, so there is a basic lack of understanding of who is covered by prevailing wages and how to calculate fringes and pay apprentices. Contractors are advised to seek outside help to navigate the opportunities and manage the complexities of PW&A compliance.

Contractors Play a Pivotal Role in Maximizing Tax Credits 
for Clients

Contractors who understand the fundamentals of eligible energy properties included in IRA have a prime business development opportunity. Given that some architects and engineers may not fully grasp IRA energy credits yet, contractors can seize the chance to integrate clean energy elements into both private and public sector projects and help project owners navigate complex requirements to take advantage of lucrative tax incentives. In addition, as project owners, investors and clients pursue the rewarding credits available through IRA, there is an increased demand for contractors who are able to meet the rigorous prevailing wage and apprenticeship requirements that result in the 5x enhanced credit.