The Inflation Reduction Act (IRA) was signed into law by President Biden on August 16, 2022. The Act creates new investment incentives, market structures and adds more flexibility for clean energy technology developers and investors.
The new tax credit structure of the IRA has led to a quest for clarification. and over a series of opinion pieces I aim to distill the key changes and highlight what to expect as the market adapts to this new environment. In my first piece, Navigating the Inflation Reduction Act I took a brief look at the high-level changes impacting solar, wind, battery storage, hydrogen and carbon capture.
Last week, the IRS issued guidance for the prevailing wage and apprenticeship requirements. These requirements are key drivers of the final credit value. A failure to comply could lead to an 80% reduction in the credit value, being both the full credit value and additional bonus credits. The guidance is available here but I have included the key takeaways to save you time.
- The clock starts ticking now. Developers must start construction within 60 days of the notice to receive full value of the credit without meeting the requirements.
- The current two methods a taxpayer can use to establish the beginning of construction of a facility being the Physical Work Test or the Five Percent Safe Harbor. This current practice for counting start of construction remains intact, except that the continuity safe harbor is stepping down to four years
- Continuity safe harbor
- 4 years as the standard for projects claiming ITC or PTC. During Covid, 5 years was applied to projects starting construction in 2020, and 6 years for projects starting construction in 2016-2019
- 6 years for projects claiming 45Q
- 10 years for certain offshore projects and projects built on federal land
- Wage requirements can extend beyond the construction costs if alterations or repairs take place while receiving tax credits.
- Paying for compliance is one way to satisfy the criteria for both requirements
- Continuity safe harbor
A narrowing window to receive full value and avoid requirements
The publication of the guidance means projects starting construction in the 60-day period from the publication (up until January 29, 2023) will receive the full value of the credit without satisfying with the wage and apprenticeship requirements. Most categories of tax credits have to comply with both requirements. The only exempted credits are the zero-emission nuclear power and energy efficient home credit (apprenticeship only), while the advanced manufacturing PTC is exempted from both.
This means most projects in the near-term will need to ensure they fulfill the following two requirements. Both these requirements apply to construction, alterations, and repairs of the project during the tax credit period.
- The prevailing wage requirement depends on the type of construction and project location. A government site is referenced as a tool to find comparable wages, and if the information is missing, a wage determination can be requested.
- Apprenticeship requirements are based on the total labor hours. In 2022 it equals 10% and steps up to 12.5% in 2023 and 15% afterwards.
Penalties to remain in good standing
- Penalties to remedy for not paying prevailing wages are referenced in the original IRA bill. A company could still satisfy the requirement if the difference between the actual and prevailing wage, interest, and an additional $5,000 for every laborer compensated below the prevailing wage are all
- Certain exceptions are made if the company made the effort to hire apprentices (referred to as Good Faith Effort Exception). Lastly, a penalty of $50 per labor hour below the required threshold can be paid. In cases of intentional disregard, the penalty increases to $500.
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