The Inflation Reduction Act introduced or expanded various tax rules—deductions and credits—related to green energy. Basic write-offs can be supercharged if employers involved in certain construction activities meet prevailing wage and apprenticeship (PWA) requirements. For example, the basic deduction for an energy-efficient commercial building that achieves a 50% reduction in energy and power costs in 2023 is $1.07/sq. ft., but can be as much as $5.36/sq. ft. if the PWA requirements are met.
The 9th annual National Apprenticeship Week runs from November 13 through 19, 2023, and reminds employers about the benefits of using apprenticeship programs in general, but tax incentives make it more so. Now is a great time for employers to understand prevailing wage and apprenticeship requirements in order to maximize tax write-offs to which they may be entitled.
Tax breaks subject to PWA requirements
There are a dozen tax breaks that can be enhanced if employers meet PWA requirements. Most of these breaks are designed for large corporations, such as those related to nuclear energy, but some may be applicable to small businesses, such as the ones listed below.
Increased credit and deduction amounts apply if PWA requirements are met with respect to:
- Alternative fuel vehicle refueling property credit (which can be used to install charging stations at a business location). The basic 6% credit rate increases to 30% if PWA requirements are met.
- Energy-efficient commercial buildings deduction (which applies to improvements that achieve certain energy standards). The increased deduction limit is listed earlier.
- Investment tax credit for energy property (which can be used to install solar panels on commercial buildings). The basic 6% credit rate increases to 30% if PWA requirements are met.
The energy-efficient home credit for contractors that build or substantially rehabilitate single or multi-family homes is increased if the prevailing wage requirement is met; the apprenticeship requirement doesn’t apply. The basic amount of the credit is $500 a unit or $1,000 a unit, depending on energy standards, but can increase to $2,500 a unit, or $5,000 a unit, respectively.
Terminology
Understanding the lingo is step one in meeting the rules to qualify for an enhanced write-off.
- Prevailing wage requirement. All laborers and mechanics employed taxpayer(or any contractor or subcontractor) on the construction, alteration, or repair of a qualified facility, project, property, or equipment (hereafter referred to as facility) are paid wages at rates that are not less than the prevailing rates determined by the U.S. Department of Labor for the work performed in the geographic area of the project.
- Apprenticeship requirement. An employer with 4 or more employees performing construction, alteration, or repair work on a facility must employ one or more qualified apprentices. A minimum percentage of the total labor hours of the construction, alteration, or repair work must be performed by qualified apprentices from a registered apprenticeship program: 12.5% percent for facilities beginning construction in 2023 and 15% for facilities beginning construction in 2024 or after.
How to proceed
The next step is to address each requirement:
- To determine the prevailing wage requirement for your project, use SAM.gov a portal of the DOL. Essentially, the rate found through SAM.gov is set in accordance with the Davis-Bacon Act—first enacted in 1931, with the latest update effective October 23, 2023—that governs labor standards on federal construction projects.
- To meet the apprenticeship requirement, a taxpayer, contractor, or subcontractor must submit a written required for a qualified apprentice. This is done through Apprenticeship.gov. If there’s no response or a request is denied within 120 days of the request, the employer is deemed to have exercised a good faith effort and can qualify for the enhanced tax break without an apprentice.
As with all tax write-offs, it’s essential to keep good records. Special recordkeeping requirements apply to PWA requirements.
- For prevailing wage requirement. The employer must keep records include payroll records that reflect the hours worked in each classification and the actual wages and fringe benefits paid to each laborer and mechanic performing construction, alteration, or repair work on the facility.
- For apprenticeship purposes. The employer must keep records that include copies of any written requests for apprentices, any agreement entered by the employer with a registered apprenticeship program, documents reflecting any registered apprenticeship program sponsored by the employer, documents verifying participation in a registered apprenticeship program by each apprentice, records reflecting the required ratio of apprentices to journeyworkers prescribed by each registered apprenticeship program from which qualified apprentices are employed, records reflecting the daily ratio of apprentices to journeyworkers, and the payroll records for any work performed by apprentices.
Resources to help with PWA requirements
The IRS and DOL have resources to assist employers trying to comply with PWA requirements.
- DOL FAQs on PWA requirements (scroll down)
- DOL guide to finding wage determination on sam.gov
- DOL webinar on Inflation Reduction Act Prevailing Wage and Apprenticeship Requirements
- IRS FAQs on PWA requirements
- IRS Publication 5855, Prevailing Wage & Apprenticeship Overview
- Proposed regulations
Final thought
If you are engaging in any projects to reduce energy use or are thinking about it, don’t wait until it’s time to prepare your tax return to discuss matters with a CPA or other tax adviser. You may lose out on increased write-offs had you known about the rules and taken actions to comply with the PWA requirements.
To read more about tax breaks, see earlier published blogs.
