Part IV

Increased Credit or Deduction Amounts for Satisfying Certain Prevailing Wage and Registered Apprenticeship Requirements

REG-100908-23

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and public hearing.

SUMMARY: This document contains proposed regulations regarding increased credit or deduction amounts available for taxpayers satisfying prevailing wage and registered apprenticeship (collectively, PWA) requirements established by the Inflation Reduction Act of 2022 (IRA). These proposed regulations would affect taxpayers intending to satisfy the PWA requirements for increased Federal income tax credits or deductions. These proposed regulations would also affect taxpayers intending to satisfy the prevailing wage requirements for increased Federal income tax credit amounts that do not have associated apprenticeship requirements. Additionally, these proposed regulations would affect taxpayers who initially fail to satisfy the PWA or prevailing wage requirements and subsequently comply with the correction and penalty procedures in order to be deemed to satisfy the PWA or prevailing wage requirements. Finally, the proposed regulations address specific PWA or prevailing wage recordkeeping and reporting requirements. The proposed regulations would affect taxpayers intending to claim increased credit or deduction amounts pursuant to the IRA, including those intending to make elective payment elections for available credit amounts, and those intending to transfer increased credit amounts. This document

also provides notice of a public hearing on the proposed regulations.

DATES: Written or electronic comments and requests for a public hearing must be received by October 30, 2023. A public hearing on these proposed regulations is scheduled to be held on November 21, 2023, at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by October 30, 2023. If no outlines are received by October 30, 2023, the public hearing will be cancelled. Requests to attend the public hearing must be received by 5 p.m. ET on November 17, 2023. The public hearing will be made accessible to people with disabilities. Requests for special assistance during the hearing must be received by November 16, 2023.

ADDRESSES : Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at https://www.regulations (indicate IRS and REG-100908-23) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS’s public docket. Send paper submissions to: CC:PA:LPD:PR (REG-100908-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, the Office of Associate Chief Counsel (Passthroughs & Special Industries) at (202) 317-6853 (not a tollfree number); concerning submissions of comments or the public hearing, Vivian Hayes at (202) 317-6901 (not a toll-free

number) or by email to publichearings@ irs.gov (preferred).

SUPPLEMENTARY INFORMATION:

Background

I. Overview

This document contains proposed regulations to amend the Income Tax Regulations (26 CFR part 1) under sections 30C, 45, 45L, 45U, 45V, 45Y, 45Z, 48C, 48E, and 179D of the Internal Revenue Code (Code) and proposed amendments to the Income Tax Regulations (26 CFR part

1. under sections 45Q and 48 (proposed regulations). The Inflation Reduction Act of 2022 (IRA), Public Law 117-169, 136 Stat. 1818 (August 16, 2022), amended sections 30C, 45, 45L, 45Q, 48, 48C, and 179D to provide increased credit or deduction amounts for taxpayers who satisfy certain requirements and added sections 45U, 45V, 45Y, 45Z, and 48E to the Code to provide new credits, which also contain provisions for increased credit amounts for taxpayers who satisfy certain requirements. Increased credit amounts are available under sections 30C, 45, 45Q, 45V, 45Y, 45Z, 48, 48C, and 48E, and an increased deduction is available under section 179D, for taxpayers satisfying certain prevailing wage and registered apprenticeship (PWA) requirements. Increased credit amounts are available under sections 45L and 45U for taxpayers satisfying certain prevailing wage requirements. ¹ The IRA includes correction and penalty provisions available in certain situations if taxpayers have failed to satisfy the PWA requirements, and they are not otherwise eligible for the increased credit or deduction because they do not qualify for an exception.

The increased credit amounts are also generally available under sections 45, 45Y, 48, and 48E with respect to certain facilities with a maximum net output (or capacity for energy storage technology under

1 The increased credit provisions in sections 45L and 45U do not contain apprenticeship requirements. For simplicity, where possible, the preamble to the proposed regulations uses the acro- nym PWA to refer to the prevailing wage and apprenticeship requirements generally, including the prevailing wage requirements in sections 45L and 45U.

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section 48E) of less than one megawatt (One Megawatt Exception). Additionally, increased credit and deduction amounts are available under sections 30C, 45, 45Q, 45V, 45Y, 48, 48E and 179D if beginning of installation or beginning of construction (BOC) occurs before January 29, 2023 (BOC Exception).

II. Prior Guidance

On October 24, 2022, the Treasury Department and the IRS issued Notice 2022-51, 2022-43 I.R.B. 331, requesting comments on aspects of the increased credits and deduction amounts enacted by the IRA, including the PWA provisions. Section 3.01 of Notice 2022-51 requested comments regarding the applicability of subchapter IV of chapter 31 of title 40 of the United States Code, which is commonly known as the DavisBacon Act; the special correction and penalty procedures generally provided for under section 45(b)(7)(B); any documentation or substantiation that should be required to show compliance with the prevailing wage requirements; and any other topics relating to the prevailing wage requirements that may require guidance. Section 3.02 of Notice 2022-51 requested comments addressing factors to be considered in regard to the appropriate duration of employment of individuals for construction, alteration, or repair work for purposes of the Participation Requirement; clarification regarding the Good Faith Effort Exception; factors to be considered in administering and promoting compliance with the Good Faith Effort Exception; whether methods exist to facilitate reporting requirements for the Good Faith Effort Exception; documentation or substantiation taxpayers maintain or could create to demonstrate compliance with the apprenticeship requirements or the Good Faith Effort Exception; and any other topics relating to the apprenticeship requirements that may require guidance. Comments received in response to Notice 2022-51 were considered in the drafting of these proposed regulations.

On November 30, 2022, the Treasury Department and the IRS published Notice 2022-61. 87 FR 73580, corrected in 87 FR 75141 (Dec. 7, 2022). Notice 2022-61 provided guidance on the PWA requirements that generally apply under sections 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E, and 179D. Additionally, Notice 2022-61 established the 60-day period described in sections 30C(g)(1)(C) (i), 45(b)(6)(B)(ii), 45Q(h)(2), 45V(e)(2) (A)(i), 45Y(a)(2)(B)(ii), 48(a)(9)(B)(ii), 48E(a)(2)(A)(ii)(II) and (a)(2)(B)(ii)(II), and 179D(b)(3)(B)(i). Specifically, Notice 2022-61 started the 60-day period applicable for determining if taxpayers qualify for the increased credit or deduction amounts by satisfying the BOC Exception. To be eligible for the BOC Exception, as indicated in Notice 2022-61, taxpayers must have begun construction or installation of a facility (as defined in Notice 2022-61) before January 29, 2023. Finally, Notice 2022-61 provided guidance for determining the beginning of construction under sections 30C, 45, 45Q, 45V, 45Y, 48, and 48E, and the beginning of installation under section 179D.

III. Inflation Reduction Act

A. In general

Prior to enactment of the IRA, the Code provided for certain temporary credits and deductions with respect to energy related facilities, projects, equipment, and investments under sections 30C, 45, 45L, 45Q, 48, 48C, and 179D. Congress had extended these provisions multiple times and for varying types of qualified facilities, energy projects, equipment, and investments. The IRA further amended these sections, generally adjusting the credit or deduction amounts, expiration dates, and qualifying activities. Under the IRA, Congress also enacted new credits under sections 45U, 45V, 45Y, 45Z, (production tax credits) and 48E (investment tax credit).

The IRA provides increased credit or deduction amounts that generally apply

for taxpayers who satisfy (i) certain PWA requirements regarding the construction, installation, alteration, or repair of a qualified facility, qualified property, qualified project, or qualified equipment, or with respect to certain facilities, (ii) the One Megawatt Exception, or (iii) the BOC Exception. Generally, if a taxpayer satisfies the PWA requirements or meets the One Megawatt Exception or the BOC Exception, the amount of credit or deduction determined is equal to the otherwise determined amount of the underlying credit or deduction multiplied by five.

B. PWA provisions

1. In General

The principal PWA requirements are set forth in section 45(b)(6), (7), and (8). In general, section 45(b)(6) provides the increased credit amount for taxpayers satisfying the PWA requirements or meeting one of the exceptions, section 45(b)(7) provides the prevailing wage requirements (Prevailing Wage Requirements), and section 45(b)(8) provides the apprenticeship requirements (Apprenticeship Requirements). ²

Section 45 provides a credit for taxpayers producing and selling electricity from renewable resources to unrelated persons during the taxable year (section 45 credit). The section 45 credit is generally equal to 0.3 cents multiplied by the kilowatt hours of electricity (i) produced by the taxpayer from qualified energy resources and at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service, and (ii) sold by the taxpayer to an unrelated person during the taxable year. If a taxpayer satisfies the PWA requirements, the One Megawatt Exception, or the BOC Exception, then the credit determined under section 45(a) for electricity produced at a qualified facility is multiplied by five.

2. Prevailing Wage Requirements

Under section 45(b)(6), in the case of a qualified facility that satisfies the PWA

2 The prevailing wage requirements in sections 30C(g), 45L(g), 45Q(h), 45U(d), 45V(e), 48(a)(10), 48C(e), and 179D(b) are substantially similar to the requirements provided under section 45(b)(7). Sections 45Y(g)(9) and 45Z(f)(6)(A) adopt by cross-reference the Prevailing Wage Requirements under section 45(b)(7). Section 48E(d)(3) adopts by cross-reference the Prevailing Wage Requirements under section 48(a)(10). Section 48(a)(10) provides for a special 5-year recapture rule that applies for purposes of the prevailing wage requirements with respect to sections 48 and 48E.

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requirements of section 45(b)(7) and (b) (8), the One Megawatt Exception, or the BOC Exception, the credit under section 45(a) “shall be equal to such amount multiplied by five.” Section 45(b)(7)(A) provides that with respect to any qualified facility, the taxpayer shall ensure that any laborers and mechanics employed by the taxpayer or any contractor or subcontractor in – (i) the construction of such facility, and (ii) with respect to any taxable year, for any portion of such taxable year that is within the 10-year period beginning on the date the qualified facility is originally placed in service, the alteration or repair of such facility, shall be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor, in accordance with subchapter IV of chapter 31 of title 40, United States Code.

3. Correction and Penalty Related to Failure to Satisfy Prevailing Wage Requirements

Under section 45(b)(7)(B), a taxpayer who is not eligible for the One Megawatt Exception or the BOC Exception and fails to satisfy the Prevailing Wage Requirements under section 45(b)(7)(A) is “deemed” to have satisfied those requirements if, for “any laborer or mechanic who was paid wages at a rate below the

[required prevailing rate] for any period” during any year of the construction, alteration, or repair of the facility, the taxpayer makes a correction payment to the laborer or mechanic and pays a penalty to the Secretary of the Treasury or her delegate (Secretary). Under section 45(b)(7)(B)(i) (I), the amount of the correction payment is the sum of (i) the difference between the amount of wages paid to the laborer or mechanic during the period and the amount of wages required to be paid to the laborer or mechanic during that period in order to meet the Prevailing Wage Requirements; and (ii) interest on the amount under (i) at the underpayment rate established under

section 6621 (determined by substituting “6 percentage points” for “3 percentage points” in section 6621(a)(2)) for the applicable period.

Under section 45(b)(7)(B)(i)(II), the amount of the penalty is “$5,000 multiplied by the total number of laborers and mechanics who were paid wages at a rate below the [prevailing wage] rate described in [section 45(b)(7)(A)] for any period” during the year. Deficiency procedures do not apply “with respect to the assessment or collection” of this penalty pursuant to section 45(b)(7)(B)(ii).

Under section 45(b)(7)(B)(iii), if the Secretary determines that the failure to satisfy the Prevailing Wage Requirements is due to “intentional disregard” of those requirements, then the correction payment to the laborer or mechanic is three times the amount that would otherwise be determined under section 45(b)(7)(B)(i)(I), and $10,000 is substituted for $5,000 in calculating the penalty under section 45(b)(7) (B)(i)(II).

Section 45(b)(7)(B)(iv) provides that, “pursuant to rules issued by the Secretary, in the case of a final determination by the Secretary with respect to any failure . . . to satisfy [the Prevailing Wage Requirements],” the correction and penalty provisions do not apply, “unless the payments . . . are made by the taxpayer on or before the date which is 180 days after the date of such determination.”

4. Apprenticeship Requirements

Under section 45(b)(8), in order to satisfy the Apprenticeship Requirements, certain requirements with respect to labor hours, apprentice-to-journeyworker ratios, and participation by apprentices must be satisfied. ³

a. Labor Hours Requirement

Section 45(b)(8)(A)(i) provides that “[t]axpayers shall ensure that, with respect to construction of any qualified facility, not less than the applicable percentage of the total labor hours of the construction,

alteration, or repair work (including such work performed by any contractor or subcontractor) with respect to such facility shall, subject to [section 45(b)(8)(B)] be performed by qualified apprentices” (Labor Hours Requirement).

For purposes of the Labor Hours Requirement, section 45(b)(8)(A)(ii) provides that the applicable percentage is: (i) in the case of a qualified facility the construction of which begins before January 1, 2023, 10 percent, (ii) in the case of a qualified facility the construction of which begins after December 31, 2022, and before January 1, 2024, 12.5 percent, and (iii) in the case of a qualified facility the construction of which begins after December 31, 2023, 15 percent.

Section 45(b)(8)(E)(i) defines “labor hours” as the “total number of hours devoted to the performance of construction, alteration, or repair work by any individual employed by the taxpayer or by any contractor or subcontractor, and exclud[ing] any hours worked by foremen, superintendents, owners, or persons employed in a bona fide executive, administrative, or professional capacity (within the meaning of those terms in part 541 of title 29, Code of Federal Regulations).” Section 45(b)(8)(E)(ii) defines “qualified apprentice” as “an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program, as defined in section 3131(e) (3)(B).” Section 3131(e)(3)(B) defines a registered apprenticeship program as an apprenticeship program registered under the Act of August 16, 1937 (commonly known as the National Apprenticeship Act, 50 Stat. 664, chapter 663, 29 U.S.C. 50 et seq. ) that meets the standards of subpart A of part 29 and part 30 of title 29 of the Code of Federal Regulations. ⁴

b. Ratio Requirement

Under section 45(b)(8)(B), the Labor Hours Requirement is subject to any applicable requirements for apprentice-to-journeyworker ratios of the U.S.

3 Sections 30C(g)(3), 45Q(h)(4), 45V(e)(4), 45Y(g)(10), 45Z(f)(7), 48(a)(11), 48C(e)(6), 48E(d)(4), and 179D(b)(5) cross-reference the apprenticeship requirements in section 45(b)(8). Sections 45L and 45U do not have apprenticeship requirements.

4 Effective November 25, 2022, 29 CFR part 29 is no longer divided into subparts A and B because subpart B (Industry Recognized Apprenticeship Programs) was rescinded in a final rule published on September 26, 2022 (87 FR 58269).

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Department of Labor (DOL) or the applicable State apprenticeship agency (Ratio Requirement).

c. Participation Requirement

Under section 45(b)(8)(C), each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work (Participation Requirement).

5. Exceptions to Apprenticeship Requirements

a. In general

Under section 45(b)(8)(D)(i), a taxpayer is not treated as failing to satisfy the Apprenticeship Requirements in section 45(b)(8) if: (i) the taxpayer satisfies the requirements described in section 45(b)(8)(D)(ii) (Good Faith Effort Exception), or (ii) in the case of any failure by the taxpayer to satisfy the Labor Hours Requirement under section 45(b)(8)(A) and the Participation Requirement under section 45(b)(8)(C), the taxpayer makes a penalty payment to the Secretary (Apprenticeship Cure Provision).

b. Good Faith Effort Exception

Under the Good Faith Effort Exception provided by section 45(b)(8)(D)(ii), a taxpayer is deemed to have satisfied the Apprenticeship Requirements with respect to a qualified facility if the taxpayer has requested qualified apprentices from a registered apprenticeship program, as defined in section 3131(e)(3)(B), and: (i) such request has been denied, provided that such denial is not the result of a refusal by the taxpayer or any contractors or subcontractors engaged in the performance of construction, alteration, or repair work with respect to such qualified facility to comply with the established standards and requirements of the

registered apprenticeship program, or (ii) the registered apprenticeship program fails to respond to such request within five business days after the date on which such registered apprenticeship program received such request.

c. Apprenticeship Cure Provision

Under section 45(b)(8)(D)(i)(II), if the Good Faith Effort Exception does not apply, then the taxpayer will not be treated as failing to satisfy the Labor Hours Requirement or the Participation Requirement if the taxpayer makes a penalty payment to the Secretary in an amount equal to the product of $50 multiplied by the total labor hours for which the Labor Hours Requirement or the Participation Requirement was not satisfied with respect to the construction, alteration, or repair work on the qualified facility. Under section 45(b)(8)(D)(iii), if the Secretary determines that the failure was due to intentional disregard of the Labor Hours Requirement or Participation Requirement, then the penalty amount increases to $500 multiplied by the total labor hours for which the requirement was not satisfied.

C. One Megawatt Exception

Under the One Megawatt Exception in section 45(b)(6)(B)(i), a qualified facility that has a maximum net output of less than one megawatt (as measured in alternating current) is eligible for the increased credit amount. A qualified facility’s nameplate capacity determines whether the facility meets the One Megawatt Exception. Similar exceptions apply for a qualified facility under sections 45Y(a)(2)(B)(i) and 48E(a)(2)(A)(ii)(I) with a maximum net output of less than one megawatt (as measured in alternating current); a qualified project under section 48(a)(9)(B)(i) with a maximum net output of less than one megawatt of electrical (as measured in alternating current) or thermal energy; and energy storage technology under section 48E(a)(2)(B)(ii)(I) with a capacity of less than one megawatt.

D. Beginning of Construction Exception

Under the BOC Exception in section 45(b)(6)(B)(ii), a qualified facility the construction of which began prior to the date that is 60 days after the Secretary publishes guidance with respect to the requirements of section 45(b)(7)(A) and (8) is eligible for the increased credit amount in section 45(b)(6). On November 30, 2022, the IRS and the Treasury Department published Notice 2022-61, providing guidance with respect to the PWA requirements in section 45(b)(7) (A) and (8), including initial guidance for determining the beginning of construction for section 45 and other credits and the beginning of installation under section 179D. Therefore, if a taxpayer began construction or installation of a facility ⁵ before January 29, 2023, then the taxpayer is eligible for the increased credit amount without satisfying the PWA requirements, provided the taxpayer is otherwise eligible for the credit. Similar exceptions apply under sections 30C, 45Q, 45V, 45Y, 48, 48E, and 179D. For purposes of determining when construction or installation begins, Notice 2022-61 incorporates by reference the notices issued under sections 45, 45Q, and 48 (collectively, IRS Notices). ⁶ The IRS Notices describe two methods of establishing that construction of a facility has begun: (i) starting physical work of a significant nature (Physical Work Test), and (ii) paying or incurring five percent or more of the total cost of the facility (Five Percent Safe Harbor).

The IRS Notices, as clarified and modified by Notice 2021-41, 2021-29 I.R.B. 17, provide that for purposes of the Physical Work Test and Five Percent Safe Harbor, taxpayers must demonstrate either continuous construction or continuous efforts (Continuity Requirement) regardless of whether the Physical Work Test or the Five Percent Safe Harbor was used to establish the beginning of construction. Whether a taxpayer meets the Continuity Requirement under either test is determined by the relevant facts and circumstances.

5 Notice 2022-61 defines “facility” as qualified facility, property, project, or equipment.

6 Notice 2013-29, 2013-20 I.R.B. 1085 (section 45); Notice 2020-12, 2020-11 I.R.B. 495 (section 45Q); Notice 2018-59, 2018-28 I.R.B. 196 (section 48).

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The IRS Notices, as subsequently clarified and modified, also provide for a “Continuity Safe Harbor” under which a taxpayer will be deemed to satisfy the Continuity Requirement provided a qualified facility is placed in service no more than four calendar years after the calendar year during which construction of the qualified facility began for purposes of sections 45 and 48, and no more than six calendar years after the calendar year during which construction of the qualified facility or carbon capture equipment began for purposes of section 45Q. For purposes of the Continuity Safe Harbor, certain offshore projects and projects built on Federal land under sections 45 and 48 satisfy the Continuity Requirement if such a project is placed into service no more than 10 calendar years after the calendar year during which construction of the project began.

Until the Treasury Department and the IRS issue further guidance on determining when construction or installation begins, taxpayers may continue to rely on the guidance provided in Notice 2022-61 and the IRS Notices. Specifically, to determine when construction begins for purposes of sections 30C, 45V, 45Y, and 48E, principles similar to those under Notice 201329 regarding the Physical Work Test and Five Percent Safe Harbor apply, and taxpayers satisfying either test will be considered to have begun construction. In addition, principles similar to those provided in the IRS Notices regarding the Continuity Requirement for purposes of sections 30C, 45V, 45Y, and 48E apply. Whether a taxpayer meets the Continuity Requirement under either test is determined by the relevant facts and circumstances. Similar principles to those under section 3 of Notice 2016-31 regarding the Continuity Safe Harbor also apply for purposes of sections 30C, 45V, 45Y, and 48E. Taxpayers may rely on the Continuity Safe Harbor with respect to those sections, provided the facility is placed in service no more than four calendar years after the calendar year during which construction began.

For purposes of section 179D, installation of energy efficient commercial building property has begun if a taxpayer generally satisfies principles similar to the two tests described in section 2.02 of