Treasury, IRS Formally Propose New Rules for Claiming Clean Energy Tax Credits

“The Inflation Reduction Act’s prevailing wage and registered apprenticeship requirements apply to many of the clean energy deployment tax incentives under the law, including for the clean energy investment and production tax credits that help finance utility-scale wind, solar, and battery storage projects as well as for the credits for carbon capture, utilization, and storage and clean hydrogen projects,” the Treasury Department said in a news release. “If the prevailing wage and registered apprenticeship requirements are satisfied, a taxpayer can claim an enhanced credit or deduction equal to up to five times the value of the regular credit or deduction.”

The Inflation Reduction Act, which became law a little more than a year ago, invests $369 billion toward tackling climate change through clean energy initiatives. Nearly three-quarters of that climate change investment—an estimated $270 billion—is delivered through tax incentives.

The Treasury Department released initial guidance on the wage and apprenticeship requirements in November of last year, which stated that the requirements apply to qualifying facilities, projects, property, or equipment for which construction begins 60 days or more after Treasury publishes guidance. So, that initial guidance has been in effect since Jan. 29, but the proposed rules released on Aug. 29 “provide employers and workers with more clarity and direction on proposed IRS guardrails, incentivize employers to adopt worker-centric practices, and ensure compliance is streamlined,” Treasury said on Tuesday.

“Importantly, the Treasury Department’s guidance, which was developed in consultation with the U.S. Department of Labor, contains new proposed rules regarding how to correct failures to meet the requirements and substantiate compliance to ensure workers are well-paid and expand the clean energy workforce,” Treasury stated.

In the initial guidance released last year, Treasury said companies must pay workers a prevailing wage for their geographical area and job classification, which are determined by the Labor Department, to qualify for the tax incentives. If no prevailing wage determination is posted for a specific geographic area and/or job classification, Treasury said companies should contact the Labor Department’s Wage and Hour Division via email to receive labor classifications and wage rates to use.

In addition, companies must employ a certain number of qualified apprentices from registered apprenticeship programs to qualify for the tax incentives, according to the initial guidance.

The proposed rules issued on Tuesday provide detail on statutory cure and penalty provisions which would help ensure timely correction of any issues and incentivize the use of project labor agreements when building clean energy projects, according to Treasury. These provisions provide additional detail on the statutory rules that require taxpayers to cure failures to satisfy prevailing wage requirements by making correction payments, including back pay and interest, to workers and paying penalties to the IRS in order to receive the full tax incentive amounts.

Penalties would be waived under (1) a de minimis exception, if the correction payment is made by the earlier of 30 days after the taxpayer became aware of the error, or the date on which the increased credit or deduction is claimed; and (2) a groundbreaking new project labor agreement exception, which would apply to work done under a “qualifying project labor agreement” and where the correction payment is made by the time the increased credit or deduction is claimed, Treasury said.

Treasury warned that taxpayers will pay greater penalties if they intentionally disregard prevailing wage requirements and try to claim increased incentive amounts.

The guidance also describes a “good faith effort” exception in which a taxpayer makes a good faith effort in requesting qualified apprentices from registered apprenticeship programs in a project’s location.

Companies must ensure that qualified apprentices perform a certain number of labor hours in the construction, alteration, or repair of their qualified energy project or facility. The labor hours requirement provides that a minimum percentage—12.5% for facilities beginning construction in 2023, 15% for facilities beginning construction in 2024 and after—of the total labor hours for a project must be performed by qualified apprentices.  

The Treasury and IRS will collect written public comments on the proposed rules until the end of October. A public hearing has been scheduled for Nov. 21.