Clean Energy Credit Questions Linger Ahead of Labor Rules

The IRS and Treasury started the clock for when the labor requirements in President Joe Biden’s tax-and-climate law go into effect—still leaving open questions on how to satisfy them.

The agencies released prevailing wage and apprenticeship requirements guidance Nov. 29 for developers and investors looking to take advantage of boosted tax credits in the law.

The guidance didn’t give stakeholders all the details needed to comply, industry groups and advisers said, making it harder for developers and investors to make project and investing decisions.

“There are more questions that need to be answered between now and when this rule goes into effect in roughly 60 days,” Ben Brubeck, Associated Builders and Contractors vice president of regulatory, labor and state affairs, said in a statement Tuesday.

The IRS said it plans to issue proposed regulations and more guidance on these labor rules.

Is It Enough?

In order to maximize their piece of the tax credits provided in the Inflation Reduction Act, investors have to pay laborers and mechanics working on their project the prevailing wage—a rate set by the US Department of Labor based on the local hourly pay plus fringe benefits—and use trained workers who have participated in a DOL-official registered apprenticeship program to complete a certain percentage of the project.

The guidance covers when construction will need to be started, how much time a taxpayer has to finish the project, what reporting is required, and what to do if a prevailing wage isn’t already established to meet the labor requirements.

However, business groups and advisers say the guidelines from the Biden administration still leave many questions unanswered, such as how quickly the DOL will respond to requests for new prevailing wage determinations—which are specific to the types of work being completed and the location where the work is conducted.

For some developers and investors, meeting the requirements could make or break a project depending on how much risk they are willing to take if these questions aren’t answered.

The tax credit amount would increase to 30% from 6% if the labor rules are met.

In a frequently asked questions page released alongside the IRS guidance, the DOL said if it doesn’t have a prevailing wage listed for a certain type of worker, investors should contact the DOL’s Wage and Hour Division via email to request a new classification.

“There are lots of instances we’ve run into already where there just aren’t prevailing wages posted on the website,” said Keith Martin, co-head of projects at Norton Rose Fulbright.

Martin’s clients have asked about wages on Guam, Northern Mariana Islands, for drill rig operations for geothermal rigs and offshore wind farms that are miles off the coast.

The WHD has established a “dedicated process” to provide additional wage classifications, a DOL spokesperson said. When asked how long it would take for the agency to answer wage classification requests from potential investors, the spokesperson said the WHD “is committed to a timely response.”

The requirements do not apply to all workers on the project, only “laborers and mechanics” who are performing “construction, alteration or repair on the facility.”

The guidelines lean on the Davis-Bacon Act when defining what is construction, who laborers and mechanics are, and procedures to get new classifications.

“This is good news because these systems have been in place for a long time,” Elizabeth Crouse, a tax partner at K&L Gates, said on Wednesday.

However, there is still uncertainty on how alterations and repair are defined, which Martin expects the DOL to clarify.

In the FAQ, DOL defines such work broadly to include “all types of work done on the facility,” including remodeling, installation, painting, providing equipment on the work site, and transportation between work sites, among other examples.

Industry Impact

Associated Builders and Contractors says the requirements could turn potential investors off to the credits, because setting up a registered apprenticeship also can be complicated—which the trade association estimates can take roughly six months to a year—and noted the lack of registered programs available in nascent green energy industries.

“These new policies may result in fewer clean energy construction projects and less private investment, which would undermine President Biden’s goals of creating well-paying, middle-class jobs across America while reducing carbon emissions,” Brubeck said in a statement Nov. 29.

Companies who want to receive the full credit amount need to provide records showing that a specific percentage of the hours worked on the project was completed by qualified apprentices.

If a project starts next year, 12.5% of the labor hours on the project must be completed by workers who are participating in registered apprenticeships, according to the IRS guidance. For projects that start in 2024, that share jumps to 15%.

Projects that started construction before the effective date still can get the full credit amount without following the labor rules.

Unions disagree that the requirements are difficult to comply with. They say there’s a variety of registered apprenticeships already available throughout the US, including programs that are nonunion operated.

Terry O’Sullivan, general president of the Laborers’ International Union of North America, said Wednesday his union is prepared to help meet the demand for skilled apprentices spurred by the IRA incentives.

“LIUNA welcomes the new guidance implementing labor standards on federal incentives for energy development,” O’Sullivan said in a statement. “LIUNA Training has a long track record of training highly skilled and experienced workers to build our nation’s infrastructure and we are ready to work with developers and contractors to meet their apprenticeship needs.”

According to the DOL, there were nearly 27,000 registered apprenticeship programs and more than 414,000 apprentices participating in registered apprenticeships in fiscal year 2021. The agency did not respond to a request for fiscal year 2022 data.

The guidelines released by the Biden administration do provide an exemption, the good faith effort, for companies who are unable to find apprentices. Companies still can receive the full tax credit as long as they maintain records showing they requested an apprentice and that it was denied or if a program fails to respond to a request in five business days.

“It doesn’t really provide any insight as to what would be considered usual and customary business practices, and with the use of apprentices being a novel requirement that might not really be well established,” Mary Alexander, a tax counsel at Vinson & Elkins, said Wednesday.

The lack of objective clarity on the good faith exception could put developers and investors in a tough position when making decisions on projects and attracting investors when they aren’t able to meet the apprenticeship requirements.

However, tax advisers differ on how they want the agencies to address some of the uncertainties, some calling for proposed regulations whereas others think it’s not needed.

“Treasury has little choice here but to start this going and then just tackle questions as they come up,” Martin said.