IRS Issues New Guidance Related to Bonus Tax Credits for Renewable Energy Projects: Prevailing Wage Requirements and Start of Construction for Tribal Projects

On November 30, 2022, the Internal Revenue Service published Notice 2022-61 in the Federal Register, providing guidance on the prevailing wage and apprenticeship requirements that, if met, entitle Indian tribal governments ("Tribes")¹ to receive bonus energy tax credits, if they elect to receive such credits under the "Direct Pay Program", under the new Internal Revenue Code (IRC) provisions in the Inflation Reduction Act (IRA).²

As we have previously explained in our IRA White Paper, Tribes are eligible for a tax credit for a portion of the expenditures they make on certain energy property. Energy property generally includes:

• Qualified fuel cell property;
• Qualified small wind energy property;
• Solar energy property;
• Wind energy property;
• Fiber-optic solar;
• Waste energy recovery property;
• Energy storage technology;
• Qualified biogas property;
• Microgrid controllers;
• Combined heat and power system property;
• Equipment used to produce, distribute, or use energy derived from a geothermal deposit; and,
• Geothermal energy property.

The energy credit for a taxable year equals the credit percentage multiplied by the basis of energy property placed in service during the year. Prior to adoption of the IRA, energy tax credits were a stated percentage of the basis of energy property and were in a period of phasedown (30% for 2109, 26% for 2020-2022, and 22% for 2023 and thereafter). The Inflation Reduction Act eliminated the tax credit phasedown and created a two-tier credit rate structure: a base rate of 6% and a bonus rate of 30%. To qualify for the bonus rate, the energy project must meet one of three alternative tests:

• The project must have maximum net output of less than 1 megawatt of electrical (alternating current) energy or thermal energy; or
• The project must begin construction before the date that is 60 days after the Treasury publishes guidance with respect to the prevailing wage and apprenticeship requirements; or
• The project satisfies the prevailing wage and apprenticeship requirements.

Recently issued Notice 2022-61 provides guidance on how Tribes can satisfy the prevailing wage and apprenticeship requirements.

Notice 2022-61 provides that a Tribe will satisfy the prevailing wage requirement if, with respect to any laborer or mechanic employed by the Tribe (or any contractor or subcontractor of the Tribe) in the construction, alteration, or repair of a facility, property, project, or equipment, such laborer or mechanic is paid wages at rates not less than those determined by the Secretary of Labor for the locality in which such facility is located. The Secretary of Labor will post such prevailing wages on sam.gov. If there is no information about prevailing wages for certain types of jobs and construction work, the Tribe can send an inquiry to the Department of Labor. It is unclear if this DOL process can also be used to establish tribal prevailing wages. The Notice also imposes recordkeeping requirements for qualifying wages paid.

With respect to the apprenticeship requirement, Notice 2022-61 provides that a Tribe will satisfy that requirement if not less than an applicable percentage (10% for construction beginning before 1/1/2023, 12.5% for construction beginning on or after 1/1/2023 and before 1/1/2024, and 15% for construction beginning on or after 1/1/2024) of the total labor hours of the construction, alteration, or repair work (including work performed by any contractor or subcontractor) is performed by an individual participating in a registered apprenticeship program as defined in IRC §3131(e)(3)(B). The Notice also imposes recordkeeping requirements for apprenticeship participation and labor hours.

The Notice also provides a good faith effort exception to the apprenticeship requirement. Under such exception, the Tribe will be considered to have made a good faith effort in requesting qualified apprentices if the Tribe requests qualified apprentices from a registered apprenticeship program in accordance with usual and customary business practices for registered apprenticeship programs in a particular industry.

Importantly, Tribes are eligible for the 30% bonus energy credits without the burden of complying with the prevailing wage and apprenticeship requirements if construction begins prior to the date that is 60 days after the issuance of guidance on the prevailing wage and apprenticeship requirements. As Notice 2022-61 is that guidance, bonus energy credits are available without meeting those requirements if construction begins before January 29, 2023.

Notice 2022-61 provides that for purposes of determining the beginning of construction, similar principals to those in Notice 2013-29 regarding the physical work test and the five-percent safe harbor test apply to the January 29, 2023 date.

• The physical work test is met when physical work of a significant nature begins on construction of the facility, provided that the Tribe maintains a continuous program of construction. However, preliminary activities are not included in the physical work test, even if those activities are property included in depreciable basis. Preliminary activities include planning or designing, securing financing, exploring, researching, obtaining permits, licensing, conducting surveys, environment and engineering studies, or clearing a site.
• The five-percent safe harbor test is met if the Tribe pays or incurs five percent or more of the total cost of the facility, and thereafter makes continuous efforts to advance towards completion of the facility.

Unfortunately, Treasury has not indicated that it will allow Tribes to set their own prevailing wage, as is allowed under several other federal programs. Tribal prevailing wage is typically more relevant to labor rates on rural or remote tribal lands. Therefore, we recommend that Tribes provide further additional comment to Treasury, by December 30 (as requested in Treasury's tribal consultation letter).   

For questions about this recent IRS guidance and how it may impact your operations, please contact our Quarles team at:

Pilar Thomas: (520) 770-8744 / pilar.thomas@quarles.com

Kevin Halloran: (317) 399-2837 / kevin.halloran@quarles.com

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¹ The term "Indian tribal governments" is an "applicable entity" eligible to elect to receive a direct payment from Treasury equal to the tax credit amount for an eligible energy project.  As of the date of this alert, Treasury has not issued any guidance on whether tribal-owned entities, such as utilities, enterprises, housing authorities, are also "applicable entities."

² The Inflation Reduction Act (Pub.L. 117-169) (the “IRA”) added prevailing wage requirements to IRC §45 (production tax credits for electricity produced from certain renewable resources), IRC §45Q (carbon capture equipment), IRC §45U (nuclear power production), IRC §45V (clean hydrogen production), IRC §48 (investment tax credit for certain energy projects), IRC §179D (energy efficient commercial building deduction), IRC §45L (new energy efficient home credit), IRC 30C (alternative fuel refueling property credit)and IRC §48C (advanced energy project credit).