Introduction: IRA Boosts U.S. Construction Industry
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the "IRA") into law. 1 The IRA marked a legislative milestone for clean energy in the United States in part by providing funding mechanisms for clean energy infrastructure projects. This new emphasis on green projects has already created a surge of opportunities across the construction industry—the Internal Revenue Service ("IRS") estimates that IRA clean energy projects will create over 1.5 million jobs over the next decade. 2
But what can contractors do to take advantage of IRA incentives to reduce costs, build a reliable workforce, and gain a competitive advantage in the new infrastructure landscape created by the ever-increasing number of IRA-related projects? The IRS Final Rule, 89 FR 53184 (29 CFR 1), effective August 26, 2024, provides some guidance by outlining the increased credits and deductions available to taxpayers that satisfy the criteria under the IRA, such as prevailing wage and registered apprenticeship requirements.
IRA Tax Credits for Clean Energy Projects
The IRA implemented several changes that expand the practical availability of clean energy tax credits. For example, the IRA created two new credit delivery mechanisms: (1) elective pay (a/k/a direct pay) and (2) transferability. 3
Elective pay makes certain clean energy tax credits and the CHIPs manufacturing credit effectively refundable because the IRS treats an elective amount as a tax payment, so that the entity receives the full value of the credit even if it owes no taxes. 4 The elective amount is ultimately counted as an overpayment and refunded to the entity. 5 Elective pay can be used by tax-exempt organizations, state and local governments, Indian tribal governments and their subdivisions, Alaska Native Corporations, the Tennessee Valley Authority, rural electric cooperatives, U.S. territories and their political subdivisions, and agencies and instrumentalities of state, local, tribal, and U.S. territorial governments. 6 (Other entities may choose to be treated as one of these covered entities in limited scenarios where the entity is seeking the credit for carbon oxide sequestration, production of clean hydrogen, or advance manufacturing production. Seek tax and legal counsel if you believe you may be entitled to one of these credits.) 7
And certain taxpayers can transfer their tax credit to others in exchange for direct money payments, referred to as transferability. The IRA expanded the ability of tax-exempt and governmental entities to take advantage of federal tax incentives utilizing the method of transferability. If in accord with the IRA, entities seeking to expand their ability to take advantage of federal tax incentives can receive elective payments for twelve clean energy tax credits; and businesses without sufficient tax liability can transfer all or a portion of any of eleven clean energy credits to a third-party in exchange for tax-free cash. 8 The third-party and the business can negotiate and agree to terms and pricing as they wish. 9
The potential tax incentives an entity may take advantage of, as outlined by the IRS, 10 can be divided into four categories:
- Energy Generation and Carbon Capture: These
tax credits reward the production of clean electricity, investments
in renewable energy projects, and carbon dioxide sequestration.
- Production Tax Credit for Electricity from Renewables. 11
- Clean Electricity Production Tax Credit. 12
- Investment Tax Credit for Energy Property. 13
- Clean Electricity Investment Tax Credit. 14
- Credit for Carbon Oxide Sequestration. 15
- Zero-Emission Nuclear Power Production Credit. 16
- Energy Efficiency: These tax credits
incentivize the production of clean energy in both an industrial
context as well as in the context of private residential or
commercial buildings.
- Clean Hydrogen Production Tax Credit. 17
- Clean Fuel Production Credit. 18
- New Energy Efficient Homes Credit. 19
- Energy Efficient Commercial Buildings Deduction. 20
- Manufacturing: The Qualified Advanced Energy Project Credit, Inflation Reduction Act of 2022, Pub. L. No. 117-169, 48C, 136 Stat. 1818, provides a credit for investments in projects in certain energy communities.
- Fuels: The Alternative Fuel Vehicle Refueling Property Credit Inflation Reduction Act of 2022, Pub. L. No. 117-169, 30C, 136 Stat. 1818, provides a tax credit for businesses placing vehicle chargers and alternative refueling stations in low-income and non-urban areas.
Tax Credit Boosts for Prevailing Wages
Owners and construction contractors on clean energy projects can take advantage of increased versions of many of these tax incentives if they meet the IRA prevailing wage requirements. 21 The IRA requires that any laborers and mechanics employed in the construction or alteration of a qualified facility under the IRA be paid prevailing wages in accordance with the Davis-Bacon Act. 22 The Department of Labor is responsible for setting the Davis-Bacon prevailing wage rate, which includes both an hourly wage rate and an allotment for fringe benefits. 23
Certain tax incentives are also subject to apprenticeship requirements—each contractor who employs four or more individuals to perform work on a qualified facility must employ qualified apprentice(s), who must perform a minimum percentage of the total labor hours on the project. 24 For construction that began before 2023, the percentage is 10%; for construction that began in 2023, the percentage is 12.5%; and for construction beginning in 2024 or later, the percentage is 15%. 25
As stated above, the IRS issued final rules regarding the increased credit and deduction amounts available to taxpayers who satisfy the IRA's PWA requirements. The final rules clarify the PWA requirements:
Taxpayers are entitled to an increased credit equal to 5x the base incentive if they pay the required prevailing wages and hire registered apprentices for IRA clean energy projects. 26 (Exceptions exist for construction projects that began before January 29, 2023, that may allow small facilities and project to claim the increased incentive without meeting PWA requirements. The specifics of each project should be discussed with tax and compliance counsel.)
The new rules also implement strong recordkeeping requirements and guarantee that taxpayers with projects covered by qualifying Project Labor Agreements ("PLA") are not required to pay penalties. 27 This is particularly important given the PLA requirement that went into effect in January of 2024 for all federal construction projects with a total estimated cost of $35 million or more. 28 Because PLAs support adherence to prevailing wage and Davis-Bacon requirements in general, the final rules state that penalties will not be enforced against PLA-bound taxpayers who claim a tax credit including the PWA increase but fail to meet PWA requirements, as long as corrective payments are made. 29 Corrective payments include back wages, interest, and a payment to the IRS. Conversely, taxpayers who do not have PLAs in place might incur penalties for not meeting the PWA requirements and claiming a PWA increased credit, with even harsher penalties imposed for intentional noncompliance. 30
The IRS hopes that these final rules will provide clarity and "will help build a strong pipeline of highly skilled workers to support the growth of the clean energy economy and ensure clean energy jobs are good-paying jobs." 31
Practical Considerations for Contractors on Clean Energy Projects
The IRS announced that it is dedicating "significant resources" to ensuring compliance with the IRA clean energy tax credit obligations. 32 Because taxpayers are solely responsible for ensuring that the PWA requirements are met before claiming the related tax credits and because there is a potential for penalties should a taxpayer fail to meet the PWA requirements, contractors should consult with tax and compliance counsel regarding the specifics of their project. 33 It is important to ascertain from the start whether a project owner intends to seek a tax incentive as this may increase the contractor's compliance and flow down obligations and will similarly affect subcontractors performing work on these projects.
Contractors and their counsel should be on the lookout for a DOL-IRS Memorandum of Understanding, scheduled to be published before the end of the year. The MOU is expected to "facilitate joint and cooperative education and public outreach," and "formalize a process for DOL to share with IRS any credible tips or information DOL receives as to potential noncompliance with the PWA requirements." 34
Footnotes
1. Pub. Law No. 117-169, 136 Stat. 1818 (August 16, 2022).
2. U.S. Department of the Treasury, IRS Release Final Rules to Ensure Good-Paying Clean Energy Jobs, Expand Clean Energy Workforce As Part of President Biden's Investing in America Agenda, U.S. Dept. of the Treasury (June 18, 2024), https://home.treasury.gov/news/press-releases/jy2413.
3. 89 FR 53184.
4. See Elective pay and transferability frequently asked questions: Elective pay, IRS (June 14, 2023), https://www.irs.gov/credits-deductions/elective-pay-and-transferability-frequently-asked-questions-elective-pay#q10.
5. Id.
6. 89 FR 53184.
7. Elective pay and transferability frequently asked questions: Elective pay, IRS (March 5, 2024), https://www.irs.gov/credits-deductions/elective-pay-and-transferability-frequently-asked-questions-elective-pay#q10.
8. 89 FR 53184.
9. Id.
10. Prevailing Wage & Apprenticeship, IRS (August 29, 2023), https://www.irs.gov/pub/irs-pdf/p5855.pdf.).
11. Inflation Reduction Act of 2022, Pub. L. No. 117-169, § 45, 136 Stat. 1818.
12. 2025 onwards. Id.
13. Id.
14. 2025 onwards. Id.
15. Id.
16. Id.
17. Id.
18. 2025 onwards. Id.
19. Id.
20. Id.
21. 89 FR 53184.
22. 26 USC § 45; 89 FR 53184.
23. 89 FR 53184.
24. Prevailing Wage & Apprenticeship, IRS (August 29, 2023), https://www.irs.gov/pub/irs-pdf/p5855.pdf.
25. Id.
26. U.S. Department of the Treasury, IRS Release Final Rules to Ensure Good-Paying Clean Energy Jobs, Expand Clean Energy Workforce As Part of President Biden's Investing in America Agenda, U.S. Dept. of the Treasury (June 18, 2024), https://home.treasury.gov/news/press-releases/jy2413.
27. Id.
28. 88 FR 88708.
29. Id.
30. Id.
31. U.S. Department of the Treasury, IRS Release Final Rules to Ensure Good-Paying Clean Energy Jobs, Expand Clean Energy Workforce As Part of President Biden's Investing in America Agenda, U.S. Dept. of the Treasury (June 18, 2024), https://home.treasury.gov/news/press-releases/jy2413.
32. Id.
33. Id.
34. Id.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.