Published date: 04/16/2024

By Guest Author: Laura Caltaldo, Director at Baker Tilly

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The irony with tax credits is that everyone wants them, but seemingly few actually want to spend the time and energy needed to fully understand the intricacies involved with obtaining them. 

We have observed this exact situation as it relates to the Prevailing Wage and Apprenticeship (PW&A) bonus credits in the Inflation Reduction Act (IRA). The bonus credits are very rewarding to project owners, but there is often a lack of understanding regarding the requirements and where to seek assistance with eligibility, compliance, and recordkeeping.  

At the same time, there also seems to be a common misconception among contractors working on these projects that substantiating PW&A is the same as complying with the Davis-Bacon’s prevailing wage provisions. While there are some shared aspects between the two, earning the enhanced PW&A credits requires a much higher standard that includes ongoing and prompt cure of any noncompliance as well as payment of penalties. Random sampling and manual record-keeping in Excel spreadsheets will not be enough to substantiate to the US Treasury that the enhanced credit is earned.

The IRA is calling this a “bonus” credit for a reason. There is a lot to understand and plenty to do to meet the requirements and maximize the credits. 

Understanding the basics 

The PW&A bonus credit, which can be claimed for up to 10 years depending on the type of credit, is available for private and publicly funded projects. Non-taxable entities like municipalities or educational institutions can apply for direct payment in lieu of tax credits. There are about 70 separate eligible energy properties (e.g., biogas, solar, geothermal, etc.) that can be incorporated into construction or alteration of projects that qualify for IRA tax credits. Determining the eligible energy property is the first step in seeking IRA tax credits.

Compliance with the PW&A requirements adds significant value to the already lucrative 6% base tax credit of sections 45 and 48, including 48C. If compliant with PW&A, the tax credit will increase by a multiple of five, meaning that a 6% tax credit can be worth 30% of eligible direct project costs.

What project owners and contractors need to know 

The IRA is tax law – not labor law (like Davis-Bacon and Related Acts). The PW&A requirement is “in accordance with” Davis-Bacon, so definitions like “laborer,” “mechanic,” “site of work,” and “prevailing wage” are the same. However, the IRA PW&A requirements are quite different than Davis-Bacon in that it contains three tiers of apprenticeship requirements, requires payment of penalties for non-compliance, and defines more stringent recordkeeping requirements. In addition, an audit would be conducted by the IRS, not the Department of Labor.

When it comes to PW&A, the project owner/credit seeker holds a significant amount of responsibility, including the payment of penalties for non-compliance prior to filing the credit. That being said, regardless of how compliant (or noncompliant) every contractor on the project is with the PW&A requirements, the enhanced credit can still be earned. Proactively managing compliance throughout the project will minimize the penalties that must be paid prior to claiming the credit.

To be more specific, the project owner must monitor overall compliance, ensuring that all laborers and mechanics are paid the federal prevailing wage – not only during construction, but additionally for any repairs or alterations during the recapture period. Even one hour of underpayment, if not cured within 30 days of the taxpayer being aware, can result in a $5,000 penalty per employee each calendar year.

Understanding the apprenticeship requirements

The apprenticeship requirement is especially complex because of the three metrics that need to be managed. At a project level, 10-15% of total project labor hours must be completed by a “qualified apprentice.” At the contractor level, each contractor with four or more workers must employ at least one apprentice. On a daily level, each day that an apprentice is working, the apprentice-to-journeyworker ratio defined by the Registered Apprenticeship Program must be met. The participation requirement is at the project level and applies to every contractor. The ratio requirement applies each day that an apprentice is working. “Qualified apprentices” means they must be enrolled in a Registered Apprentice Program that meet criteria defined by the National Apprenticeship Act and are credentialed by either the DOL Office of Apprenticeship or a State Apprenticeship Agency.

Project owners can enforce that the contractors comply with the PW&A requirements by including them in the contract terms and conditions and by proactively monitoring and verifying their performance throughout the project. Additionally, they can require the contractors to submit certified payroll reports, apprenticeship agreements, and other documents to substantiate their compliance.

Finding an end-to-end compliance solution 

The PW&A compliance and recordkeeping requirements are complex, but the potential benefits can be valuable and lucrative.

It’s generally considered best practice for a project owner to connect with a tax professional that fully understands the unique tax requirements of sections 45 and 48 to ensure they are complying. While there are many competent tax professionals out there, far fewer have expertise with this Inflation Reduction Act. Furthermore, organizations seeking the credits will find that they can streamline the process further by finding a tax professional that also collaborates with a prevailing wage and apprenticeship compliance platform to help their clients more easily substantiate the PW&A requirements.

Baker Tilly, for example, has taken that extra step. In collaboration with LCPtracker, Baker Tilly offers a safe and secure prevailing wage and apprenticeship compliance solution to help its clients maintain compliance and maximize the IRA tax credits which they are eligible to receive. The firm’s PW&A compliance program includes: 

• Providing interpretation of IRA guidance
• Identifying local Registered Apprenticeship Programs
• Delivering program training to contractors and subcontractors 
• Providing apprenticeship request templates and supplemental wage requests 
• Customizing tools for clients to monitor and assist with PW&A compliance 
• Notifying clients when they are trending towards non-compliance 
• Documenting incurred penalties to be paid prior to filing
• Generating a final deliverable for tax credit filing
• Maintaining recordkeeping to serve as defense under an IRS audit

These services are critical because it is expected that the IRA tax credits will continue to be highly scrutinized. Project owners will want to make things easier for themselves as well as for their contractors. For instance, Baker Tilly’s portal can engage with a contractor on what information or correction is necessary to remain in compliance.

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About the author

Laura Cataldo is a director with Baker Tilly’s development advisory practice. She works with construction organizations of all sizes to evaluate business practices and assist with management challenges. Having specialized in the construction industry for almost 25 years, Laura offers a depth of experience working with management teams to improve profitability and succeed in the changing marketplace. She is part of a dedicated team that responds to contractor questions during open office hours and provides documented FAQs to resolve common questions. Their main goal is to provide assurance to tax filers who are working to comply with PW&A by providing tools, processes and resources to establish, monitor and document compliance.  

To learn more about Baker Tilly’s PW&A compliance program, including their relationship with LCPtracker, or to discuss how they can assist your organization, check out Baker Tilly’s website or contact Laura at [email protected].
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These materials are being issued with the understanding that LCPtracker is not engaged in rendering legal or other professional services and is providing these for informational purposes only. If legal, accounting, or tax expert assistance is required, the services of a competent legal, accounting or tax professional should be sought.