Article
A municipality’s guide to prevailing wage and apprenticeship compliance
Jun 24, 2024 · Authored by Doug Baldessari, Laura Cataldo
The Inflation Reduction Act (IRA) of 2022 created revolutionary, first-of-its-kind opportunities for non-taxable and tax-exempt entities to take advantage of direct payment provisions from the Internal Revenue Service (IRS), in lieu of tax credits or energy incentives. States, local governments, Tribes, territories, non-profits and other entities can leverage the IRA and invest in more substantial clean energy projects to enhance their communities and advance environmental justice.
Non-taxable entities can substantially increase their direct payment amounts by meeting specific bonus criteria, such as adhering to prevailing wage and apprenticeship (PW&A) standards. Compliance with the PW&A standards and other bonus credits, including the energy community tax credit bonus, can multiply the base incentives by up to five times.
To receive a direct payment and the five times multiplier, a project will need to regularly evaluate compliance and endure stringent record-keeping requirements for extended periods of time. However, achieving and maintaining this compliance involves rigorous evaluation and extensive record-keeping, which can be complex and challenging to substantiate. Taxable entities that fail to comply face significant risks and potential penalties, jeopardizing their total credit or direct payment. Local governments and other tax-exempt entities can face signatory risk and substantial penalties.
Baker Tilly's IRA advisors co-hosted a webinar with LCPtracker to provide an overview of the PW&A enhancer, share updates on the stringent regulations and demo the compliance solution specifically for nontaxable entities. In today's competitive marketplace, PW&A compliance presents tax exempt entities with an opportunity to optimize their direct payment potential.
Continue reading or access the on-demand webinar below
Methods to achieve the 5x multiplier
There are three main ways to achieve the multiplier for direct payments:
- Meet IRA PW&A requirements
- Meet one of the two safe harbor criteria by
-either establishing that construction had begun before January 29, 2023, or
-verify the project generates less than one megawatt (MW) of energy.
Additionally, entities can stack other bonus opportunities to increase eligible energy property costs by up to 70%. These criteria include domestic content, energy community tax credit bonus or environmental justice (solar and wind). Eligible projects cover a wide range of energy properties, including wind, solar, geothermal, combined heat and power, energy storage, electric vehicles, charging stations and renewable fuels.
The IRA provides additional benefits to "energy communities," which are regions disproportionately impacted by the transition to green energy. These areas have traditionally relied on fossil fuel extraction, processing, or usage and lack capital for green energy projects.
The federal government acknowledges the potential economic impact to these regions and is therefore investing in and rewarding renewable energy projects through IRA incentives. If in an energy community, an entity will receive a 2 percent bonus to the base investment tax credit (ITC) or production tax credit (PTC) rate, which can increase to a 10% bonus for projects meeting PW&A requirements.
Generally, the IRA allows for the following communities to participate in this bonus:
- a brownfield site, which is a former industrial or commercial site where future use is affected by real or perceived environmental contamination, or
- a region where at least 0.17% of its jobs or 25% of its local taxes come from or is related to the extraction, processing, transport or storage of coal, oil or natural gas AND the area has an unemployment rate higher than the national average for the previous year. In other words, if a significant part of the area’s economy is based on fossil fuels and it has higher than average unemployment rate, it qualifies, or
- A community qualifies if it is near a coal mine that closed after Dec. 31, 1999 or near a coal-fired power plant that was shut down after Dec. 31, 2009. The closed coal mine or shut-down power plant must be located in the same area or in a neighboring area as the credit seeking project.
To determine if a project qualifies under the energy community tax credit bonus, use the interactive mapping tool that helps identify eligible areas for the energy community bonus component of the ITC and PTC under the IRA. Discover our interactive energy community mapping tool.
PW&A requirements are more complex than Davis-Bacon, falling under tax law rather than labor law. Compliance involves submitting detailed records to the IRS and maintaining stringent documentation over extended periods.
Dive deeper into the nuances of compliance requirements for tax-exempt entities by watching our on-demand webinar and exploring additional resources.
Where to go from here?
It’s not easy to maximize your IRA tax credit opportunity, however it is a worthwhile venture to get clean energy projects off the ground. To take advantage of the PW&A bonus credit, Baker Tilly and LCPtracker have created a end-to-end solution for contractors that provides comprehensive data-set coverage, shielding proprietary payroll data from customers, while mitigating risk for project owners, leveraging technology to establish, monitor and document all three pillars of prevailing wage compliance: prevailing wage, apprenticeship and penalties. Get started today!
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Prevailing wage and apprenticeship bonus credit solutions
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
