A credit is basically a dollar-for-dollar offset that business owners can use against their own tax liability. Under the IRA, if they do not have tax liability or taxable income, then they can sell certain credits to another taxpayer, which is known as transferability. Additionally, tax-exempt organizations (not-for-profits, governments, etc.) now have the option to receive a “direct pay” from the government instead of tax credits that, in the past, were not particularly valuable to these entities.
Generally speaking, these “direct pay” tax credits offer a 6% base credit for qualifying energy projects, and that number can increase by a multiple of five if the prevailing wage and apprenticeship requirements are met, and then it can increase by additional percentages based on domestic content, energy community requirements and other factors.
Three things that contractors need to understand
1. Domestic content
Domestic content requirements have been around for more than 20 years and generally apply to products that have been manufactured within the United States. This may include control systems, elevators, HVAC systems and chillers. However, the expectations are increasing, and projects that get underway before Jan. 1, 2025 must contain domestically manufactured products comprised of at least 40% domestic content to qualify for the 10% bonus credit.
Additionally, 100% of the steel and iron that is used in the project must be U.S.-sourced, as defined by the Buy American Act.
2. Prevailing wage
In order to qualify for the aforementioned 30% credit (the 6% credit with the 5x multiplier), projects need to meet the requirements surrounding prevailing wage, which is the average hourly rate of wages and benefits paid to similar workers in a geography, regardless of union status. Projects that are less than 1MW or have met the “begun construction” test are waived of the prevailing wage requirement. In order to meet the prevailing wage requirement, the following guidelines must be met:
- Trade and craft compensation packages are equal to or greater than local prevailing wage rates
- Compliance supported with documented certified payroll records
- Contractor-signed documentation certifying prevailing wage compliance
- Failure to comply will result in reduction in the realized tax credit to the owner
3. Apprenticeship
While many contractors are already familiar with prevailing wage, qualified apprenticeship requirements are a much newer concept. The Qualified Apprenticeship requirement of the IRA defines a minimum percentage of total trade and craft labor hours (on a construction project in which four or more individuals are doing the work) that must be performed by qualified apprentices. In order to be a ‘qualified apprentice’ the individual must currently participate in a Registered Apprenticeship Program that is credentialed by the Department of Labor or a State Apprenticeship office, and meets the following criteria:
- Apprentice is paid on an incremental wage schedule based on experience and skill
- A minimum of 2,000 hours or one year of on-the-job training
- A minimum of 144 hours per year of classroom instruction
- 1-on-1 mentoring and supervision
The applicable percentage of hours that must be worked by a qualified apprentice are based on when the construction project began. For projects that began before 2023, the required apprenticeship percentage is 10%. For projects beginning during 2023, the required percentage is 12.5%. For projects beginning in 2024 and beyond, the required percentage is 15%.
Next steps for contractors
- Evaluate your project landscape for prior, current or future projects that involve energy efficiency, renewable energy or other eligible components under the Act
- Reach out to project owners that have been considering projects and promote the opportunity for savings that the credits now present
- “Prequalify” your company as meeting the requirements for the bonus credits (prevailing wage, qualified apprentices, and domestic content)
- Consider a development plan for projects you wish to move forward – conducting activities now may preserve credits and optimize value
- Maintain documentation to verify projects considered to have “begun construction” by the Jan. 28, 2023 deadline
- Assess options to defer or modify completion, if your project is underway, to recover benefits from the Act
Of course, Baker Tilly’s construction specialists are here to assist your organization with understanding the IRA and its potential credits and benefits. To learn more about how you can take full advantage of the IRA, contact our team.
