Navigate prevailing wage and apprenticeship guidance to earn 5x enhanced IRA credit value

The Inflation Reduction Act (IRA) offers a unique opportunity for tax credit seekers to increase their credit value by up to five times (5X) by complying with prevailing wage and apprenticeship guidance (PW&A). While these guidelines may seem similar to Davis-Bacon at first glance, they are in fact quite different. It is crucial for project owners to understand and carefully manage these requirements throughout the project, as failure to do so can result in significant penalties and loss of eligibility for the 5X credit enhancement.

Prevailing wage and apprenticeship bonus credit requirements, set forth by the Internal Revenue Service (IRS), are complex. Failure to carefully manage these requirements can result in significant penalties, which must be catalogued and paid at the time of filing the tax return. It is essential for project owners to understand and proactively manage these complex requirements to maximize their credit value.

An industrial company learned the hard way. PW&A for IRA tax credits is not a check-the-box activity.

Consider a large industrial company embarking on a $20 million facility investment. The company anticipates being eligible for approximately $5 million in IRA bonus tax credits if they comply with prevailing wage and apprenticeship guidance; without compliance, the credit would amount to roughly $1 million.

The engineering, procurement and construction (EPC) contractor overseeing said project mistakenly believes that compliance is as straightforward as Davis Bacon (i.e. random-sampled certified payroll) and provided the wrong DOL Wage Determination. Consequently, all of the contractors utilized an incorrect wage determination, resulting in underpaid workers. Upon project completion, the project owner assumes it can claim the 5x enhanced credit, unaware of their negligent EPC contractor’s mistake. However, upon further examination of the credit requirements, the credit seeker's tax department realizes they lack sufficient documentation to substantiate compliance. They also discover that certified payroll alone does not demonstrate compliance with the IRS’ prevailing wage and apprenticeship guidance.

As a result, the company is unable to calculate penalties owed, nor can they ascertain their level of negligence regarding PW&A requirements, which increases the penalties owed even more. Fearing further penalties and legal repercussions, the company forfeits approximately $4 million in credit value, opting only to claim the base credit.

How could the forfeit of $4 million in credit value be avoided?

Baker Tilly’s end-to-end credit compliance program is designed to ensure companies can proactively manage compliance throughout the project, substantiate earning the enhanced credit through compliance with prevailing wage and apprenticeship guidance, therefore maximizing tax credits and minimizing penalties.

Within this program, Baker Tilly provides the following services:

1. Contract language advisory: Advising on contract language to notify contractors of PW&A project requirements, ensuring clarity and compliance from the outset.
2. Project plan analysis: Collaborating with client to analyze project plans and assess their impact on the credit amount. This includes identifying key action steps for preserving the tax credit through PW&A compliance.
3. Pre-construction communication and training: Offering pre-construction communication and training sessions for contractors on prevailing wage and apprentice requirements and implementation, fostering an understanding of compliance throughout the project.
4. Compliance dashboard monitoring: Real time project-level transparency of non-compliance, pending cures and projected penalties, minimizing the risk of incurring penalties or waiting until the end of the project when a cure is no longer possible.
5. Templates and regulatory support: Assisting credit seekers and their contractors in navigating the process of submitting for Department of Labor wage determinations or Good Faith Effort exceptions (GFEs), ensuring adherence to regulatory requirements.
6. Work papers that substantiate the earned credit: Provide a summary memo and associated work papers to support the project’s ability to claim the enhanced tax credit and defend the credit in the event of an IRS audit.

Don’t let the fear of complexity around prevailing wage and apprenticeship guidance in the IRA deter you from getting started today.

Want to learn more about the prevailing wage and apprenticeship compliance solution? Contact a PW&A specialist.

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.