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.