Clean energy tax incentives have been an important driving factor of the renewable energy sector of the USA. The Inflation Reduction Act implemented in 2022 facilitated the taxpayers with increased tax benefits up to five times, provided they met the prevailing wage and apprenticeship or PWA compliance. In November of the same year, the IRS, in conjunction with the Department of Treasury, announced the PWA requirements. The final rule was published on June 18, 2024, drafting a complete guideline for PWA compliance.
Read on for a detailed explanation of PWA requirements, matters of non-compliance, challenges faced by taxpayers, and the best practices to ensure compliance.
PWA Compliance Requirements
Tax credits available for renewable energy aim to encourage the steady development of clean energy. The official guidelines and requirements stand to guarantee just allocation of tax incentives and avoid any foulplay.
Prevailing Wage Compliance
The US Department of Labor of DOL has set prevailing wage rates. All laborers and mechanics must be paid wages at the same rate or more.
Apprenticeship Utilisation
You must employ a certain percentage of labor hours with qualified apprentices selected from registered apprenticeship programs.
Recordkeeping and Reporting
Keep accurate records of payroll and report of hours of labor worked by apprentices. Follow documentation requirements for verification of compliance.
Exceptions
The PWA compliance guideline is a little more relaxed in some cases, and taxpayers can claim increased credits of 5 times without fulfilling the requirements. The exceptions include:
- Facilities producing clean energy amounting below 1 megawatt
- Facilities to have begun construction before January 29, 2023
The Importance of PWA Compliance & Consequences of Non-Compliance
Successful claim and receival of the tax credits depends on whether the clean energy developer meets all the requirements or not. Non-compliance can have unfavorable consequences, both immediate and long-term.
Failing to meet the Prevailing Wage requirement is a fixable mistake. The developer in question can have 180 days to pay off the difference between the paid amount and the fair wage, followed by submitting a penalty.
The apprenticeship requirement clause does not come with any flexibility and there is no easy fix to resolve it. If a developer does not implement the rule, it will attract immediate penalties and the loss of tax credits.
In addition to the instant penalties, developers charged with non-compliance may end up causing significant damage to the investors and credit buyers. This will further affect their current and future scope of financing.
Best Practices for Compliance
When PWA compliance is mandatory, the smart strategy is to adopt the best practices to reduce any risk of errors and avoid penalties.
Comprehensive Planning and Assessment
Assess early, at project initiation, and identify the applicable PWA requirements. Clearly outline work to be done under the PWA mandate. This will involve the designation of all of the construction, alteration, or repair work as being under prevailing wage and apprenticeship requirements.
Incorporation of PWA Provisions in Contracts
Incorporate provisions in all contracts, including contractor and subcontractor contracts, requiring compliance with prevailing wage rates and apprenticeship provisions. This keeps everyone contractually responsible for compliance.
Make sure prime contractors also follow the same practice to ensure the PWA compliance requirements of their subcontractors. It will help establish a seamless compliance chain throughout the project structure.
Collaboration with Qualified Apprenticeship Programs
Connect to registered apprenticeship programs early to meet the mandatory percentage of apprentice work hours. Pre-establishing such relationships will make the incorporation of apprentices into the workforce easier.
Keep thorough records of all correspondence and requests made to apprenticeship programs. When apprentices are not available, records of these attempts are essential to document compliance efforts.
Sound Recordkeeping and Reporting Systems
Keep meticulous payroll records reflecting hours, pay rates, and classifications for every laborer and mechanic. Transparency is critical to substantiating compliance during audits.
Perform regular examination of payroll and apprentice records to determine and correct inconsistencies in a timely manner to continue meeting PWA requirements.
Education and Training
Conduct thorough training sessions for all concerned parties, including subcontractors and contractors, so that they realize PWA commitments and compliance requirements.
Prepare and share easy-to-understand guidelines and tools that identify PWA mandates in order to allow easy accessibility to required information to all involved stakeholders.
Active Interconnection with Regulating Agencies
Make use of tools and advice offered by the Department of Labor (DOL) and the IRS to stay updated with prevailing wage determinations and compliance approaches.
Remain current on regulatory developments. Keep track of any updates provided by concerned authorities to ensure that your compliance practices are up to the latest regulations and guidelines.
Project Labor Agreement (PLA) Implementation
Opt for PLAs for defining employment terms to simplify PWA compliance and reduce the risk of non-compliance and associated penalties. PLAs can help assure improved coordination across different labor structures, ensuring prevailing wage and apprentice standards are enforced consistently.
Prompt Resolving of Problems of Non-Compliance
If non-compliance is discovered, address the problem immediately by paying back impacted workers for pay imbalances and taking care of any other responsibilities to set things right. Learn about the monetary repercussions of non-compliance, such as possible penalties, and adopt preventive measures to avoid such incidents.
Ongoing Improvement and Feedback Loops
Review and evaluate the compliance measures and look for areas that need improvement. This reflective practice makes future compliance efforts better. Invite comments from all project stakeholders to learn from the first-hand problems faced in order to maintain PWA compliance and modify exciting practices accordingly.
IRS and DOL Collaboration
Thanks to the combined efforts of DOL and IRS, a Memorandum of Understanding or MOU is in the pipeline, which is expected to help increase enforcement of compliance. The MOU will allow the agencies to share data, create training resources, and engage in joint outreach. Through the utilisation of the DOL’s experience in prevailing wage and apprenticeship programs, the IRS seeks to provide strict enforcement of PWA provisions.
Wrapping Up!
Tax credits, their eligibility criteria, and compliance requirements have been clearly laid out. The clean energy developers now must access the available information, keep up with the latest updates from concerned authorities, and ensure compliance. The process and requirements can be complex and lengthy at times but can be smoothly completed with an organized approach.
