The massive, 728-page Inflation Reduction Act passed by Congress in 2022—deemed as one of the most significant energy incentive legislative efforts in U.S. history—offers a few perks for construction contractors, mostly in the form of tax credits or rebates for taking environmentally friendly measures when building or paying employees.
“There are over 70 separate tax credits in the Inflation Reduction Act, and many credits are good through 2032,” says Michelle Abel, a partner at Baker Tilly, a leading advisory CPA firm, ServiceTitan certified accounting partner, and preferred provider of Sage Intacct. “This is really significant, because most tax credits don't last for 10 years.”
To help contractors understand how the Inflation Reduction Act (IRA) affects their current and future building projects, Abel and Chad Resner, a director at the Baker Tilly firm, break down a few important points during a recent ServiceTitan webinar.
Focusing on the most important issues for contractors in the construction industry, the Baker Tilly team explains what you need to know about:
Prevailing wage requirements
Registered apprenticeship requirements
Domestic content requirement
Compliance with the legislation
Let’s first start with some basics.
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What is a tax credit?
A tax credit can mean different things to business owners in the construction industry, but it basically boils down to the type of owner it benefits, Abel says. For instance:
If the owner of the project owes taxes, they can apply tax credits to their tax liability and reduce the amount they're paying the IRS.
If the owner of the project doesn’t owe taxes, they can sell the credits to someone else as part of the Act’s new transferability option.
Under the transferability option, an owner can choose to keep a portion of the tax credit while also selling a portion of the credit. Credits can be transferred only once, however.
If the owner of the project is tax-exempt, such as state and local governments or nonprofit organizations, they can apply to claim a tax credit from the IRS and receive cash back through a new direct pay option.
Which construction projects qualify for IRA tax credits?
While the IRA also offers tax advantages for residential contractors and homeowners, Abel says the type of projects discussed during this webinar focus more on construction contractors involved in qualifying projects that help create renewable energy or reduce energy consumption. A qualifying construction project, for instance, earns a 6% base tax credit, she says.
“In this webinar, we’re going to focus on the factors that expand that 6% base up to 30%, sometimes 50% or even 70%, depending on how many of the bonus criteria are met,” Abel says.
Bonus criteria to boost your tax credits include:
Meeting the prevailing wage and apprenticeship requirements: add 30%
Meeting the domestic content requirements: add 20%
Projects in energy communities that are dependent on fossil fuels: add 10%
Projects aimed at environmental justice (for solar and wind) and low-income communities: add 10%
The Act also includes a safe harbor period, Abel says, for any construction projects that have begun by Jan. 30, 2023. This means any project started before that date will be deemed to have met the prevailing wage and apprenticeship requirements, as long as they can prove work is fully underway or a minimum of 5% of project costs have been incurred by the owner, as compared to all project costs. To meet these criteria, construction must have not only begun but must be continuing.
“What's important for contractors is, you're likely going to be asked to provide a good amount of the information that's required for project owners to prove they have met the requirements,” Abel says, and you must also keep the tax-supporting documentation for at least three years.
Prevailing wage requirements and how to meet them
As outlined above, any qualifying construction projects that meet the prevailing wage and apprenticeship requirements can take that base 6% tax credit, multiply it by 5, to earn a 30% bonus tax credit. Resner says that meeting the prevailing wage and apprenticeship requirements applies to a variety of construction-related projects, mainly related to clean energy.
What do we mean by prevailing wage?
Resner says it’s the wage your construction company pays to:
Who? Laborers, mechanics, subcontractors, and any others employed by the taxpayer contractor on the site of the qualifying construction project eligible for the tax credits.
When? During construction of the facility, and during the recapture credit period when repairs or alterations may be done.
Investment tax credit: Must meet prevailing wage requirements for any repair, work, or alteration for up to 5 years.
Production tax credit: Must meet prevailing wage requirements for any repair, work, or alteration for up to 10 years.
What? The U.S. Department of Labor determines prevailing wages based on the type of work and location of where the work is performed.
If your company fails to meet the prevailing wages requirement for some or all of your workers, the IRA offers provisions that allow contractors to pay a penalty to become compliant. Just know that for each worker who did not earn the prevailing wage, you must pay the shortfall plus interest to the employee and pay a penalty to the IRS. And if failure to meet prevailing wages is deemed due to “intentional disregard,” the penalty fees increase substantially.
“You're looking at anyone working on the project—whether that’s the taxpayer contractor, subcontractor, anybody doing the construction alteration or repair—they have to be paid the prevailing rates for the work they're doing based on the type of work, the geographic location, and the facility they're working on,” Resner says.
The Department of Labor’s prevailing wages vary based on location of the project, worker, construction project, and more. Check this website for published prevailing wages, or email the Department of Labor to request prevailing wages for your specific project. If you request them, be prepared to describe the type of facility, location, your proposed labor classifications, proposed prevailing wage rates, job descriptions and duties, and other documentation.
“Basically, you have to tell the Department of Labor what you think the answer should be, what you think the prevailing wage rates should be, and they will either agree or adjust what you send them,” Resner explains.
The IRS plans to issue future regulations that provide additional guidance, Resner says, but one big question remains: What documentation or substantiation should contractors be required to show compliance with the prevailing wage requirements?
“What exactly is the information that needs to be compiled?” Resner asks, pointing out how at least a document checklist could provide better guidance.
“I can tell you where it seems the industry is going,” he adds. “For prevailing wage, you’re looking at a certified payroll report. It’s got the base wage, the benefits, and it’s got to be signed by the employer of whoever is getting paid the wages. This is the start of what is generating the report to document the prevailing wage.”
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Registered apprenticeship requirements
Again, to qualify for the 30% bonus tax credit, companies must meet the prevailing wage and apprenticeship requirements. Most construction companies know about prevailing wages, but the apprenticeship rules may be something new.
To meet registered apprenticeship requirements, qualified apprentices must perform at least:
10% of the work when construction begins before Jan. 1, 2023
12.5% of the work when construction begins during 2023
15% of the work when construction begins after 2023
In addition, the IRA requires any taxpayer, contractor, or subcontractor who employs more than four individuals to perform construction, alteration, or repair work on a project to also employ one or more apprentices.
“A qualified apprentice must participate in a registered apprenticeship program as defined by the National Apprenticeship Act, and the registered apprenticeship program must be credentialed by the Department of Labor or the state apprenticeship agency,” Abel says.
Apprentices must also:
Be paid on an incremental wage schedule that's based on experience and skill
Receive a minimum of 2,000 hours or one year of on-the-job training
Receive a minimum of 144 hours of classroom instruction per year
Receive a one-on-one ratio of mentoring and supervision
“The apprenticeship requirements apply to both employees and independent contractors who are working on a project, but they don't apply to owners or to roles like foreman, superintendents, executive or administrative personnel,” Abel says.
And similar to prevailing wages, Abel says many questions remain about the new apprenticeship rules, such as:
What is the appropriate amount of time for an apprentice to be employed on a project? For the entire duration, or only enough to satisfy the requirements?
How do we define “intentional disregard” for not meeting apprenticeship rules?
What documentation must be maintained to show apprentices worked on a project?
What about new industries without established apprenticeship programs?
The last question is especially relevant, Abel says, since so many of the projects that qualify under the IRA relate to newer technologies. “These are technologies in solar, wind, geothermal, biodiesel, renewable fuels, energy-efficient construction…what if there aren't established apprenticeship programs yet in some of those areas?” she asks.
As with prevailing wages, construction contractors can pay a penalty if they fail to meet apprenticeship requirements, Abel says. The penalty is $50 times total labor hours for which the requirement was not satisfied. If the Department of Labor deems the unsatisfied apprenticeship requirement occurred due to intentional disregard, the penalty increases to $500 times total labor hours not met.
Domestic content requirements? Resner says, think “Buy American.”
“All steel or iron has to be produced in the United States,” he says. “That’s really what the domestic content requirement comes down to.”
Contractors who satisfy the domestic content requirement will receive a 10% production tax credit bonus. They can also receive another 10% investment tax credit bonus if they satisfy the prevailing wage and apprenticeship requirements, but only a 2% ITC bonus if they fail to satisfy the wage and apprenticeship rules.
“Everything used in the project, steel- or iron-related, has to be manufactured in the U.S., except metallurgical processes (involving refinement of steel additives),” Resner says. “So, there are some little things to go with this, but steel or iron, generally, 100% domestic.”
The other side of the domestic content requirement involves manufactured products, and the new law references the Buy American Act, which allows contractors to buy steel or iron from other countries like Canada.
“Currently, the percentage of U.S.-sourced for those products, whether it's bought from manufactured products in the United States, needs to be 40% of those other products. That percentage will increase starting in 2025 by 5% a year, until it gets up to 55%,” Resner explains.
How to meet compliance requirements for IRA
While many questions remain about the compliance requirements for IRA, Resner says the four main areas to focus on are:
Prevailing wage requirements
Domestic content requirements
Project cost certification
“This is where we see the industry going right now. This is what is being done at this current point in time,” Resner says. “Additional guidance will come out, so I just have to warn you that it could change.”
To provide supporting documentation for prevailing wages, Resner says you can simply show your certified payroll report with all wages outlined. To document apprentice hours, you can take the certified payroll report and add information about who’s working as an apprentice to show your percentage of apprenticeship work. For domestic content documentation, Resner suggests asking suppliers and manufacturers for letters certifying construction materials were U.S.-sourced. To certify project costs, contractors don’t need to show the amount they charged the client, but show what they were billed for total project costs.
“One of our recommendations for taxpayers is to get ahead of it,” Resner says. “If you need to meet any of these requirements we've talked about…It should almost go out with a request for bid, that we are planning on meeting certain requirements and we're going to need this documentation to go with it. It's a lot easier to compile information that's needed on a go-forward basis, rather than going back.”
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