IRS Notice 2023-29: Increased Clean Energy Credits

The Inflation Reduction Act of 2022 introduced enhancements to clean energy tax credits, creating new incentives for projects that meet specific criteria. Final regulations from the Internal Revenue Service (IRS) and the Department of the Treasury offer definitive rules for taxpayers. These regulations explain how developers and investors can qualify for a substantially larger credit amount by adhering to new labor and employment standards.

The Increased Credit and Core Labor Standards

A multiplier effect for certain clean energy credits, such as the Investment Tax Credit (ITC) and Production Tax Credit (PTC), can increase a project’s base credit value by five times. For example, a base ITC of 6% can become 30% if the requirements are met. This bonus is contingent upon adherence to two core standards: prevailing wage and apprenticeship requirements. These rules apply to the construction of the facility and, in some cases, to alteration and repair work after the project is placed in service.

The prevailing wage requirements mandate that all laborers and mechanics employed by the taxpayer, or any contractor or subcontractor, are paid wages at or above the local prevailing rates for similar work. These rates are determined by the U.S. Department of Labor and published on its website. Taxpayers must ensure that wages for construction, alteration, or repair work align with these geographically specific and job-specific classifications.

To qualify for the increased credit, a specific percentage of total labor hours on a project must be performed by qualified apprentices from a Registered Apprenticeship Program. This percentage is 12.5% for projects that began construction in 2023 and rises to 15% for projects starting in 2024 and beyond. Furthermore, apprentice-to-journeyworker ratios must comply with the standards of the relevant apprenticeship program, and each contractor or subcontractor with four or more employees must employ at least one qualified apprentice.

Determining When a Project Begins Construction

The date on which a project “begins construction” is a threshold that determines whether the prevailing wage and apprenticeship requirements apply. Projects that commenced construction on or after January 29, 2023, must meet these labor standards to qualify for the increased credit amount. The IRS provides two distinct tests that a taxpayer can use to establish this start date.

The first method is the Physical Work Test, which focuses on the commencement of tangible, on-site construction activity. This test is met when significant work of a physical nature begins, such as excavation for foundations, installation of equipment, or pouring concrete. Preliminary activities like clearing a site, conducting soil tests, or building a fence do not qualify as significant physical work.

The second method is the Five Percent Safe Harbor, a financial benchmark. Under this test, a project is considered to have begun construction if the taxpayer has paid or incurred at least five percent of the total expected cost of the facility. For example, if a solar project is projected to cost $10 million, the taxpayer would need to incur $500,000 in costs to meet this safe harbor.

Required Documentation and Recordkeeping

To claim the increased credit, taxpayers must maintain records to substantiate that they have met both the prevailing wage and apprenticeship requirements. These records are subject to IRS review upon audit. Failure to produce adequate documentation could result in the disallowance of the bonus credit amount, as the burden of proof rests on the taxpayer.

For the prevailing wage requirements, taxpayers must keep payroll records that show the wages paid to each laborer and mechanic. This documentation should include the identity of the workers, their labor classifications, hourly pay rates, hours worked, and total wages paid. Taxpayers must also maintain records that identify the applicable prevailing wage determination from the Department of Labor for the project’s location.

For the apprenticeship requirements, documentation includes copies of written requests sent to Registered Apprenticeship Programs for qualified apprentices. If an agreement is reached, a copy must be kept. Taxpayers must also maintain records showing the total labor hours performed on the project and the portion performed by qualified apprentices, demonstrating compliance with the applicable percentage threshold.

The Good Faith Effort Exception for Apprenticeships

The IRS recognizes that a taxpayer may not always be able to meet the apprenticeship requirements despite their best efforts, so the regulations include a Good Faith Effort Exception. This provision offers a way to secure the increased credit even if the apprenticeship targets are missed, provided the taxpayer can prove they tried to meet them. This exception applies only to the apprenticeship requirements and provides no relief from the prevailing wage standards.

To qualify for this exception, the taxpayer must submit a documented written request to at least one Registered Apprenticeship Program that could provide qualified apprentices for the project’s location and trade. If the request is denied for reasons other than the taxpayer’s refusal to comply with the program’s standards, the taxpayer is considered to have made a good faith effort. The same applies if the program fails to respond within five business days.

The taxpayer must maintain records of the request and the subsequent denial or non-response. This documentation serves as evidence that the inability to meet the apprenticeship requirements was outside the taxpayer’s control. By demonstrating this diligent effort, the taxpayer can still claim the full tax credit.