On November 30, 2022, the U.S. Department of the Treasury (the Treasury) and Internal Revenue Service (IRS) issued Notice 2022-61, Prevailing Wage and Apprenticeship Initial Guidance Under Section 45(b)(6)(B)(ii) and Other Substantially Similar Provisions (Notice 2022-61). Notice 2022-61 provides information and guidance on how business taxpayers can meet requirements to qualify for maximum tax benefits of Internal Revenue Code (IRC) Section 179D Energy-Efficient Commercial Building Deduction (Section 179D) and 45L Energy Efficient Home Credit (Section 45L). The notice defines a prevailing wage, identifies an “employee” earning this wage, describes a qualified apprenticeship and provides examples.
Inflation Reduction Act (IRA) Background
The Inflation Reduction Act (IRA), enacted on August 16, 2022, included substantial expansion and restructuring of tax incentives in IRC Section 179D and Section 45L. Under Section 179D, a tax deduction may be claimed for as much as $5 per square foot for an eligible, energy-efficient commercial building, and under Section 45L, a tax credit of up to $5,000 may be claimed for construction of an energy-efficient home. Notice 2022-61 provides guidance to builders, developers, contractors and owners of clean energy facilities on how to satisfy the prevailing wage and apprenticeship requirements during construction to boost the base tax benefits to these maximum amounts.
What Is Prevailing Wage?
According to Notice 2022-61, the prevailing wage requirement applies to wages paid to laborers and mechanics employed by the taxpayer (including the taxpayer’s contractors and subcontractors) during the construction of a qualifying building or facility. The prevailing wage is the combination of the basic hourly wage rate and any fringe benefits rate, paid to workers in a specific classification of laborer or mechanic in the area where construction, alteration or repair is performed, as determined by the Secretary of Labor. The Wage and Hour Division posts labor classifications and their prevailing wage rates in wage determinations on sam.gov.
An individual laborer or mechanic that is paid the prevailing rate may be classified as an employee or as an independent contractor for other federal tax purposes. The Secretary of Labor regularly publishes determinations of prevailing wage for geographic areas and types of construction worked on.
Satisfying Apprenticeship Program Requirements
Taxpayers satisfy the apprenticeship program requirement when hours worked by qualified apprentices fulfill a set percentage of the total hours worked on a construction project. The percentage of qualified apprentice hours to total hours varies based on the date construction begins:
| Date | Percentage of Qualified Apprentice Hours |
| Before January 1, 2023 | 10% |
| January 1, 2023-December 31, 2023 | 12.5% |
| January 1, 2024 and Beyond | 15% |
IRC Section 45L provides relief to taxpayers, their contractors and subcontractors that find it difficult to meet the apprenticeship program requirement. The Good Faith Effort Exception of IRC Section 45(b)(8)(D)(ii) applies to taxpayers who do not meet the apprentice hour requirement, so long as a reasonable effort is made to request apprentices from a registered apprentice program. Notice 2022-61 provides guidance for this exception.
Recordkeeping for Prevailing Wage and Apprenticeship Requirements
Notice 2022-61 clearly states that the taxpayer claiming benefits under IRC Section 179D or Section 45L is responsible for documenting and maintaining records to demonstrate the prevailing wage and apprenticeship requirements are met. Documentation includes wages paid and hours worked for the taxpayer, as well as those for their contractors and subcontractors.
The guidance in Notice 2022-61 applies to construction projects that begin on or after January 29, 2023. For construction projects beginning before that date, the prevailing wage and apprenticeship requirements will not need to be met to claim the maximum tax benefits discussed. The notice also provides guidance to determine the date when construction begins.
Additional Guidance on Prevailing Wage and Apprenticeship Requirements
The title of Notice 2022-61 states that this is initial guidance. Taxpayers can expect additional guidance to be developed and regulations issued as the Treasury and IRS receive input from taxpayers.
Taxpayers, contractors and subcontractors should review guidance from both the Treasury and the Department of Labor to determine how to qualify for the maximum credits and deductions from construction projects. In addition, taxpayers should consider what inducements may be appropriate in contracts to ensure that contractors and subcontractors meet the requirements for prevailing wages and apprenticeships and can provide supporting documentation.
If you have any questions regarding Notice 2022-61 and the tax benefits of IRC Section 179D and Section 45L, please reach out to a team member on our Tax Credits and Incentives Advisory team.
