How New Prevailing Wage and Apprenticeship Requirements Impact the Real Estate & Construction Industry

MARK COOTER: On November 30, 2022, the Treasury and IRS published guidance on the Inflation Reduction Act’s prevailing wage and apprenticeship requirements. The publication of this guidance started a 60-day period, meaning that in order to receive increased incentives, taxpayers must meet the prevailing wage and apprenticeship requirements for facilities where construction begins on or after January 29, 2023.

MARK COOTER: Welcome. My name is Mark Cooter, and I am a tax partner with Cherry Bekaert and head of our Real Estate & Construction practice.

MARK COOTER: Ron Wainwright is with me, and we are going to talk about this prevailing wage and apprenticeship program to discuss how to maximize the incentives that may be available for you and your project. This is the first podcast of four on the prevailing wage and apprenticeship requirements, challenges, and compliance.

MARK COOTER: With that, Ron, maybe a quick introduction before we get started.

RON WAINWRIGHT: Great, Mark. Thank you, and thank you to our listeners today.

RON WAINWRIGHT: My name is Ron Wainwright. I am a strategic tax partner with Cherry Bekaert, located in our Raleigh, North Carolina office, and I work significantly with Mark in our Real Estate & Construction industry group.

MARK COOTER: Ron, can you give us more background on the context under the Inflation Reduction Act of 2022 and what we are talking about here?

RON WAINWRIGHT: On August 16, 2022, President Biden signed the Inflation Reduction Act into law. Under this act, taxpayers may receive increased tax benefits by meeting the so-called prevailing wage and apprenticeship requirements.

RON WAINWRIGHT: By statute, the prevailing wage and apprenticeship requirements generally apply to facilities where construction begins 60 days or more after the November 30, 2022, date you mentioned. From a tax policy perspective, a critical piece of the Inflation Reduction Act is providing what we refer to as "good-paying jobs" by offering enhanced tax benefits for a range of clean energy provisions.

RON WAINWRIGHT: It is by far our nation's largest investment in clean, green energy. Many of the prevailing wage and apprenticeship programs deal with energy efficiency deductions, specifically with respect to our real estate and construction industry.

RON WAINWRIGHT: By pairing climate investments with the creation of good-paying jobs, the Inflation Reduction Act is an unparalleled investment to fight the climate crisis while improving job quality in clean energy and real estate industries.

RON WAINWRIGHT: There is a lot of focus on these provisions following the release of the initial guidance on November 30, 2022. Now that we are past the January 29, 2023, effective date, developers and real estate companies need to be focused on these prevailing wage and apprenticeship requirements in the Internal Revenue Code.

MARK COOTER: Ron, what is a prevailing wage, and how does the taxpayer go about satisfying the requirement?

RON WAINWRIGHT: For purposes of complying with the prevailing wage provisions under the Inflation Reduction Act, the prevailing wage refers to the minimum wage rates that a taxpayer must ensure are paid to laborers and mechanics performing construction of a facility, project, property, or even equipment. In some cases, it even applies to alterations or repairs.

RON WAINWRIGHT: A prevailing wage is the combination of the basic hourly wage rate and any fringe benefits rate paid to a worker in a specific classification of laborer or mechanic in the area where that work is being performed. These are ultimately guidelines that come from the Secretary of Labor with respect to what is often referred to as the Davis-Bacon Act.

RON WAINWRIGHT: In order to satisfy the prevailing wage provisions of the Inflation Reduction Act and achieve enhanced tax benefits, taxpayers must ensure that they and their contractors and subcontractors are documenting and substantiating that pay and fringe benefits are exceeding the prevailing wage rate. This is required by job classification.

RON WAINWRIGHT: The definition of a laborer and mechanic includes workers who perform primarily manual or physical work in trades or occupations such as electricians, ironworkers, equipment operators, truck drivers, and general laborers. Each of those specific examples has a specific prevailing wage that must be exceeded, documented, and substantiated.

RON WAINWRIGHT: An electrician could be different than an ironworker, who will be different from a truck driver or an equipment operator. There is a lot of new documentation and substantiation required of listeners specifically to achieve enhanced tax benefits under the Section 179D energy efficiency deduction or the multi-residential credit, which are the two most familiar in the Real Estate & Construction industry.

RON WAINWRIGHT: Many of the clean and green energy provisions in the Inflation Reduction Act dealing with solar, micro-turbines, and other types of alternative energy are also impacted by this prevailing wage and apprenticeship program.

MARK COOTER: In the context of those requirements, what do construction, alteration, and repair really mean?

RON WAINWRIGHT: There is still a little bit of uncertainty. The initial guidance that came out on November 30, 2022, brought us more questions than answers.

RON WAINWRIGHT: Ultimately, construction, alteration, and repair mean all types of work done on the facility, including altering, remodeling, installation, painting, and decorating. It also includes the manufacturing of furnishings, materials, supplies, or equipment on the site of the work, and transportation between the taxpayer's facility and an off-site facility dedicated to that construction.

RON WAINWRIGHT: When we think about monitoring and substantiating that we are paying in excess of the prevailing wage based on that job type, we have to break down what exactly we are doing on that job site. The definition is not limited to new construction or complete renovation of a facility.

RON WAINWRIGHT: Construction, alteration, and repair can include anything from painting mailboxes to installing fixed modular furniture or even replacing cores and turbines in a hydroelectric facility. Ultimately, the definition applies based on the scope of the work to be performed and the type of work being done by laborers or mechanics performing manual or physical labor.

RON WAINWRIGHT: A lot of documentation, substantiation, and contemporaneous records will have to be maintained to ensure you are maximizing the Inflation Reduction Act benefits, such as the Section 179D energy efficiency deduction or a multi-residential credit.

MARK COOTER: Given the guidance we have, when does the taxpayer need to ensure that they pay the wages to qualify for the benefit?

RON WAINWRIGHT: The Inflation Reduction Act, as well as IRS Notice 2022-61, identifies the circumstances under which a taxpayer must ensure that the prevailing wage is paid to laborers and mechanics. Ultimately, you want to qualify for the enhanced tax benefit.

RON WAINWRIGHT: A simple example is Section 179D, the Energy-Efficient Commercial Buildings Deduction. That was a $1.88 per square foot deduction for an asset placed in service prior to December 31, 2022.

RON WAINWRIGHT: Under the Inflation Reduction Act, when coupled with the prevailing wage and apprenticeship program, that deduction moves from $1.88 to $5.00 per square foot. For a 100,000-square-foot facility, the deduction moves from $188,000 to $500,000, which is a game-changer.

RON WAINWRIGHT: This highlights the criticality of documenting substantiation with contemporaneous records in all areas to show that you are exceeding those prevailing wage rates paid to laborers or mechanics at that specific facility.

MARK COOTER: Based on what you have gone over, Ron, can you confirm for our listeners what types of facilities this is going to apply to and what they need to be on the lookout for?

RON WAINWRIGHT: This is one of the very broad provisions within the Inflation Reduction Act used to achieve higher energy credits or deductions. To receive those enhanced tax benefits, the requirements apply to any facility that produces electricity from certain renewable resources, such as wind, biomass, geothermal, or solar.

RON WAINWRIGHT: If you are installing a solar array on the roof of your real estate asset and you want to maximize the credit, you need to pay attention to the prevailing wage of your installers. It also applies to energy storage technologies and energy-efficient commercial buildings.

RON WAINWRIGHT: As you are constructing, renovating, or altering a building and want to achieve that $5.00 per square foot deduction, you must pay the prevailing wage and include the appropriate percentage of apprenticeship programs in your base of employees.

RON WAINWRIGHT: It applies to any dwelling that meets certain energy star efficiency standards, qualified nuclear power facilities, and alternative vehicle refueling property, such as EV stations. It also impacts clean hydrogen facilities and clean fuel production facilities.

RON WAINWRIGHT: It is very broad. Almost any real estate asset you can think of will require meeting these standards if you want to achieve higher energy deductions or credits. For instance, the $5,000 credit on a residential unit, which was previously $2,000, requires exceeding prevailing wage requirements.

MARK COOTER: We talked a lot about these requirements and the properties they might apply to. Is there any guidance that speaks to what records taxpayers will have to keep to document all this and ensure IRS requirements are met?

RON WAINWRIGHT: This is where the rubber hits the road. The income tax regulations and initial IRS guidance provide that any person wanting to claim the enhanced benefit shall keep records sufficient to establish the amount of any credit or deduction claimed.

RON WAINWRIGHT: The taxpayer would need to keep records showing that all laborers and mechanics, by job title and function, have been paid the applicable prevailing wage rate for all of their hours worked. This includes records of the applicable wage determinations and classifications from the Department of Labor.

RON WAINWRIGHT: The taxpayer would have to identify all laborers and mechanics who performed construction work on the facility and reflect the correct classification of work performed, the hours worked in each classification, and the specific prevailing wage rate that was exceeded. This also includes any bona fide fringe benefit contributions or costs.

RON WAINWRIGHT: You have to evaluate the standards, identify all employees and their job functions, and tie each employee to that specific job activity and prevailing wage. It is quite a matrix to meet that simple definition of "sufficient to establish the amount." Unpacking sufficient documentation will be very complex.

MARK COOTER: Thank you, Ron, for this first part in a four-part series on this topic. Are there any other conclusions that you would like to draw for our listeners today?

RON WAINWRIGHT: In general, taxpayers that wish to take advantage of the hundreds of enhanced clean energy tax benefits within the Inflation Reduction Act must ensure that all their laborers and mechanics are paid the applicable prevailing wage, including fringe benefits, for all hours performed during construction, renovation, or repair work.

RON WAINWRIGHT: For purposes of showing compliance, we wanted to make listeners aware of these requirements to maintain records that are "sufficient to establish" those benefits.

RON WAINWRIGHT: Cherry Bekaert stands ready to assist you if you have a new construction project, a renovation, or any type of repair and maintenance occurring on an underlying asset that you might own or build. These requirements are voluminous and will be a labyrinth, but Cherry Bekaert is ready to guide you forward regarding the prevailing wage and apprenticeship requirements.

MARK COOTER: Thank you, listeners, for joining us today, and we look forward to hosting you in future podcasts.