Why Inflation Reduction Act (IRA) is not the same as Davis-Bacon
Complying with prevailing wage and apprenticeship (PW&A) requirements under the Inflation Reduction Act (IRA) can significantly enhance the value of tax credits for qualifying energy projects, a five times multiplier. However, unlike Davis-Bacon, compliance with IRA prevailing wage and apprenticeship requirements is complex and challenging to verify. While Davis-Bacon is a labor law, PW&A falls under tax law, necessitating compliance submissions to the Internal Revenue Service (IRS) along with stringent, extended record-keeping requirements.
For contractors, this means continuously addressing noncompliance issues, paying penalties and maintaining extensive records. Manual record-keeping, such as using Excel, is not enough. Project owners and credit seekers for clean energy projects face significant risk and are looking to contractors to comply with PW&A requirements to maximize their tax credit value.
Let’s compare Davis-Bacon and prevailing wage and apprenticeship requirements
| Davis-Bacon (Labor law) |
IRA (Tax law) |
|
Qualifying projects |
Projects greater than $2,000 that receive federal funding |
Any size project, public or private-owned, that is seeking IRA energy credits IRA is not a related act |
Wage determination |
Agency
|
Taxpayer
Taxpayer, contractor or subcontractor:
|
Prevailing wage (PW) compliance |
All laborers and mechanics Copeland Act requires weekly certified payroll Post Davis-Bacon (DB) poster and wage determination on work site Agency has responsibility for administration and enforcement of DB provisions Conduct worker interviews Conduct investigations Submit enforcement reports to Department of Labor (DOL) |
All laborers and mechanics, including those employed by taxpayer Copeland Act does not apply. Requirement to pay prevailing wages is binding when credit is filed Certified payroll recommended Post wage determination on work site Taxpayer has responsibility for administration and enforcement of DB provisions Exception for projects less than one megawatt (1 MW) or projects that met ‘Begun Construction’ by Jan. 29, 2023 |
Apprenticeship requirements |
Ratio requirement | Labor hour requirement (10-15%) Participation requirement Ratio requirement |
PW Noncompliance |
Contract payments may be withheld to satisfy the liability of the contractor for unpaid wages Prime contractors have a contractual obligation to cover unpaid wages or liability Potential debarment from future contracts Cure as noncompliance is identified. |
30-day grace period once taxpayer is aware if
Employee paid back pay + interest (federal short-term rate + 6%) $5,000/worker per calendar year taxpayer penalty for noncompliance Intentional disregard
|
Apprentice noncompliance |
Ratio violation: apprentice paid full prevailing wage rate |
Project labor hour: $50/unmet apprentice hour taxpayer penalty Participation requirement: $50/unmet apprentice hour taxpayer penalty Ratio violation: apprentice paid full prevailing wage rate plus interest |
Alteration or repair |
PW required for construction, alteration or repair |
PW required for construction, alteration or repair through 5-10 year recapture period after placed in service |
Recordkeeping |
Agency retains for 3 years after prime contract is completed |
Taxpayer maintains with tax records for 5-10 years |
Audit |
Audited by Department of Labor (DOL) |
Audited by Internal Revenue Service (IRS) |
EO 14026 |
Federal minimum wage applies |
Does not apply |
EO 13706 |
Paid sick leave for federal contractors applies |
Does not apply |
Our solution
To address these challenges, Baker Tilly and LCPtracker have developed a comprehensive solution for contractors and credit seekers. This end-to-end system ensures complete data-set coverage while protecting proprietary payroll data from customers. It establishes, monitors and documents compliance with prevailing wage, apprenticeship, and penalty requirements.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
