Key Compliance Considerations for Contractors on IRA Projects
The Inflation Reduction Act (IRA) provides major tax incentives for energy projects, but contractors must meet prevailing wage and apprenticeship requirements to qualify for full benefits. While these standards align with Davis-Bacon requirements, enforcement under the IRA presents unique challenges. Noncompliance can result in penalties and loss of tax credits, making proactive compliance essential.
Prevailing Wage Compliance: Key Steps for Contractors
To maintain tax credit eligibility, contractors must:
- Ensure Proper Wage Classifications - Workers must be paid according to the correct prevailing wage rate. If a necessary classification is missing, a conformance request must be submitted to the Department of Labor (DOL).
- Correct Underpayments Quickly – All underpayments must be corrected by the end of the month following the quarter in which they occurred. Late corrections trigger a $5,000 penalty per worker and could impact tax credits.
- Calculate and Pay Interest on Underpayments – Unlike standard Davis-Bacon projects, the IRA mandates interest payments on wage shortfalls at the federal underpayment rate plus six percentage points. Interest is not considered wages and must be paid separately.
- Avoid Intentional Disregard Penalties – Willful noncompliance can result in $10,000 per worker in penalties plus triple the back wages owed.
- Contractors should review underpayments, interest, and penalties with their legal and tax advisors promptly to avoid costly mistakes.
Apprenticeship Requirements: Meeting the Standards
In addition to prevailing wages, the IRA enforces apprenticeship utilization requirements to qualify for full tax credits:
Minimum Apprentice Hours:
- 10% for projects started before 2023
- 12.5% for projects started in 2023
- 15% for projects starting in 2024 or later
Mandatory Hiring Ratio: Any employer with four or more workers on-site must hire at least one apprentice.
Good Faith Effort Exception: If registered apprentices are unavailable, contractors must document all attempts to hire them. Requests to apprenticeship programs that go unanswered for five business days satisfy this requirement.
Enforcement & Documentation: IRS VS. DOL
The IRS enforces IRA labor compliance through tax credit adjustments, while the DOL oversees wage determinations and apprenticeship programs.
Contractors should maintain:
- Certified Payroll Reports – Weekly documentation of wages and apprentice hours.
- Good Faith Hiring Records – Proof of apprenticeship requests and responses.
- Jobsite Posters – Davis-Bacon wage rates displayed for workers.
Avoiding Tax Credit Risks
Failure to meet prevailing wage or apprenticeship requirements could lead to reduced or denied tax credits. Contractors should work closely with legal and tax advisors to ensure compliance, avoid penalties, and protect their financial benefits under the IRA.
The Bottom Line
Plan ahead, document everything, and don’t wait until tax season to ensure compliance. Proactive payroll and apprenticeship oversight will help contractors maximize tax credits and avoid unnecessary penalties.
