Learn how meeting prevailing wage and apprenticeship requirements increases renewable energy tax credits from 6% to 30% (or 5X for PTCs).
If you discover (or the IRS identifies) that workers were underpaid, you can cure the violation by:
1. Calculate Total Underpayment: - Identify each worker underpaid - Calculate shortfall: (Required Wage - Actual Wage) × Hours Worked - Sum across all affected workers
2. Issue Back-Pay: - Pay workers the full underpayment amount - Include interest at prevailing rates (if required) - Obtain signed receipts from workers acknowledging payment
3. Pay Penalty to IRS: - Calculate penalty: $5,000 × number of workers underpaid - Submit penalty payment to IRS - Document payment
4. Document Cure: - Prepare summary of underpayment, back-pay issued, and penalty paid - Retain all documentation for IRS audit defense - Submit documentation to IRS if cure is part of audit process
Timeline: Cure must typically be completed within 180 days of discovering the violation (or receiving IRS notice).
Effect: If cure is completed timely and properly, the enhanced credit (30% ITC) is retained. No recapture occurs.
Prevailing Wage Underpayment Penalty: - $5,000 per worker underpaid (regardless of underpayment amount or duration) - Example: 15 workers underpaid = $75,000 penalty
Apprenticeship Shortfall Penalty: - $50 per labor hour shortfall from required apprentice participation - Example: Required 3,000 apprentice hours, achieved 1,500 = 1,500 shortfall = $75,000 penalty
Intentional Disregard Penalty: - Additional $10,000 per worker for intentional violations (determined by IRS based on facts and circumstances) - Raises penalty from $5,000 to $15,000 per worker
Penalty Mitigation: Penalties may be reduced or waived in cases of: - Good faith effort to comply - Reliance on professional advice - Prompt self-correction before IRS audit - Minor or technical violations
Best Practice: Self-disclose violations and cure proactively before IRS audit to demonstrate good faith and potentially reduce penalties.
If you fail to cure violations within the 180-day cure period, or if the IRS determines cure was not completed properly, the consequences escalate:
Recapture Triggered: Credit is recalculated at 6% base rate, and the excess credit claimed (30% - 6% = 24% of basis) is recaptured.
Increased Penalties: - Accuracy-related penalties (20% of underpayment) - Interest on recaptured credit from original filing date - Potential fraud penalties (75%) if IRS determines willful non-compliance
Loss of Cure Option: Once the 180-day cure period expires, you cannot retroactively cure to avoid recapture. The only recourse is to challenge the IRS determination through administrative appeals or Tax Court.
Example: $30M Project, Failed Cure: - Credit Claimed: $9M (30%) - Violation Discovered: 20 workers underpaid - Cure Period: 180 days to pay back-pay + $100K penalty - Failure to Cure: Developer misses deadline or incomplete back-pay - Consequence: - Recapture: $9M - $1.8M (6%) = $7.2M - Accuracy Penalty: 20% × $7.2M = $1.44M - Interest: ~$500K (2 years) - Total: $9.14M exposure vs $100K cure cost
Lesson: Missing cure deadlines or failing to properly document cure is catastrophic. Engage counsel and labor compliance consultants immediately upon discovering violations.
Projects with maximum net output of less than 1 MW AC are exempt from prevailing wage and apprenticeship requirements. These projects automatically qualify for the 30% ITC (or 5X PTC) without compliance obligations.
Exemption Details: - 1 MW AC Threshold: Measured at the generator’s AC interconnection point, not DC capacity - Example: A 1.3 MW DC solar project with 1.0 MW AC inverter → Exempt (AC output ≤ 1 MW) - Example: A 1.5 MW DC solar project with 1.2 MW AC inverter → Not Exempt (AC output > 1 MW)
Benefits of Exemption: - No prevailing wage compliance required - No apprenticeship compliance required - No certified payroll or documentation burden - Automatically qualify for 30% ITC (or 5X PTC)
Common Applications: - Residential solar (virtually all are <1 MW) - Small commercial/industrial rooftop solar - Community solar gardens under 1 MW - Agricultural solar installations
Aggregation Rules: Multiple small projects at the same location or under common ownership may be aggregated for purposes of the 1 MW threshold. Consult tax advisors to ensure separate projects are not aggregated.
Standalone Storage: Battery energy storage systems (BESS) are eligible for the ITC (Section 48E, technology-neutral credits post-2024). Prevailing wage and apprenticeship requirements apply identically:
Solar + Storage: When storage is co-located with solar, the entire hybrid facility (solar + storage) is treated as one project for prevailing wage purposes. If the total AC interconnection exceeds 1 MW, both solar and storage construction must comply with prevailing wage.
Storage Alteration Period: For ITC projects, the 5-year alteration compliance period applies to the storage system. If you replace battery modules or upgrade inverters within 5 years of placed-in-service, the replacement work must comply with prevailing wage.
Charging Labor: Prevailing wage applies to construction and installation labor, not to operational labor (charging/discharging operations).
Repowering involves replacing major components of an existing renewable energy facility (e.g., replacing wind turbine blades, generators, or gearboxes, or replacing solar panels).
Prevailing Wage Application: - If the repowering constitutes construction of a “new” facility for tax credit purposes, prevailing wage and apprenticeship requirements apply to the repowering labor. - If the repowering is treated as an alteration/repair of the original facility, prevailing wage applies only if within the original facility’s alteration period (5 years ITC, 10 years PTC).
Complexity: Determining whether repowering creates a “new” facility or is an alteration of the existing facility is highly fact-specific. Consult tax advisors.
Example: A wind farm placed in service in 2020 (with 30% ITC, prevailing wage compliant) undergoes blade replacement in 2024 (year 4). This is an alteration within the 5-year period, so the blade replacement labor must comply with prevailing wage.
Offshore wind projects face unique prevailing wage challenges:
Marine Construction: Offshore foundation installation, subsea cable laying, and offshore turbine installation may require Heavy Construction or specialized marine construction wage determinations, which can have significantly higher wage rates than onshore projects.
Geographic Determination: Offshore projects must determine which county’s wage determination applies. Typically: - Onshore work (staging areas, onshore substations): County where work occurs - Offshore work: County of the nearest shoreline or port of departure
Jones Act Compliance: Offshore wind projects must also comply with Jones Act requirements (U.S.-flagged vessels for inter-U.S. transport), which intersects with prevailing wage compliance for marine workers.
Higher Costs: Prevailing wage compliance for offshore wind typically adds 15-25% to labor costs (vs 10-15% for onshore projects) due to higher marine construction wage rates and logistical complexity.
Why Hire a Consultant: - Prevailing wage compliance is complex, specialized, and high-stakes - Consultants provide expertise in wage determinations, classification, certified payroll review, and audit defense - Costs ($25,000-$150,000 for typical projects) are negligible compared to recapture risk
When to Engage: During development phase, before finalizing contractor agreements. Consultants should: - Review and advise on contractor agreements - Identify applicable wage determinations - Establish compliance processes and payroll review systems - Train project staff and contractors - Conduct ongoing compliance monitoring during construction - Prepare final compliance reports - Defend audits if IRS challenges compliance
Leading Firms: - Elias Matz Tiernan (EMT) - Loulena Associates - Morrison Tenenbaum - First Due (compliance software + consulting)
Union Advantage: Union contractors typically: - Already pay prevailing wages (union collective bargaining agreements often meet or exceed prevailing wage rates) - Have access to registered apprenticeship programs through union training centers - Maintain certified payroll as standard practice - Understand Davis-Bacon compliance from federal construction experience
Simplified Compliance: Using union contractors can significantly reduce compliance burden and risk. Union contractors are accustomed to prevailing wage requirements and have established systems.
Cost Consideration: Union labor may be more expensive than non-union open-shop labor in some markets, but the delta is often smaller than expected (especially when accounting for prevailing wage requirements that apply to both union and non-union workers).
Project Labor Agreements (PLAs): Consider negotiating PLAs that guarantee labor supply, apprentice participation, and prevailing wage compliance in exchange for exclusive hiring rights for union contractors.
Real-Time Tracking: Implement systems to track compliance in real-time during construction, not retroactively:
Software Tools: Use specialized compliance software: - LCPtracker: Leading certified payroll and prevailing wage compliance platform - First Due: Compliance tracking and apprenticeship management - CMiC: Construction management software with prevailing wage modules
Avoid Retroactive Compliance: Attempting to assemble certified payroll and apprentice documentation months after construction is extremely difficult and often incomplete. Track contemporaneously.
Independent Verification: Engage third-party auditors (labor compliance consultants or accounting firms) to review compliance before claiming the credit:
Audit Scope: - Review 100% of certified payroll records - Verify wage rates paid vs wage determinations - Confirm worker classifications - Validate apprentice participation and program qualifications - Identify deficiencies and recommend corrections
Timing: Conduct audit after construction is complete but before filing tax return claiming the credit. This allows time to cure any identified violations before IRS scrutiny.
Benefits: - Identifies and corrects issues proactively - Provides independent assurance to lenders/investors - Strengthens IRS audit defense - Reduces recapture risk
Cost: $15,000-$75,000 depending on project size. Small investment compared to recapture exposure.
Budgeting: When planning project budgets, assume prevailing wage compliance will increase labor costs by 10-15% on average:
Example Budget Impact: - $20M Solar Project - Labor Component: $6M (30% of total cost) - Prevailing Wage Increase: 12% × $6M = $720,000 - Total Project Cost: $20.72M (3.6% increase) - Enhanced ITC: $20.72M × 30% = $6.22M - Base ITC Alternative: $20.72M × 6% = $1.24M - Net Benefit: $6.22M - $1.24M - $0.72M = $4.26M
Even with the 12% labor cost increase, the net benefit is $4.26M—far exceeding the incremental cost.
Avoid Underbidding: Ensure contractors understand prevailing wage requirements and have budgeted accordingly. Low bids from contractors unfamiliar with prevailing wage often lead to underpayment violations and recapture risk.
Error: Believing that only union contractors must comply with prevailing wage, or that hiring non-union contractors avoids the requirement.
Reality: Prevailing wage requirements apply to all laborers and mechanics, whether union or non-union. Open-shop (non-union) contractors must pay the same prevailing wage rates as union contractors. The wage determination is based on geographic area and trade, not union status.
Correction: Require all contractors and subcontractors (union and non-union) to comply with prevailing wage. Include prevailing wage requirements in all construction contracts regardless of contractor type.
Error: Using the wrong wage determination (wrong county, wrong construction type, outdated version) or failing to obtain a wage determination at all.
Reality: The wage determination must match the project’s county, state, and construction type. Using the wrong determination can result in underpayment violations if the correct determination had higher wage rates.
Example: Using a Building construction wage determination for a large wind farm that should use Heavy construction wage determination (Heavy rates are often higher).
Correction: Work with labor compliance consultants to identify the correct wage determination. Download the official version from sam.gov and verify it matches your project location and type. Update if wage determinations are modified during construction.
Error: Classifying electricians as “laborers” or equipment operators as “truck drivers” to pay lower wage rates.
Reality: Workers must be classified based on the work they actually perform, not the job title preferred by the employer. Misclassification is a common source of underpayment violations and attracts IRS scrutiny.
Example: An electrician installing solar panels and wiring inverters is classified as “laborer” to avoid the higher electrician wage rate. This is a violation.
Correction: Classify workers based on actual duties performed. If a worker performs multiple trades, pay the highest applicable rate for each hour worked. Document classification decisions and consult DOL guidance or labor compliance advisors for uncertain cases.
Error: Claiming to pay fringe benefits through employer-provided health insurance or retirement plans, but failing to document the actual cost or eligibility.
Reality: If you pay fringe benefits through bona fide benefit plans (rather than cash), you must document: - The cost of benefits per hour worked - Worker eligibility and enrollment - Employer contributions made
Simply claiming “we provide health insurance” without documentation of the hourly equivalent cost and worker enrollment is insufficient.
Correction: Either (A) pay fringe as cash in lieu of benefits (simpler), or (B) maintain detailed documentation of benefit costs, eligibility, and contributions for each worker. Work with payroll and benefits teams to calculate hourly fringe equivalent accurately.
Error: Focusing solely on prevailing wage and neglecting apprenticeship requirements, or assuming apprentices are unavailable and not attempting to comply.
Reality: Both prevailing wage and apprenticeship must be satisfied to achieve the 30% ITC. Failing apprenticeship requirements triggers the same recapture and penalties as failing prevailing wage.
Correction: Engage apprenticeship programs early in the project. Contact union and non-union programs to request apprentices. Document requests and responses. Track apprentice hours weekly to ensure 15% participation. If apprentices are unavailable despite good faith efforts, document all outreach attempts as a “good faith effort” defense.
Error: Requiring contractors to submit certified payroll monthly, quarterly, or only at project completion.
Reality: Weekly certified payroll submission is best practice and standard for Davis-Bacon compliance. Monthly or less frequent submissions delay identification of underpayment issues, making correction more difficult and costly.
Correction: Require weekly certified payroll submission in all contractor agreements. Review payroll within 1 week of receipt. Flag and correct issues immediately rather than discovering violations months later.
Error: Assuming that any post-placed-in-service work is “routine maintenance” and doesn’t trigger prevailing wage requirements.
Reality: The distinction between routine maintenance (exempt) and alteration/repair (subject to prevailing wage) is nuanced. Significant work like equipment replacement, structural repairs, or capacity additions typically constitutes alteration and triggers prevailing wage for 5 years (ITC) or 10 years (PTC).
Example: Replacing 200 damaged solar panels after a hailstorm in year 3 is an alteration, not routine maintenance, and requires prevailing wage compliance.
Correction: Consult with labor compliance and tax advisors before undertaking significant post-placed-in-service work. Document the decision-making process. When uncertain, apply prevailing wage to be safe.
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Contact UsThis content is for educational purposes only and does not constitute tax, legal, or financial advice. Always consult with qualified professionals before making tax credit decisions.