News & Insights


February 22, 2023

H2ypothetical - Prevailing Wage and Apprenticeship Requirements

The Inflation Reduction Act of 2022 (the Act) included multiple tax benefits for hydrogen production, storage and utilization, summarized in the following King & Spalding Client Alert. Many of these provisions became effective as of January 1, 2023.

This H2ypothetical is the fifth in our series designed to provide our observations on the Act’s hydrogen related provisions and government guidance that has since been published. Many of the ambiguities still remain, and we expect them to be addressed by future guidance. In the meantime, these H2ypotheticals will hopefully answer some basic questions and tease out some issues that need additional guidance to resolve.


Taxpayer owns and operates a solar or wind farm that is eligible for either the Section 45 production tax credit (PTC) or the Section 48 investment tax credit (ITC). The taxpayer places an order for an electrolyzer and related equipment to generate “clean hydrogen” which would be eligible for the Act’s new “clean hydrogen” tax credits. The taxpayer plans to have the electrolyzer and related equipment be “placed in service” in 2023 and located next to the solar or wind farm within the United States.  

The taxpayer placed an order for a large electrolyzer and related storage equipment. The installation of the electrolyzer and related equipment began in 2023.

In addition, the taxpayer ordered new storage tanks to hold the hydrogen produced by the electrolyzer. The storage tanks and related equipment will be placed in service at the same time and place as the electrolyzer.

The taxpayer is the subsidiary of a larger group. An affiliate of the taxpayer provides back-office functions to the taxpayer, and the taxpayer’s parent company provides other services to the taxpayer including security guards, cleaners and other supporting employees each earning an hourly wage. Another affiliate of the taxpayer provides a substantial amount of pre-installation fabrication work on the hydrogen storage tanks and related equipment.

Late 2023

After it was placed in service the facility suffered serious storm damage in late 2023 making it inoperable. The taxpayer hired third party contractors to repair the facility before the end of the taxable year and it resumed operations. The taxpayer used some of its own employees and a third-party contractor to repaint the facility and return it to its original cosmetic condition. 

The taxpayer began construction of its facility in late 2022.  Pursuant to Notice 2022-61 (Notice), the IRS provided a safe harbor for “beginning construction” if the preparatory work constitutes “physical work of a significant nature” (physical work test) or if the taxpayer paid or incurred 5% or more of the total cost of the project for the facility’s equipment (5% safe harbor). Both off-site and on-site work may be taken into account for purposes of meeting the physical work test. We assume that the project satisfied either the physical work test or 5% safe harbor before January 29, 2023 and made continuous progress toward completion when the project was placed in service.

The taxpayer will place the facility in service by August 1, 2023. 

Prevailing Wage & Apprenticeship Requirements

Hydrogen storage facilities are eligible for the standard ITC.  Please see our earlier H2ypothetical for a general discussion of this credit.1

Achieving a full 30% ITC for the project requires satisfaction of the Act’s prevailing wage rate and fringe benefit requirements and apprentice-to-journeyman ratios (the PW&A Rules). The ITC’s requirements are set out in Sections 48(a)(10) and (11). The PW&A Rules apply in the project’s construction and to alterations or repairs of the project during the five-year period beginning on the date the project is placed in service. The requirement generally applies to all laborers and mechanics employed by a taxpayer and any of the taxpayer’s contractors or subcontractors working on the facility.

The PW&A Rules as interpreted by the Notice are further described in the Wage Rate Requirements for Construction Act (formerly known as the Davis-Bacon Act) and the Department of Labor’s (DOL) implementing regulations. The statute and DOL’s regulation make it clear that in this case all laborers and mechanics performing construction, alteration, or repair work on the facility’s equipment (Covered Workers) must be paid consistent with the wage determination issued by DOL for that location. Foreman devoting more than 20% of their time during a workweek to mechanic or laborer duties should also be considered Covered Workers.


The taxpayer is initially deemed to satisfy the prevailing wage and apprenticeship requirements. This means that all of the work performed to place the facility in service up to August 1, 2023 are exempt from the PW&A Rules.

The PW&A Rules do apply for the five-year period beginning on the date the project is placed in service for any repairs or alterations. The DOL rules and guidance elaborate on the repair concept. It covers a range of activities excluding routine maintenance, including in some cases repainting and similar work. Failure to satisfy the PW&A Rules during this five-year period could result in recapture of part of the ITC. 

PW&A Rules do not apply to employees of the taxpayer or its affiliates that are not Covered Workers. Thus, back-office functions such as clerical work, security guards, cleaners and other supporting employees should be excluded. However, work by an affiliate’s Covered Workers on pre-installation fabrication work on the hydrogen storage tanks and related equipment should be subject to these rules.

The taxpayer must comply with the PW&A Rules for Covered Workers if it wants to achieve the full 30% ITC. The answer is the same even if the repair work occurs at any time during the five-year period. 

The taxpayer must ensure that laborers and mechanics employed by contractors and subcontractors in the construction, alteration or repair of a facility must be paid wages at not less than prevailing rates as determined by the Secretary of Labor. The taxpayer must also ensure that a certain percentage of all construction, alteration, and repair work on any eligible facility must be performed by qualified apprentices.

The wage determination requirements would apply not only to the employees of the taxpayer performing the work on the facility, but also to Covered Workers who may be employees of affiliates of the taxpayer, their subcontractors, and independent contractors performing the work. In addition, the apprenticeship requirements would apply to each of the taxpayer, its affiliates, their subcontractors, and independent contractors if they employ four or more Covered Workers. In that case, they must employ one or more qualified apprentices to perform the work. Once the apprenticeship requirements are applicable, qualified apprentices must perform 12.5% of the total labor hours for the work on the facility’s equipment that began in 2023.  

If the taxpayer had begun construction on its facility after January 29, 2023, the project needs to fully comply with the PW&A Rules in order to receive the full 30% ITC. 


The Act broke new ground for the Internal Revenue Code by effectively importing other concepts of federal law, including those from the Departments of Energy and Labor. This means many energy tax provisions require assistance from experts in other areas of federal law. 

The centrality of the “facility” definition is a recurring theme in our H2ypotheticals. Depending on the facts, multiple storage sites could each be considered a facility even if co-located. Thus, failure to comply with the PW&A Rules, for example with respect to repair work at one facility, may be isolated to that one facility if other co-located sites are compliant. 

For purposes of discussion, the fact patterns described above have been considerably simplified and many simplifying assumptions have been made. Readers should not construe the contents of this Hypothetical as legal, tax or other advice, and should consult their own tax or legal advisor as to legal, tax and other related matters concerning the Act.