Prevailing Wages and Green Building Tax Incentives

A guide on how paying prevailing wages impacts Green Building Tax Incentives

Taking advantage of Green Building Tax Incentives has proven to be a financially viable way to reduce one’s tax burden when constructing or designing sustainable and environmentally friendly buildings. While the signing of the Inflation Reduction Act (IRA) in 2022 expanded many sustainable energy incentives to allow more businesses than ever to claim them, maximizing the value of these initiatives requires paying employees prevailing wages. 

Defining What Prevailing Wages Are

Prevailing wages are the basic hourly wages and benefits paid to employed individuals in a specific area. Lawmakers often use prevailing wage levels to set benefits and wage floors for workers in their locality. Prevailing wage laws also ensure government funds do not undercut local wage and benefit standards, providing value to taxpayers by supporting jobs and preventing a race to the bottom among government-funded contractors. 

Through the IRA, businesses that ensure prevailing wages are paid to employees can receive further tax incentives for the work being done on energy-efficient commercial and residential buildings. Companies must adhere to the prevailing wage requirements if construction is commenced on or after January 1, 2023, to be eligible for the additional tax incentives,  

Companies wanting to take advantage of the additional benefits from prevailing wages must be sure that every employee classified is paid the current prevailing wage, including fringe benefits like the ones below: 

  • Holiday pay 
  • Sick leave  
  • Health insurance 

Businesses must pay prevailing wages for all the hours employees dedicate to constructing a building. Prevailing wages are ultimately determined by the Department of Labor, meaning the government-approved compensation is what must be paid to employees. 

Keeping Proper Records of Prevailing Wages

In addition to adhering to the government’s standards for prevailing wages, businesses must maintain proper recordkeeping to establish the amount of the credits or deductions that are trying to be claimed. These records must also show the business has complied with the prevailing wage standards set forth by the IRA and that the business’s contractors and subcontractors were not paid less than the prevailing wage.  

Based on the Department of Labor’s guidelines, these records should include the following documentation:  

  • The prevailing wage rate in that area or region 
  • The list of employees who performed any work on the project 
  • The type of work employees performed 
  • The number of hours worked by each employee 

Impacts of Prevailing Wages on Green Building Tax Incentives

One of the primary ways prevailing wages affect tax incentives is through increased construction costs. Paying higher wages can inflate the overall project budget, potentially making it more challenging for developers to meet the financial criteria necessary for Green Building Tax Incentives. In some cases, this additional cost of prevailing wages can exceed the benefits the incentives offer. 

Though prevailing wages can impact a project’s eligibility for Green Building Tax Incentives by increasing construction costs, they can also have positive effects on workforce quality and project efficiency. Striking a balance between fair wages and sustainable construction practices is critical to successfully navigating this complex landscape and reaping the benefits of both financial incentives and reducing the carbon footprint in the world of building for a green future. 

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