Section 45Z and Prevailing Wage & Apprenticeship Regulations: From Proposed Rules to Implementation
Finalized in June 2024, the U.S. Department of the Treasury Department and the Internal Revenue Service established a rigorous compliance framework for Inflation Reduction Act Section 45Z tax credits, requiring adherence to prevailing wage and apprenticeship (PWA) standards throughout contractor chains. As guidance continues to evolve with 2025 notices and 2026 proposed regulations, taxpayers must ensure comprehensive oversight to avoid significant penalty exposure.
The Evolution of the PWA Regulatory Framework
The Treasury Department and the IRS first proposed broad Inflation Reduction Act prevailing wage and apprenticeship (PWA) regulations on Aug. 29, 2023, and finalized those rules on June 18, 2024 (published in the Federal Register on June 25, 2024, as T.D. 9998). The final regulations established the overarching labor compliance framework applicable across Inflation Reduction Act credits, including the Section 45Z Clean Fuel Production Credit, and included Treas. Reg. §1.45Z-3 specifically addressing application of PWA requirements to §45Z.
Key Clarifications for Clean Fuel Producers
While the June 2024 final regulations largely preserved the proposed framework, Treasury clarified several issues important to clean fuel producers, including correction payment procedures, apprenticeship “good faith effort” standards, contractor oversight responsibilities, and substantiation requirements. Critically, taxpayers seeking enhanced §45Z credit amounts remain responsible for prevailing wage and apprenticeship compliance throughout the contractor and subcontractor chain.
Penalties, Corrections, and Financial Risks
One of the most significant aspects of the final regulations is the correction and penalty regime applicable when prevailing wage requirements are not satisfied. In general, taxpayers that discover underpayments may be required to make correction payments to affected workers and, depending on the circumstances, make additional penalty payments to the government to preserve eligibility for enhanced credit amounts. As a result, payroll errors, worker classification issues, and contractor compliance failures can create substantial financial exposure long after construction activities have been completed.
Recent 2025 and 2026 Regulatory Updates
Treasury and the IRS subsequently issued Notices 2025-10 and 2025-11 on Jan. 10, 2025, providing initial guidance on implementation of §45Z. Among other topics, the guidance addressed registration procedures, recordkeeping obligations, anti-stacking limitations, and fuel qualification requirements. Treasury emphasized that PWA compliance directly affects the amount of credit available, increasing the potential credit from base rates to as much as $1 per gallon for non-sustainable aviation fuel and $1.75 per gallon for sustainable aviation fuel, subject to inflation adjustments.
Treasury and the IRS later issued proposed §45Z regulations on Feb. 3, 2026 (published Feb. 4, 2026), which refined earlier guidance and addressed issues raised by industry stakeholders. The proposed regulations generally permit taxpayers to rely on the rules pending issuance of final regulations, provided the rules are applied consistently and in their entirety.
Operational Realities of Multi-Tier Compliance
As a practical matter, §45Z compliance has evolved into a significant operational undertaking. Producers seeking enhanced credit amounts must maintain comprehensive systems to monitor contractor and subcontractor compliance, validate prevailing wage rates, track apprenticeship hours, preserve payroll records, and maintain audit-ready documentation. The compliance burden extends well beyond the taxpayer's direct workforce and frequently requires coordination across multiple contractors, facilities, and jurisdictions.
The financial stakes are substantial. Industry participants have reported situations where prevailing wage correction obligations and related penalty payments have exceeded $1 million across multiple facilities. These exposures often arise not from intentional noncompliance, but from documentation deficiencies, contractor oversight failures, payroll administration errors, or apprenticeship shortfalls discovered during later reviews.
Strategic Steps for Credit Maximization
Accordingly, taxpayers pursuing enhanced §45Z credits should view PWA compliance as a core component of their overall credit strategy. Robust contractor management, ongoing payroll verification, apprenticeship monitoring, and contemporaneous documentation are increasingly essential not only to maximize available credits but also to mitigate potentially significant correction and penalty costs.
For more information, reach out to Vice President Nick Scott at nick@mickco.com or 605-977-4873 ext. 5, or one of our team members if you are interested in learning more about tax credit transfers.
Your organization should seek independent legal, tax, and accounting advice as part of this process. Mickelson & Company is not providing legal or accounting services.