Bulletin No. 2023–39

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HIGHLIGHTS

OF THIS ISSUE

Bulletin No. 2023–39

September 25, 2023

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

INCOME TAX

Notice 2023-63, page 919.

Notice 2023-63 announces the IRS’ intent to issue regulatory

guidance to address issues regarding specified research or

experimental expenditures under § 174. Notice 2023-63

also provides interim guidance regarding these expenditures.

This includes definitions of relevant terms; in addition to rules

for allocation of costs, software development, research provided under contract, disposition of property, long term contracts, and cost-sharing transactions. Finally, Notice 2023-63

requests comments for issues regarding the interim guidance

provided.

Finding Lists begin on page ii.

REG-100908-23, page 931.

The proposed regulations describe the rules for satisfying

the prevailing wage and registered apprenticeship requirements to qualify for increased credit or deduction amounts

under the Internal Revenue Code. In addition, the proposed

regulations provide correction and penalty procedures

for taxpayers to be deemed to satisfy the prevailing wage

and registered apprenticeship requirements. The proposed

regulations also describe recordkeeping and reporting

requirements related to the prevailing wage and registered

apprenticeship requirements.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

September 25, 2023

Bulletin No. 2023–39

Part III

Guidance on Amortization

of Specified Research or

Experimental Expenditures

under Section 174

Notice 2023-63

SECTION 1. OVERVIEW

This notice announces that the

Department of the Treasury (Treasury

Department) and the Internal Revenue

Service (IRS) intend to issue proposed

regulations (forthcoming proposed regulations) addressing (1) the capitalization

and amortization of specified research or

experimental (SRE) expenditures under

§ 174 of the Internal Revenue Code

(Code)1, as amended by Public Law 11597, 131 Stat. 2054 (Dec. 22, 2017), commonly referred to as the Tax Cuts and

Jobs Act (TCJA), (2) the treatment of

SRE expenditures under § 460, and (3)

the application of § 482 to cost sharing

arrangements involving SRE expenditures. The Treasury Department and the

IRS intend to propose rules in the forthcoming proposed regulations consistent

with the interim guidance provided in sections 3 through 9 of this notice. Section

10 of this notice provides that taxpayers

may rely on the interim guidance provided

in sections 3 through 9 of this notice prior

to the publication date of the forthcoming proposed regulations in the Federal

comments, including comments on specific issues and issues not addressed in

this notice.

The guidance in this notice does not

apply for purposes of determining whether

an expenditure paid or incurred for taxable years beginning before January 1,

2022, is a research or experimental expenditure under § 174 as in effect for taxable

years beginning before January 1, 2022

(former § 174). This notice provides

guidance regarding expenditures that are

treated as SRE expenditures under § 174

and, therefore, affects expenditures that

may be treated as SRE expenditures for

purposes of § 41(d)(1)(A) and § 1.41-4(a)

(2)(i). However, this notice is not intended

to change the rules for determining eligibility for or computation of the research

credit under § 41 and the regulations

thereunder, including rules for “research

with respect to computer software,” and

the definitions of “qualified research” and

“qualified research expenses.”

SECTION 2. BACKGROUND

.01 Prior law treatment of research or

experimental expenditures.

(1) In general. Former § 174 was first

enacted in 1954 to provide certainty to

taxpayers regarding the treatment of otherwise capitalizable research or experimental expenditures with no determinable

useful life. See H.R. Rep. No1337, 83d

Cong., 2d Sess. 28 (1954); S. Rep. No.

1622, 83d Cong., 2d Sess. 33 (1954).

Before the enactment of former § 174,

courts consistently held that the law

required capitalization of product research

and development costs, including production costs of tangible property used

in the research process. Under such prior

law, expenditures related to a taxpayer’s

research and experimentation generally

were capitalized and held in suspense until

the taxpayer could determine (1) whether

or not the research had failed; and (2) if

the research was successful, whether or

not the research resulted in property that

had a useful life determinable with reasonable accuracy.

Former § 174 allowed taxpayers to

elect to deduct research or experimental

expenditures paid or incurred in connection with a trade or business as currently

deductible expenses, to capitalize and

amortize such expenditures over a period

of not less than 60 months, or to charge

such expenditures to capital account.

(2) Definition of research or experimental expenditures under former § 174.

The provisions of § 1.174-2 address the

scope and definition of research or experimental expenditures under former § 174.

Specifically, § 1.174-2(a)(1) provides

that the term “research or experimental

expenditures” means those expenditures

incurred in connection with a taxpayer’s

trade or business that represent research

and development costs in the experimental or laboratory sense, and generally

includes all such costs incident to the

development or improvement of a product

or a component or subcomponent of the

product, as well as the costs of obtaining

a patent. Expenditures represent research

and development costs in the experimental or laboratory sense if they are for activities intended to discover information that

would eliminate uncertainty concerning

the development or improvement of a

product. Section 1.174-2(a)(3) defines the

term “product” to include any pilot model,

process, formula, invention, technique,

patent, or similar property, and includes

products to be used by the taxpayer in its

trade or business as well as products to be

held for sale, lease, or license.

Section 1.174-2(a)(10) and (b)(3)

generally provide that former § 174 also

applies to expenditures paid or incurred

by a taxpayer for research or experimentation carried on by another person or

organization (such as a research institute,

foundation, engineering company, or similar contractor) on behalf of the taxpayer,

provided that such expenditures are made

at the taxpayer’s order and risk. However,

§ 1.174-2 does not explicitly address

expenditures paid by a contractor for

research or experimentation carried on for

another person or organization.

Section 1.174-2(a) also provides guidance on expenditures that are not subject

to former § 174, including costs paid or

incurred in the production of a product

after the elimination of uncertainty concerning the development or improvement

of the product, and expenditures for: quality control testing, efficiency surveys,

management studies, consumer surveys,

advertising or promotions, the acquisition

of another’s product, and research in connection with literary, historical or similar

projects. In addition, § 1.174-2(b) and

former § 174(c) provide that any expenditure for the acquisition or improvement

Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2023–39

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September 25, 2023

of land or depreciable property to be

used in connection with the research or

experimentation and of a character which

is subject to the allowance under § 167

or § 611 are not research or experimental

expenditures. However, allowances for

depreciation and depletion with respect

to such property are treated as research

or experimental expenditures. Finally,

§ 1.174-2(c) and former § 174(d) provide that the provisions of former § 174

are not applicable to any expenditures

paid or incurred for the purpose of ascertaining the existence, location, extent, or

quality of any deposit of ore, oil, gas, or

other mineral.

(3) Software development. Prior to the

effective date of the TCJA amendments

to former § 174, section 5 of Rev. Proc.

2000-50, 2000-2 C.B. 601, permitted taxpayers to treat costs to develop computer

software that were not otherwise treated

as research or experimental expenditures

under former § 174 as currently deductible expenses or capital expenditures

that are amortized over 60 months or 36

months. Accordingly, under section 5

of Rev. Proc. 2000-50, costs to develop

computer software that did not otherwise

meet the definition of research or experimental expenditures under former § 174

were afforded generally similar treatment to research or experimental expenditures under former § 174. Rev. Proc.

2000-50 does not define software development or otherwise describe software

development activities. See also Kellett

v. Commissioner, T.C. Memo. 2022-62

(discussing, and questioning the statutory

support for, deduction of software development expenditures under Rev. Proc.

2000-50).

.02 Treatment of research or experimental expenditures under the TCJA.

(1) Requirement to capitalize and

amortize SRE expenditures. Section

13206(a) of the TCJA amended former

§ 174 for amounts paid or incurred in taxable years beginning after December 31,

2021. For such amounts, § 174(a)(1) disallows deductions for SRE expenditures,

except as provided in § 174(a)(2). Section

174(a)(2) requires taxpayers to charge

SRE expenditures to capital account and

allows amortization deductions of such

capitalized expenditures ratably over the

applicable § 174 amortization period,

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beginning with the midpoint of the taxable

year in which such expenditures are paid

or incurred. As used in this notice, the term

“applicable § 174 amortization period”

refers to a 5-year (60-month) period in

the case of SRE expenditures attributable

to domestic research or a 15-year (180month) period in the case of SRE expenditures attributable to foreign research, as

defined in section 3.03 of this notice.

(2) Definition of SRE expenditures.

Section 174(b), as amended by section

13206(a) of the TCJA, defines “SRE

expenditures” to mean, with respect to any

taxable year beginning after December

31, 2021, research or experimental expenditures that are paid or incurred by the

taxpayer during such taxable year in connection with the taxpayer’s trade or business. See Snow v. Commissioner, 416 U.S.

500 (1974) (“in connection with” a trade

or business is broader than “in carrying

on” a trade or business).

(3) Software development. Section

13206(a) of the TCJA added new § 174(c)

(3) to require that any amount paid or

incurred in connection with the development of any software in taxable years

beginning after December 31, 2021, be

treated as a research or experimental

expenditure (and thus an SRE expenditure

to the extent paid or incurred by the taxpayer during the taxable year in connection with the taxpayer’s trade or business).

(4) Amortization deductions for disposed of, retired, or abandoned property.

Section 13206(a) of the TCJA added new

§ 174(d) to provide that deductions of

SRE expenditures may not be taken on

account of the disposition, retirement, or

abandonment of property with respect to

which such SRE expenditures are paid or

incurred. If such property is disposed of,

retired, or abandoned during the applicable § 174 amortization period, § 174(d)

requires that the amortization deductions

for such SRE expenditures continue over

that period.

(5) Other changes to former § 174.

Section 13206(a) of the TCJA redesignated former § 174(c) to § 174(c)(1) and

former § 174(d) to § 174(c)(2), removed

former § 174(e), which provided that only

reasonable expenditures are considered

research or experimental expenditures

under former § 174, and also removed

former § 174(f), which contained

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cross-references to basis adjustments

under § 1016(a)(14) and to an election for

10-year amortization under § 59(e).

(6) Change in method of accounting.

(a) TCJA requirement. Section 13206(b)

of the TCJA requires taxpayers to apply

the provisions of § 174, as amended by

section 13206(a) of the TCJA, as a change

in method of accounting for purposes of

§ 481, initiated by the taxpayer and made

with the consent of the Secretary of the

Treasury or her delegate, and applied on

a cutoff basis to SRE expenditures paid or

incurred in taxable years beginning after

December 31, 2021. Thus, no adjustments

under § 481(a) are permitted or required

with respect to research or experimental

expenditures paid or incurred in taxable

years beginning before January 1, 2022.

(b) Procedural guidance. On December

12, 2022, the Treasury Department and

the IRS issued Rev. Proc. 2023-8, 2023-3

I.R.B. 407, to provide procedures for

taxpayers to obtain automatic consent to

change methods of accounting to comply with § 174, as amended by the TCJA.

On December 29, 2022, the Treasury

Department and the IRS issued Rev. Proc.

2023-11, 2023-3 I.R.B. 417, to modify

and supersede Rev. Proc. 2023-8. The

change in method of accounting provided

by Rev. Proc. 2023-11 was subsequently

included in section 7.02 of Rev. Proc.

2023-24, 2023-28 I.R.B. 1207. Section

7.02 of Rev. Proc. 2023-24 implements

the requirement imposed by § 13206(b) of

the TCJA that a taxpayer must make this

change in method of accounting on a cutoff basis if the change was made during

the taxpayer’s first taxable year beginning

after December 31, 2021. However, section 7.02 of Rev. Proc 2023-24 provides

that a taxpayer making the change for a

taxable year subsequent to the taxpayer’s first taxable year beginning after

December 31, 2021, is required to make

that change with a modified § 481(a)

adjustment that takes into account only

SRE expenditures paid or incurred in

taxable years beginning after December

31, 2021. Section 7.02(7) of Rev. Proc.

2023-24 also provides that a taxpayer

that changes its method of accounting for

SRE expenditures under the revenue procedure will receive limited audit protection. Specifically, audit protection will not

apply for expenditures paid or incurred in

Bulletin No. 2023–39

taxable years beginning before January 1,

2022. Audit protection also will not apply

for expenditures paid or incurred in taxable years beginning after December 31,

2021, if a change in method of accounting

is made for the taxable year immediately

subsequent to the first taxable year beginning after December 31, 2021. See section

10.02 of this notice for additional procedural guidance the Treasury Department

and IRS intend to issue.

SECTION 3. CAPITALIZATION

AND AMORTIZATION OF SRE

EXPENDITURES

.01 Purpose. The Treasury Department

and the IRS intend to propose rules in

forthcoming proposed regulations consistent with the interim guidance provided in

this section 3, which provides taxpayers

with clarity regarding the requirement in

§ 174(a) to capitalize and amortize SRE

expenditures and the treatment of short

taxable years.

.02 Requirement to capitalize and

amortize SRE expenditures. Taxpayers

are required to capitalize SRE expenditures (as defined in section 4.02(2) of this

notice) and amortize such expenditures

ratably over the applicable § 174 amortization period beginning with the midpoint

of the taxable year in which such expenditures are paid or incurred.

.03 Definition of foreign research. The

term foreign research means any research

conducted outside the United States, the

Commonwealth of Puerto Rico, or any

U.S. territory or other possession of the

United States. See §§ 174(a)(2)(B) and

41(d)(4)(F).

.04 SRE expenditures attributable to

foreign research. Taxpayers must look to

where the SRE activities (as defined in section 4.02(4) of this notice) are performed

to determine whether the corresponding

SRE expenditures are attributable to foreign research for purposes of section 3.02

of this notice.

.05 Definition of midpoint. Except as

provided in section 3.06 of this notice,

for purposes of determining when amortization begins under § 174(a)(2)(B) and

section 3.02 of this notice, the term midpoint means the first day of the seventh

month of the taxable year in which the

SRE expenditures are paid or incurred.

Bulletin No. 2023–39

See section 7.03 of this notice for interim

guidance with respect to SRE expenditures that relate to property disposed of

before the midpoint of the taxable year in

which such SRE expenditures are paid or

incurred.

.06 Short taxable years.

(1) In general. The amortization deduction for a short taxable year is based on

the number of months in the short taxable

year. If a short taxable year includes part

of a month, the entire month is included in

the number of months in the taxable year,

but the same month may not be counted

more than once. If a taxpayer has two successive short taxable years and the first

short taxable year ends in the same month

that the second short taxable year begins,

the taxpayer should include that month in

the first short taxable year and not in the

second short taxable year.

(2) Midpoint for short taxable years.

The midpoint of a short taxable year is

the first day of the midpoint month. In the

case of a short taxable year with an even

number of months (as determined under

section 3.06(1) of this notice), the midpoint month is determined by dividing the

number of months in the short taxable year

by two and then adding one (for example,

for a short taxable year consisting of ten

months, the midpoint month is the sixth

month of the short taxable year ((10 / 2)

+ 1 = 6)). In the case of a short taxable

year with an odd number of months (as

determined under section 3.06(1) of this

notice), the midpoint month is the month

for which there are an equal number of

months before and after such month (for

example, for a short taxable year consisting of seven months, the mid-point month

is the fourth month of the short taxable

year).

.07 Example.

(1) Facts. Taxpayer is a calendar-year taxpayer

that incorporated and began operations on October

17, 2022. In 2022, Taxpayer paid or incurred $60,000

in SRE expenditures that were not attributable to foreign research. Taxpayer has no short taxable years

after its initial taxable year.

(2) Analysis. Taxpayer has a short taxable

year that begins on October 17, 2022, and ends on

December 31, 2022, and thus is treated as having a

three-month taxable year under section 3.06(1) of

this notice. The midpoint month is November, and

thus November 1, 2022, will be treated as the midpoint under section 3.06(2) of this notice. In 2022,

Taxpayer amortizes $2,000 of SRE expenditures

($60,000 / 60 months × 2 months). In taxable years

2023 through 2026, each a full 12-month taxable

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year, Taxpayer amortizes $12,000 ($60,000 / 60

months × 12 months) each year, or $48,000 total.

In 2027, Taxpayer amortizes the remaining $10,000

($60,000 / 60 months × 10 months).

SECTION 4. SCOPE OF

SECTION 174

.01 Purpose. The Treasury Department

and the IRS intend to propose rules in forthcoming proposed regulations consistent

with the interim guidance provided in this

section 4, which provides taxpayers with

clarity in determining whether expenditures are SRE expenditures subject to capitalization and amortization under § 174.

.02 Definition of SRE expenditures and

other relevant terms. For purposes of this

notice:

(1) Terms used in § 1.174-2. Unless

otherwise provided, all terms used in this

notice have the same meaning as those in

§ 1.174-2. For example, the term product

has the meaning set forth in § 1.174-2(a)

(3).

(2) SRE expenditures defined. The term

SRE expenditures means, with respect to

any taxable year beginning after December

31, 2021, research or experimental expenditures (as defined in section 4.02(3) of

this notice), which are paid or incurred

by the taxpayer during such taxable year

in connection with the taxpayer’s trade or

business.

(3) Research or experimental expenditures defined. The term research or experimental expenditures means expenditures

that—

(a) satisfy the requirements under

§ 1.174-2 to be research or experimental

expenditures, or

(b) are paid or incurred in connection

with the development of any computer

software (as provided in section 5 of

this notice), regardless of whether such

expenditures are research or experimental

expenditures under § 1.174-2.

See section 6 of this notice for rules to

determine whether expenditures paid or

incurred pursuant to a contract meet the

definition of research or experimental

expenditures under this section 4.02(3).

(4) SRE activities defined. The term

SRE activities means—

(a) software development activities

described in section 5.03 of this notice, or

(b) research or experimental activities

described in § 1.174-2 (that is, activities

September 25, 2023

in the experimental or laboratory sense

intended to discover information that

would eliminate uncertainty concerning the development or improvement or

appropriate design of a product or a component or subcomponent of a product).

.03 Identification and allocation of

SRE expenditures. As provided in section 4.02(2) and (3) of this notice, SRE

expenditures include expenditures that

satisfy the requirements under § 1.174-2

or are paid or incurred in connection with

the development of any computer software, regardless of whether such software

expenditures satisfy the requirements

under § 1.174-2. Section 1.174-2(a)(1) and

(5) provide that research or experimental expenditures under § 1.174-2 include

all costs incident to the development or

improvement of a product, a component of

a product, or subcomponent of a product,

as applicable (that is, research or experimental expenditures under § 1.174-2

include all costs incident to SRE activities described in section 4.02(4)(b) of this

notice). Section 4.03(1) of this notice provides a non-exhaustive list of examples of

the types of costs that are incident to SRE

activities described in section 4.02(4)(b)

of this notice or paid or incurred in connection with software development activities described in sections 4.02(4)(a) and

5.03 of this notice. In other words, section

4.03(1) of this notice provides a non-exhaustive list of examples of the types of

costs that are SRE expenditures. Section

4.03(2) of this notice provides a list of

costs that are not permitted or required to

be treated as SRE expenditures, regardless

of whether they may be incident to SRE

activities described in section 4.02(4) of

this notice. Section 4.03(3) of this notice

provides interim guidance addressing

the allocation of costs, including those

described in section 4.03(1) of this notice,

to SRE activities.

(1) Examples of costs that are SRE

expenditures. The types of costs that are

considered incident to SRE activities

described in section 4.02(4)(b) of this

notice or paid or incurred in connection

with software development activities

described in sections 4.02(4)(a) and 5.03

of this notice include but are not limited

to:

(a) Labor costs. Labor costs of full-time, parttime, and contract employees and independent

September 25, 2023

contractors who perform, supervise, or directly support SRE activities. Labor costs include all elements

of compensation other than severance compensation,

such as basic compensation, stock-based compensation, overtime pay, vacation pay, holiday pay, sick

leave pay, payroll taxes, pension costs, employee

benefits, and payments to a supplemental unemployment benefit plan.

(b) Materials and supplies costs. Costs of

materials and supplies, including tools and equipment that are not depreciable under § 168, which

are used or consumed in the performance of SRE

activities or in the direct support of SRE activities.

For example, a cost described in § 1.162-3, relating

to the cost of a material or supply, may be an SRE

expenditure.

amortization, or depletion allowances with respect to

property used in the performance of SRE activities

or in the direct support of SRE activities, including property placed in service in a taxable year that

begins on or before December 31, 2021. For example, depreciation with respect to a test bed used in the

performance of SRE activities, or allocable depreciation with respect to a facility in which SRE activities,

or services that directly support SRE activities, are

performed.

(d) Patent costs. Costs of obtaining a patent, such

as attorneys’ fees expended in making and perfecting

a patent application.

(e) Certain operation and management costs.

Rent, utilities, insurance, taxes, repairs and maintenance costs, security costs, and similar overhead

costs with respect to facilities, equipment and other

assets used in the performance of SRE activities or in

the direct support of SRE activities.

(f) Travel costs. Travel costs for the performance of SRE activities or the direct support of SRE

activities.

(2) Costs that are not treated as SRE

expenditures. The following costs are

not permitted or required to be treated as

SRE expenditures, regardless of whether

they may be incident to SRE activities

described in section 4.02(4)(b) of this

notice or paid or incurred in connection

with software development activities

described in sections 4.02(4)(a) and 5.03

of this notice:

(a) Costs paid or incurred by general

and administrative service departments

(or functions) that only indirectly support

or benefit SRE activities (for example,

services of payroll personnel in preparing salary checks of research personnel,

services of human resources personnel

who hire research personnel, or services

of accounting personnel who account for

research expenses);

(b) Interest on debt to finance SRE

activities;

described in section 5.05 of this notice;

922

(d) Costs to input content into a

website;

(e) Costs for website hosting that

involve the payment of a specified, periodic fee to an Internet service provider in

return for hosting a website on its server(s)

connected to the Internet;

(f) Costs to register an Internet domain

name or trademark;

(g) Costs listed in § 1.174-2(a)(6)

(i)-(vii);

(h) Amounts representing amortization

of SRE expenditures; and

(i) Amounts representing amortization

of research or experimental expenditures

paid or incurred in taxable years beginning before January 1, 2022.

(3) Allocation method. To determine

total SRE expenditures for a taxable year,

taxpayers must allocate costs, including

the types of costs described in section

4.03(1) of this notice, to SRE activities

on the basis of a cause-and-effect relationship between the costs and the SRE

activities or another relationship that

reasonably relates the costs to the benefits provided to the SRE activities. The

allocation method used for one type of

cost may be different than the allocation

method used for another type of cost.

However, the allocation method used for

each type of cost must be applied on a

consistent basis. For example, a taxpayer

that consistently allocates labor costs

described in section 4.03(1)(a) of this

notice to SRE activities by multiplying

such labor costs by the ratio of the total

time the person or people actually spent

performing, supervising, or directly supporting SRE activities during the taxable

year to the total time the person or people spent performing all services for the

taxpayer during the taxable year, meets

the requirements in this section 4.03(3).

Similarly, a taxpayer that consistently

allocates facility cost recovery allowances described in section 4.03(1)(c) of

this notice to SRE activities by multiplying such cost recovery allowances by

the ratio of the square footage of the area

used to conduct or directly support SRE

activities to the total square footage of

the facility, meets the requirement of this

section 4.03(3). An allocation method

for a particular type of cost that meets

the requirements of this section 4.03(3)

may not be appropriate for purposes of

Bulletin No. 2023–39

allocating that same type of cost under

other sections of the Code.

(4) Example. The following example

illustrates the rules set forth in section

4.03 of this notice.

(a) Facts. Company A, a calendar year taxpayer, is engaged in the business of manufacturing

chemical products. On January 1, 2023, Company

A begins a research project to develop a new product. This research project constitutes an SRE activity. Company A does not undertake any other SRE

activities during its 2023 taxable year. Company A is

comprised of six departments: (1) the Manufacturing

Department, (2) the Research Department, (3) the

Engineering Department, (4) the Legal Department,

(5) the Personnel Department, and (6) the Accounting

Department. The Manufacturing Department does

not provide any support services to the Research

Department. The Personnel Department provides

indirect support services to the Research Department

by hiring research personnel and preparing their paychecks but does not directly support any aspect of

the research project. The Accounting Department

provides indirect support services to the Research

Department by paying Research Department

invoices and accounting for research costs but does

not directly support any aspect of the research project. The Engineering Department provides direct

support services to the Research Department with

respect to the research project by collaborating with

the Research Department to develop the new product. The Legal Department provides direct support

services to the Research Department with respect to

the research project by preparing patent applications

for the new product. Company A owns the following

assets, each of which is used, in whole or in part,

to perform research or directly support the research

project:

Description

Department(s)

Depreciation for 2023

10,000 square foot facility

The Manufacturing Department occupies 5,000 square feet of the

facility. The other departments each occupy 1,000 square feet.

$200,000

Computers, furniture, and equipment used exclusively for the

research project

Research Department

$150,000

Computers, furniture, and equipment used by the Engineering

Department

Engineering Department

$100,000

Computers and furniture used by the Legal Department

Legal Department

$20,000

In addition to interest on debt used to finance operations and research and costs specific to the Manufacturing,

Personnel, and Accounting Departments, Company A

incurs the following costs during its 2023 taxable year:

Description

Department(s)

Total Cost

Materials and supplies used exclusively for the research project

Research Department

$50,000

Materials and supplies used by the Engineering Department

Engineering Department

$40,000

Materials and supplies used by the Legal Department

Legal Department

$10,000

Labor costs of Research Department employees and their direct

supervisor, each of which spends 100% of their time on the

research project

Research Department

$600,000

Labor costs of all Engineering Department employees, each of

which spends 20% of their time on the research project

Engineering Department

$200,000

Labor costs of all Legal Department employees, each of which

spends 10% of their time on the research project

Legal Department

$100,000

Electricity for the facility

The Research Department and the Manufacturing Department

consume large amounts of electricity relative to the other

departments. The Research Department uses 100,000 kilowatthours of electricity. The Manufacturing Department uses 220,000

kilowatt-hours of electricity. The other departments each use

20,000 kilowatt-hours of electricity.

$200,000

Other utilities and overhead costs for the facility

All departments benefit from such costs in proportion to square

footage occupied

$100,000

Other miscellaneous overhead costs incurred by the Research

Department

Research Department

$50,000

Other miscellaneous overhead costs incurred by the Engineering

Department

Engineering Department

$50,000

Other miscellaneous overhead costs incurred by the Legal

Department

Legal Department

$50,000

(b) Analysis. Pursuant to section 4.03(1) of

this notice, Company A determines that the costs

described in the tables in section 4.03(4)(a) are the

types of costs that are incident to SRE activities

described in section 4.02(4) of this notice. Pursuant

to section 4.03(2)(a) of this notice, Company A determines that the costs incurred by the Manufacturing,

Bulletin No. 2023–39

Personnel, and Accounting Departments are not

treated as SRE expenditures because the activities

of those departments are not SRE activities and

such costs either do not, or only indirectly, support

or benefit SRE activities. Similarly, pursuant to

section 4.03(2)(b) of this notice, Company A determines that interest on debt used to finance operations

923

and research is not treated as an SRE expenditure.

Pursuant to section 4.03(3) of this notice, Company

A determines its total SRE expenditures for 2023 by

allocating the costs described in the tables in section

4.03(4)(a) of this notice to its SRE activities on the

basis of a cause-and-effect relationship between the

costs and the SRE activities or another relationship

September 25, 2023

that reasonably relates the costs to the benefits provided to the SRE activities as provided in the following table. This allocation method generally relates

the costs described in the tables in section 4.03(4)

(a) of this notice to SRE activities on the basis of

total labor hours spent on such activities; however,

for certain costs, Company A determines that a different allocation method more appropriately relates

the costs to the benefits that they provide to the SRE

activities, such as an allocation method based on the

relative square footage of each department. As noted

in section 4.03(4)(a), employees in the Research

Department spent 100% of their time on SRE activities, employees in the Engineering Department spent

20% of their time on SRE activities, and employees

in the Legal Department spent 10% of their time on

SRE activities.

Description

Allocation Method

Amount of SRE

Expenditure

Depreciation on facility - $200,000

Research Department: $20,000 ($200,000 × 1,000/10,000 square feet ×

100% of time spent by Research Department on research project)

Engineering Department: $4,000 ($200,000 × 1,000/10,000 square feet ×

20% of time spent by Engineering Department on research project)

Legal Department: $2,000 ($200,000 × 1,000/10,000 square feet × 10%

of time spent by Legal Department on research project)

$26,000

Depreciation on computers, furniture, and equipment used by

the Research Department exclusively for the research project

- $150,000

$150,000 × 100% use for research project

$150,000

Depreciation on computers, furniture and equipment used by

the Engineering Department - $100,000

$100,000 × 20% of time spent by Engineering Department employees on

the research project

$20,000

Depreciation on computers and furniture used by the Legal

Department - $20,000

$20,000 × 10% of time spent by Legal Department employees on the

research project

$2,000

Materials and supplies used exclusively by the Research

Department for the research project - $50,000

$50,000 × 100% use for research project

$50,000

Materials and supplies used by the Engineering Department

- $40,000

$40,000 × 20% of time spent by Engineering Department employees on

the research project

$8,000

Materials and supplies used by the Legal Department - $10,000

$10,000 × 10% of time spent by Legal Department employees on the

research project

$1,000

Labor costs of Research Department employees and their direct

supervisor - $600,000

$600,000 × 100% of time spent by Research Department employees on

the research project

$600,000

Labor costs of Engineering Department employees - $200,000

$200,000 × 20% of time spent by Engineering Department employees on

the research project

$40,000

Labor costs of Legal Department employees - $100,000

$100,000 × 10% of time spent by Legal Department employees on the

research project

$10,000

Electricity for the facility - $200,000

Research Department $50,000 ($200,000 × 100,000/400,000 kilowatthours used for research project)

Engineering Department $2,000 ($200,000 × 20,000/400,000 kilowatthours used by Engineering Department × 20% of time spent by

Engineering Department employees on the research project)

Legal Department $1,000 ($200,000 × 20,000/400,000 kilowatt-hours

used by Legal Department × 10% of time spent by Legal Department

employees on research project)

$53,000

Other utilities and overhead costs for the facility - $100,000

Research Department $10,000 ($100,000 × 1,000/10,000 square feet ×

$13,000

100% of time spent by Research Department on research project)

Engineering Department $2,000 ($100,000 × 1,000/10,000 square feet ×

20% of time spent by Engineering Department on research project)

Legal Department $1,000 ($100,000 × 1,000/10,000 square feet × 10% of

time spent by Legal Department on research project)

Other miscellaneous overhead costs incurred by the Research

Department - $50,000

$50,000 × 100% of time spent by Research Department employees on the $50,000

research project

Other miscellaneous overhead costs incurred by the

Engineering Department - $50,000

$50,000 × 20% of time spent by Engineering Department employees on

the research project

$10,000

Other miscellaneous overhead costs incurred by the Legal

Department - $50,000

$50,000 × 10% of time spent by Legal Department employees on the

research project

$5,000

Total SRE Expenditures

September 25, 2023

$1,038,000

924

Bulletin No. 2023–39

.04 Consistency requirement. SRE

expenditures must be treated consistently

for purposes of all provisions under subtitle

A of the Code (subtitle A). Thus, expenditures that are defined as SRE expenditures

under section 4.02(2) of this notice must

be treated as SRE expenditures for all purposes under subtitle A. Such expenditures

may not be treated as ordinary and necessary expenses under § 162 or capitalized

under § 195, § 263(a), § 263A, or § 471.

The amortization deductions arising from

such SRE expenditures must also be allocated and apportioned consistent with the

rules under §§ 1.861-8 and 1.861-17.

SECTION 5. SOFTWARE

DEVELOPMENT

.01 Purpose. The Treasury Department

and the IRS intend to propose rules in

forthcoming proposed regulations consistent with the interim guidance provided in

this section 5, which provides taxpayers

with clarity in determining whether certain activities constitute software development for purposes of § 174(c)(3).

.02 Defined terms. For purposes of this

notice:

(1) Computer software. The term

computer software generally means any

computer program or routine (that is, any

sequence of code) that is designed to cause

a computer to perform a desired function

or set of functions, and the documentation required to describe and maintain

that program or routine. The code may be

stored on a computing device, affixed to

a tangible medium (for example, a disk

or DVD), or accessed remotely via a private computer network or the Internet, for

example, via cloud computing. Computer

software generally includes system software, programming software, application

software, embedded software, and all

forms and media in which the software

is contained, whether written, magnetic,

or otherwise. Computer software also

generally includes computer programs of

all classes, for example, operating systems, executive systems, software monitors, compilers and translators, assembly

routines, and utility programs as well as

application programs.

Computer software includes a computer program, a group of programs,

and upgrades and enhancements (as

Bulletin No. 2023–39

defined in section 5.02(2) of this notice).

Computer software also includes any

incidental and ancillary rights that are

necessary to effect the acquisition of the

title to, the ownership of, or the right to

use the computer software, and that are

used only in connection with that specific

computer software. Computer software

includes software developed for use by

the taxpayer in its trade or business or

for sale or licensing to others. Computer

software does not include any data or

information base described in § 1.1972(b)(4) unless the database or item is in

the public domain and is incidental to a

computer program. For example, customer lists or client files are not included

in computer software unless such items

are in the public domain and incidental

to a computer program. Additionally,

computer software does not include any

procedures that are external to the computer’s operation.

(2) Upgrades and enhancements. The

term upgrades and enhancements generally means modifications to existing

computer software that result in additional

functionality (enabling the software to perform tasks that it was previously incapable of performing), or materially increase

speed or efficiency of the software.

.03 Activities that are treated as software development. Activities that are

treated as software development for purposes of § 174 generally include but are

not limited to:

(1) Planning the development of the

computer software (or the upgrades and

enhancements to such software), including identification and documentation of

the software requirements;

(2) Designing the computer software

(or the upgrades and enhancements to

such software);

(3) Building a model of the computer

software (or the upgrades and enhancements to such software);

(4) Writing source code and converting

it to machine-readable code;

(5) Testing the computer software (or

the upgrades and enhancements to such

software) and making necessary modifications to address defects identified during

testing, but only up until the point in time

that:

(a) In the case of computer software

developed for use by the taxpayer in its

925

trade or business, the computer software

is placed in service; and

(b) In the case of computer software

developed for sale or licensing to others,

technological feasibility has been established, product masters(s) have been produced, and the computer software is ready

for sale or licensing to others; and

(6) In the case of computer software

developed for sale or licensing to others

(or the upgrades and enhancements to

such software), production of the product

master(s).

.04 Software development activities

related to purchased computer software.

In the case of upgrades and enhancements

to purchased computer software, the principles set forth in section 5.03 of this

notice apply. However, the purchase and

installation of purchased computer software, including the configuration of precoded parameters to make such software

compatible with the business and reengineering the business to make it compatible with the purchased software, and any

planning, designing, modeling, testing, or

deployment activities with respect to the

purchase and installation of such software, are not activities that constitute software development for purposes of § 174.

.05 Activities that are not treated as

software development. The following

activities associated with software development projects are not treated as software development for purposes of § 174:

(1) Computer software developed by

a taxpayer for use in its trade or business. In the case of computer software

that is developed for use by the taxpayer

in its trade or business (or upgrades and

enhancements to such software):

(a) Training employees and other

stakeholders that will use the computer

software;

(b) Maintenance activities after the

computer software is placed in service

that do not give rise to upgrades and

enhancements (for example, corrective

maintenance to debug, diagnose, and fix

programming errors);

for activities to develop computer software that facilitate access to existing data

or data conversion; and

(d) Installing the computer software

and other activities relating to placing the

computer software in service.

September 25, 2023

(2) Computer software developed for

sale or licensing to others. In the case of

computer software that is developed for

sale or licensing to others (or upgrades

and enhancements to such software),

activities that occur after such software

(or upgrades and enhancements to such

software) is ready for sale or licensing

to others, such as marketing and promotional activities, maintenance activities

that do not give rise to upgrades and

enhancements, distribution activities (for

example, making the software available

via remote access), and customer support

activities.

SECTION 6. RESEARCH

PERFORMED UNDER CONTRACT

.01 Purpose. The Treasury Department

and the IRS intend to propose rules in

forthcoming proposed regulations consistent with the interim guidance provided in

this section 6, which provides taxpayers

with clarity in determining whether costs

paid or incurred for research performed

under contract are SRE expenditures

under § 174.

.02 Defined terms. For purposes of this

section 6:

(1) Research provider. The term

research provider means the party that

contracts with a research recipient (as

defined in section 6.02(2) of this notice)

to:

(a) perform research services for the

research recipient with respect to an SRE

product, or

(b) develop an SRE product (as defined

in section 6.02(4) of this notice) that

the research recipient acquires from the

research provider.

(2) Research recipient. The term

research recipient means the party that

contracts with the research provider to:

(a) perform research services for the

research recipient with respect to an SRE

product, or

(b) develop an SRE product that the

research recipient acquires from the

research provider.

(3) Financial risk. The term financial

risk means the risk that the research provider may suffer a financial loss related to

the failure of the research to produce the

desired SRE product.

September 25, 2023

(4) SRE product. The term SRE product means any pilot model, process,

formula, invention, technique, patent,

computer software, or similar property

(or a component thereof) that is subject

to protection under applicable domestic or foreign law. For example, mere

know-how gained by a research provider

through the performance of research services for a research recipient that is not

subject to protection under applicable

domestic or foreign law does not give

rise to an SRE product in the hands of the

research provider.

.03 Treatment of costs paid or incurred

by research recipient. The treatment of

costs paid or incurred by the research

recipient is governed by the principles set

forth in § 1.174-2(a)(10) and (b)(3).

.04 Treatment of costs paid or

incurred by research provider. If the

research provider bears financial risk

under the terms of the contract with the

research recipient, then costs paid or

incurred by the research provider that

are incident to the SRE activities (see

section 4.03 of this notice) performed

by the research provider under the contract are SRE expenditures. However,

even if the research provider does not

bear financial risk under the terms of the

contract with the research recipient, if

the research provider has a right to use

any resulting SRE product in the trade or

business of the research provider or otherwise exploit any resulting SRE product

through sale, lease, or license, then costs

paid or incurred by the research provider

that are incident to the SRE activities

performed by the research provider under

the contract are SRE expenditures of the

research provider for which no deduction

is allowed except as provided in § 174(a)

(2), regardless of whether the research

recipient is required to treat its costs as

SRE expenditures under section 6.03 of

this notice. For purposes of the preceding

sentence, a research provider will not be

treated as having a right to use the SRE

product in the trade or business of the

research provider or otherwise exploit

the SRE product through sale, lease, or

license if such right is available to the

research provider only upon obtaining approval from another party to the

research arrangement that is not related

926

to the research provider within the meaning of § 267 or § 707.

.05 Example. The following example

illustrates the rules set forth in section 6

of this notice.

(1) Facts. Company C engages Company D, a

contractor located in the United States, to develop an

SRE product for use in Company C’s trade or business. The activities undertaken by Company D are

undertaken upon Company C’s order, and Company

D makes no performance guarantees with respect to

the SRE product. Company C will pay Company D

a fixed sum of $25,000 plus an amount equivalent to

Company D’s actual expenditures. Company D does

not have any right to use or otherwise exploit any

resulting SRE product. In 2023, Company D incurs

$125,000 of expenditures to successfully develop the

product in the United States, and Company C pays to

Company D $150,000 pursuant to the terms of the

contract.

(2) Analysis. Under section 6.04 of this notice,

Company D may not treat the $125,000 of expenditures it incurs to develop the SRE product on

behalf of Company C as SRE expenditures under

§ 174 because (i) Company D does not bear financial risk, and (ii) Company D does not have any

right to use or otherwise exploit any resulting SRE

product. Under section 6.03 of this notice, the

$150,000 paid by Company C is an amount paid

to another party for research or experimentation

undertaken on Company C’s behalf under § 1.1742(a)(10) and (b)(3) and is thus an SRE expenditure

under section 4.02(2) of this notice. The applicable

§ 174 amortization period is 5 years (60 months)

because the research is performed by Company D

in the United States. Company C’s location is not

relevant for determination of the applicable § 174

amortization period.

SECTION 7. DISPOSITION,

RETIREMENT, OR

ABANDONMENT OF PROPERTY

.01 Purpose. The Treasury Department

and the IRS intend to propose rules in

forthcoming proposed regulations consistent with the interim guidance provided in

this section 7, which provides taxpayers

with clarity in determining the treatment

of unamortized SRE expenditures if property with respect to which such expenditures are paid or incurred is disposed of,

retired, or abandoned in certain transactions during the applicable § 174 amortization period.

.02 In general. Except as provided in

section 7.04 of this notice, if any property

with respect to which SRE expenditures

are paid or incurred is disposed of, retired,

or abandoned during the applicable

§ 174 amortization period, no recovery is

Bulletin No. 2023–39

allowed with respect to the unamortized

SRE expenditures on account of such

disposition, retirement, or abandonment,

and the taxpayer that disposed of, retired,

or abandoned such property continues to

amortize such expenditures under § 174

over the remainder of the applicable § 174

amortization period. For purposes of this

section 7, the term unamortized SRE

expenditures means the amount of any

SRE expenditures paid or incurred by the

corporation (or its predecessor), less the

amount of any amortization deductions

previously allowed to the corporation (or

its predecessor) under § 174.

.03 Transactions occurring before the

midpoint of the taxable year. An amortization deduction is allowed under § 174

for SRE expenditures even if such expenditures relate to property that is disposed

of, retired, or abandoned prior to the

midpoint of the taxable year in which

such expenditures are paid or incurred.

Accordingly, such expenditures are subject to the rules in sections 7.02 and 7.04

of this notice.

.04 Transaction in which corporation

ceases to exist.

(1) Transaction described in § 381(a).

If a corporation ceases to exist for Federal

income tax purposes in a transaction or

series of transactions described in § 381(a),

the acquiring corporation will continue to

amortize the distributor or transferor corporation’s unamortized SRE expenditures

over the remainder of the distributor or

transferor corporation’s applicable § 174

amortization period beginning with the

month of transfer.

(2) Transaction not described in

§ 381(a).

(a) In general. Except as provided in

section 7.04(2)(b), if a corporation ceases

to exist for Federal income tax purposes

in a transaction or series of transactions to

which § 381(a) does not apply, the corporation is allowed a deduction equal to the

unamortized SRE expenditures in its final

taxable year.

(b) Anti-abuse exception. Section

7.04(2)(a) of this notice does not apply if

a principal purpose of the transaction(s)

described in section 7.04(2)(a) of this

notice is to claim a deduction for the

unamortized SRE expenditures.

.05 Examples. The following examples

illustrate the rules set forth in section 7 of

this notice.

(1) Sale of property with respect to which SRE

expenditures were incurred.

(a) Facts. Company X, an accrual method, calendar-year taxpayer, incurs $100,000 in SRE expenditures in 2023 for research performed in the United

States. On September 30, 2025, Company X sells

the property with respect to which such expenditures

were incurred to Company Y and recognizes gain

under § 1001.

(b) Analysis. In 2023, Company X amortizes

$10,000 (10% × $100,000). See section 3.05 of this

notice. In 2024, Company X amortizes $20,000

(20% × $100,000). In 2025 through 2028, Company

X ratably amortizes the remaining $70,000

($100,000 – $10,000 – $20,000) notwithstanding

Company X’s disposition of the assets with respect

to which Company X’s SRE expenditures were

incurred. Company Y does not amortize any portion

of the SRE expenditures originally paid or incurred

by Company X. Company X does not factor its

unamortized SRE expenditures into the computation of gain or loss under § 1001. See section 7.02

of this notice.

2023

2024

2025

2026

2027

2028

Company X amortization %

10%

20%

10%

Company X Dollar amount

$10,000

$20,000

$10,000

be the same as in section 7.05(1)(b) of this notice if the

sale of property with respect to which the SRE expenditures were incurred were part of an applicable asset

acquisition within the meaning of § 1060(c).

(d) Section 351 exchange. The results would

be the same as in section 7.05(1)(b) of this notice

if X transferred the property with respect to which

the SRE expenditures were incurred in an exchange

described in § 351.

(2) Section 381(a) transaction.

(a) Facts. The facts are the same as in section

7.05(1)(a) of this notice, except that, on October 16,

2025, Company X is acquired by Company Z, an

accrual method, calendar-year taxpayer, in a transaction described in § 381(a).

(b) Analysis. In 2023, Company X amortizes

$10,000 (10% × $100,000). See section 3.05 of this

notice. In 2024, Company X amortizes $20,000

(20% × $100,000). In 2025, Company X amortizes

$15,000 ((9 months/12 months) × 20% × $100,000),

and Company Z amortizes $5,000 ((3 months/12

months) × 20% × $100,000). See sections 3.06(1),

7.02, and 7.04(1) of this notice. In 2026 through

2028, Company Z ratably amortizes the remaining

$50,000 ($100,000 – $10,000 – $20,000 – $15,000

– $5,000).

2023

2024

2025

2026

2027

2028

Company X amortization %

10%

20%

15%

Company Z amortization %

20%

10%

Company X Dollar amount

$10,000

$20,000

$15,000

$20,000

$10,000

Company Z Dollar amount

SECTION 8. LONG-TERM

CONTRACTS UNDER § 460

.01 Purpose. The Treasury Department

and the IRS are providing this interim

Bulletin No. 2023–39

$5,000

guidance to provide taxpayers with information about a proposed revision to the

regulations under § 460 in forthcoming proposed regulations regarding how

to apply the percentage-of-completion

927

method (PCM) to account for income

from long-term contracts when allocable

contract costs include SRE expenditures.

.02 Background. Section 460(a) generally requires use of the PCM to account for

September 25, 2023

taxable income from a long-term contract.

Section 1.460-4(b)(2)(i) provides that

under the PCM, the portion of the contract

price a taxpayer must report in a tax year

corresponds to the ratio of incurred allocable contract costs to total estimated allocable contract costs. This ratio represents the

portion of a contract considered completed

for purposes of the PCM. Under the PCM,

a taxpayer generally deducts allocable

contract costs as they are incurred. As provided by § 1.460-4(b)(2)(iv), an increase

in the percentage of the contract price to

be reported is matched by deduction of

the incurred costs that cause the increase.

Under the current § 460 regulations in

§ 1.460-5(b)(2)(vi), allocable contract

costs include research or experimental

expenses, other than independent research

and development expenses. Thus, when

these expenses are incurred, they increase

the portion of a contract considered completed and the percentage of the contract

price required to be reported. The current

§ 460 regulations were drafted when a

taxpayer could deduct currently research

or experimental expenses under former

§ 174. Section 174(a), as amended by the

TCJA, requires that SRE expenditures be

charged to capital account and deducted

over the applicable § 174 amortization

period. As a result, the current § 460 regulations provide that incurred research or

experimental expenses increase the percentage of the contract price required to

be reported, although § 174(a) prevents

a corresponding current deduction of

incurred SRE expenditures. The resulting

mismatch of contract price and contract

costs is inconsistent with the contemplated operation of the PCM.

.03 Treatment of SRE expenditures

under § 460. The Treasury Department

and the IRS anticipate issuing proposed

regulations that would amend the existing

§ 460 regulations, including § 1.460-5(b)

(2)(vi), to provide that the costs allocable to a long-term contract accounted

for using the PCM include amortization

of SRE expenditures under § 174(a)(2)

(B), rather than the capitalized amount of

such expenditures, and that such amortization is treated as incurred for purposes

of determining the percentage of contract

completion as deducted. The amendments

would not apply to expenditures previously capitalized under § 59(e)(2)(B) or

September 25, 2023

under former § 174(b), or to independent

research and development expenditures,

as defined in § 460(c)(5), which are not

allocable contract costs. Research or

experimental expenditures that are not

independent research and development

expenditures, however, would remain

subject to allocation under § 460(c)

(1) regardless of whether they are SRE

expenditures.

SECTION 9. COST SHARING

REGULATIONS AT § 1.482‑7

.01 Purpose. The Treasury Department

and the IRS are providing this interim

guidance to provide taxpayers with

information about a proposed revision

to § 1.482‑7(j)(3)(i) in forthcoming proposed regulations.

.02 Background. Section 1.482-7(j)(3)

(i) addresses cost sharing transaction payments (CST Payments) between controlled

participants in a cost sharing arrangement

(CSA) that are made to ensure that each

controlled participant’s share of intangible

development costs (IDCs) is in proportion

to its share of reasonably anticipated benefits from exploitation of the developed

intangibles (RAB share). Section 1.4827(j)(3)(i) generally provides that CST

Payments reduce deductible IDCs borne

by the controlled participant to which the

CST Payments are owed. Any amount of

CST Payment in excess of such deductible IDCs is treated as in consideration

for the use of land and tangible property

furnished for purposes of the CSA by the

controlled participant to which the CST

Payment is owed. CST Payments generally are considered the payor’s costs

of developing intangibles at the location

where such development is conducted.

See also § 1.482-7(j)(3)(iii), Example 1.

.03 Anticipated revisions to § 1.482‑7(j)

(3)(i).

(1) The Treasury Department and the

IRS anticipate issuing proposed regulations that would replace the second

through fourth sentences of § 1.482‑7(j)

(3)(i) with rules providing that CST

Payments owed to a controlled participant

reduce:

(a) The amount of the category of IDCs

borne directly by that participant that are

required to be charged to capital account,

and

928

(b) The amount of the category of IDCs

borne directly by that participant that are

not described in section 9.03(1)(a) of this

notice and that are deductible.

(2) CST Payments not in excess of the

payor’s RAB share of the total amount of

the IDCs in both categories described in

section 9.03(1)(a) and (b) of this notice

reduce the amount of each such category

of IDCs in the same proportion that the

total amount of the IDCs in each category

bears to the total amount of IDCs in both

categories. CST Payments in excess of the

payor’s RAB share of the total amount of

IDCs in both categories described in section 9.03(1)(a) and (b) of this notice will

be treated as income.

.04 Examples. The examples provided

below illustrate the anticipated revisions

to § 1.482-7(j)(3)(i).

(1) Example 1.

(a) Facts. U.S. Parent (USP) and its wholly

owned Foreign Subsidiary (FS) form a CSA to

develop a miniature widget, the Small R. Based on

RAB shares, USP agrees to bear 40% and FS agrees

to bear 60% of the IDCs incurred during the term

of the agreement. USP incurs $100,000 of IDCs to

perform research in the United States annually and

FS incurs $100,000 of IDCs to perform research in

country X annually. USP’s IDCs are required under

U.S. Federal income tax rules to be charged to capital

account and amortized ratably over the 5-year applicable § 174 amortization period beginning with the

midpoint of the taxable year in which such expenditures are paid or incurred, and FS’s IDCs incurred

in country X are required under U.S. Federal income

tax rules to be charged to capital account and amortized ratably over the 15-year applicable § 174 amortization period beginning with the midpoint of the

taxable year in which such expenditures are paid or

incurred.

(b) Analysis. Of the total IDCs of $200,000,

USP’s share is $80,000 ($200,000 × 40%) and FS’s

share is $120,000 ($200,000 × 60%) so that FS must

make a payment to USP of $20,000 ($120,000 –

$100,000). The CST Payment reduces USP’s IDCs

in the United States that are required to be charged

to capital account by $20,000. Accordingly, USP is

required to charge $80,000 to capital account, all of

which is required to be amortized over 5 years, while

FS is required to charge $120,000 to capital account,

$100,000 of which is required to be amortized over

15 years, and $20,000 of which is required to be

amortized over 5 years.

(2) Example 2.

(a) Facts. The facts are the same as in Example

1, except that the $100,000 of IDCs borne by USP

consist of (1) $5,000 of IDCs incurred by USP in

the United States that are required to be charged

to capital account and amortized ratably over the

5-year applicable § 174 amortization period beginning with the midpoint of the taxable year in which

such expenditures are paid or incurred, (2) $5,000

of deductible IDCs, and (3) $90,000 of arm’s length

Bulletin No. 2023–39

rental charge, as described in § 1.482-7(d)(1)(iii), for

the use of USP’s facility in the United States.

(b) Analysis. As in Example 1, of the total IDCs

of $200,000, USP’s share is $80,000 and FS’s share

is $120,000, so that FS must make a payment to

USP of $20,000. The $20,000 CST Payment from

FS to USP will first be treated as reducing the

$5,000 of IDCs that are required to be charged to

capital account and the $5,000 of deductible IDCs

pro rata to the extent of FS’s RAB share of such

IDCs. Because the IDCs required to be charged

to capital account make up 50% of the combined

amount of IDCs chargeable to capital account and

the deductible IDCs directly borne by USP (i.e.,

$5,000 = 50% × $10,000), and because FS’s RAB

share of the total amount of IDCs in both categories is $6,000 (i.e., 60% × $10,000), $3,000 of the

$20,000 CST Payment reduces USP’s IDCs chargeable to capital account, $3,000 of the CST Payment

reduces USP’s deductible IDCs, and the remaining

$14,000 ($20,000 – $6,000) of the CST Payment is

treated as income.

(3) Example 3.

(a) Facts. The facts are the same as in Example

1, except that the $100,000 of IDCs borne by USP

consist of (1) $15,000 of IDCs incurred by USP in

the United States that are required to be charged

to capital account and amortized ratably over the

5-year applicable § 174 amortization period beginning with the midpoint of the taxable year in which

such expenditures are paid or incurred, (2) $45,000

of deductible IDCs, and (3) $40,000 of arm’s length

rental charge, as described in § 1.482-7(d)(1)(iii), for

the use of USP’s facility in the United States.

(b) Analysis. As in Example 1, of the total

IDCs of $200,000, USP’s share is $80,000 and

FS’s share is $120,000, so that FS must make a

payment to USP of $20,000. The $20,000 CST

Payment from FS to USP will first be treated as

reducing the $15,000 of IDCs that are required to

be charged to capital account and the $45,000 of

deductible IDCs pro rata to the extent of FS’s RAB

share of such IDCs. Because the IDCs required to

be charged to capital account make up 25% (that

is, $15,000 / ($15,000 + $45,000)) of the combined

amount of IDCs chargeable to capital account

and deductible IDCs directly borne by USP, and

because the deductible IDCs make up 75% (that is,

$45,000 / ($15,000 + $45,000)) of the combined

amount of IDCs chargeable to capital account and

deductible IDCs directly borne by USP, 25% of the

$20,000 CST Payment, or $5,000, reduces USP’s

IDCs chargeable to capital account, and 75%, or

$15,000, reduces USP’s deductible IDCs. Because

all $20,000 of the CST Payment is applied against

deductible IDCs directly borne by USP and IDCs

incurred by USP that are chargeable to capital

account, there is no amount of the CST Payment

that is treated as income.

SECTION 10. APPLICABILITY

DATES

.01 In general. It is anticipated that

the forthcoming proposed regulations

will provide that rules consistent with the

rules described in sections 3 through 9 of

Bulletin No. 2023–39

this notice would apply for taxable years

ending after September 8, 2023. Except

as otherwise provided in this section

10.01, prior to the publication date of the

forthcoming proposed regulations in the

Federal Register, a taxpayer may choose

to rely on the rules described in sections

3 through 9 of this notice, including for

expenditures paid or incurred in taxable years beginning after December 31,

2021, provided the taxpayer relies on all

the rules in sections 3 through 9 of this

notice and applies them in a consistent

manner. However, taxpayers may not rely

on the rules in section 7 of this notice for

SRE expenditures paid or incurred with

respect to property that is contributed to,

distributed from, or transferred from a

partnership.

.02 Additional procedural guidance. The Treasury Department and IRS

intend to issue guidance in the Internal

Revenue Bulletin (see § 601.601(d) of

the Procedural Rules) to provide procedures for taxpayers to obtain automatic

consent to change methods of accounting

to comply with this notice. Until the issuance of such procedural guidance, taxpayers may rely on section 7.02 of Rev.

Proc. 2023-24 to change their methods of

accounting under § 174 to comply with

this notice. The Treasury Department and

IRS anticipate issuing updated procedures

that will address situations in which taxpayers have, prior to the issuance of this

notice, changed methods of accounting

to comply with § 174 as amended by the

TCJA but whose treatment of SRE expenditures is not entirely consistent with this

notice. Unless specifically authorized by

the Commissioner of Internal Revenue

or by statute, a taxpayer may not request,

or otherwise make, a retroactive change

in method of accounting by filing an

amended return. See Rev. Rul. 90-38,

1990-1 C.B. 57; Rev. Rul. 2023-8, 202318 I.R.B. 801.

SECTION 11. REQUEST FOR

COMMENTS

.01 Comments regarding guidance

provided in this notice. The Treasury

Department and the IRS request comments on issues arising from the interim

guidance set forth in this notice. In addition to general comments regarding the

929

provisions of this notice, the Treasury

Department and the IRS request comments to address the following issues:

(1) Scope of § 174 (section 4 of this

notice).

(a) Whether additional guidance is

needed regarding identifying expenditures

allocable to SRE activities and allocating

such expenditures to SRE activities.

(b) Whether simplified methods or safe

harbors should be provided for identifying

expenditures allocable to SRE activities

and allocating such expenditures to SRE

activities. If so, what methods or safe

harbors should be provided? Are special

methods needed for government research

contracts?

(2) Software development (sections 4

and 5 of this notice).

(a) The definition of computer software

is based on section 2 of Rev. Proc. 200050 and § 1.197-2(c)(4)(iv). Is there a more

appropriate definition under the Financial

Accounting Standards Board Accounting

Standards Codifications (ASCs) or an

appropriate industry standard that should

be used instead? If so, what ASC or industry standard definition should be used?

Additionally, to what extent should ASC

guidance or an appropriate industry standard be used to determine activities that

are software development activities, and

costs that are software development costs,

for purposes of § 174?

(b) What examples of costs that are,

or are not, software development costs

would be helpful to include in the forthcoming proposed regulations?

needed to determine what activities

related to developing a website would be

software development?

(3) Research performed under contract

(section 6 of this notice).

(a) Should the rules for determining

whether a party to a research contract has

SRE expenditures under § 174 be similar

to the funded research rules under § 41(d)

(4)(H)?

(b) Are special rules needed for service

or manufacturing production contracts

with the government, including § 460

long-term contracts?

be considered in determining whether

a party to a research contract has SRE

expenditures?

September 25, 2023

(d) Are special rules or safe harbors

needed to determine if research performed

under a contract is foreign research (for

example, where a research recipient pays

the research provider for research that is

performed by the research provider both

inside and outside the U.S.)?

(e) Are special rules needed for contracts with related foreign research providers and recipients?

(4) Disposition, retirement, or abandonment of property (section 7 of this

notice). What, if any, changes to the rules

in section 7 of this notice are appropriate

to address potential abuses?

(5) Long-term contracts under § 460

(section 8 of this notice). In the case of

SRE expenditures allocable to long-term

contracts accounted for under the PCM

set forth in § 460, do estimated total

allocable contract costs include all SRE

expenditures that directly benefit or are

incurred by reason of the performance of

the long-term contract or, alternatively,

only that portion of the SRE expenditures expected to be amortized during

the term of the contract? Under the first

alternative, a taxpayer would be required

to report any remaining portion of the

contract price not previously reported

by the tax year following the tax year

in which the contract is completed, notwithstanding that some portion of the

SRE expenditures remain unamortized.

See § 460(b)(1).

.02 Comments regarding rules not

included in this notice. The Treasury

Department and the IRS continue to study

issues that are not addressed in this notice,

including but not limited to whether the

general requirements governing record

retention under § 1.6001-1 are adequate

for purposes of substantiating expenditures under § 174, whether the definition

of “pilot model” under § 1.174-2(a)(4)

should be amended, and whether and how

§ 59(e) applies to § 174 expenditures.

In addition to requests for comments on

these issues, the Treasury Department and

the IRS request comments on the following specific issues not addressed by this

notice:

(1) Under what circumstances should

unamortized SRE expenditures continue to be amortized or accelerated with

September 25, 2023

respect to property that is contributed to,

distributed from, or transferred from a

partnership?

(2) Under what circumstances should

unamortized SRE expenditures continue

to be amortized or accelerated with respect

to property of a partnership that is a party

to a merger, consolidation, division, or

liquidation, or that otherwise terminates

under § 708 and the regulations thereunder? Is there potential for abuse as a result

of allowing a deduction for unamortized

SRE expenditures in the final year of a

partnership that liquidates or otherwise

terminates? If so, what rules are appropriate to address such abuse?

(3) Should special rules apply to

start-up companies or small taxpayers? If

so, how should § 174 be applied in such

cases?

(4) Sections 280C(c)(1)(B) and

56(b)(2)(A) each refer to an “amount

allowable as a deduction” for qualified research expenses or basic research

expenses (in the case of § 280C(c)(1)

(B)), and § 174(a) (in the case of § 56(b)

(2)(A)). On the one hand, § 174(a)(1)

(as amended by the TCJA) does not

allow a deduction for qualified research

expenses or basic research expenses

because such expenses are required to be

charged to capital account. On the other

hand, § 174(a)(2) allows an amortization

deduction with respect to the capitalized

amount of such expenses. Should the

“amount allowable as a deduction” references in §§ 280C(c)(1)(B) and 56(b)(2)

(A) be interpreted to refer to the amortization deduction allowed under § 174(a)(2)

or to $0, which is the deduction allowed

for the qualified research expenses or

basis research expenses under § 174(a)

(1)? The Treasury Department and IRS

request comments on this interpretation

and how to resolve any potential issues

that might arise by applying the same

interpretation to both §§ 280C(c)(1)(B)

and 56(b)(2)(A).

.03 Procedures for submitting comments.

(1) Deadline. Written comments should

be submitted by November 24, 2023.

Consideration will be given, however,

to any written comment submitted after

November 24, 2023, if such consideration

930

will not delay the issuance of the forthcoming proposed regulations.

(2) Form and manner. The subject line

for the comments should include a reference to Notice 2023-63. All commenters

are strongly encouraged to submit comments electronically. However, comments

may be submitted in one of two ways:

(a) Electronically via the Federal

eRulemaking Portal at www.regulations.

gov (type IRS-2023-0040 in the search

field on the regulations.gov homepage to

find this notice and submit comments); or

(b) By mail to: Internal Revenue

Service, CC:PA:LPD:PR (Notice 202363), Room 5203, P.O. Box 7604, Ben

Franklin Station, Washington, D.C.,

20044.

(3) Publication of comments. The

Treasury Department and the IRS will

publish for public availability any comment submitted electronically or on paper

to its public docket on www.regulations.

gov.

SECTION 12. EFFECT ON OTHER

DOCUMENTS

As a result of the TCJA amendments to

§ 174 and the rules in sections 3 through

5 of this notice, section 5 of Rev. Proc.

2000-50 is obsolete.

SECTION 13. DRAFTING AND

CONTACT INFORMATION

The principal author of this notice

is Bruce Chang of the Office of the

Associate Chief Counsel (Income Tax

and Accounting). Other personnel from

the Treasury Department and the IRS participated in its development. For further

information regarding this notice, please

contact Mr. Chang at (202) 317-4870 (not

a toll-free number). For further information regarding corporate matters in section 7 of this notice, please contact Austin

Diamond-Jones of the Office of Associate

Chief Counsel (Corporate) at (202) 3175085 (not a toll-free number). For further information regarding section 9 of

this notice, please contact Annette Ofori

of the Office of Associate Chief Counsel

(International) at (202) 317-4910 (not a

toll-free number).

Bulletin No. 2023–39

Part IV

Increased Credit or

Deduction Amounts

for Satisfying Certain

Prevailing Wage and

Registered Apprenticeship

Requirements

REG-100908-23

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking and public hearing.

SUMMARY: This document contains

proposed regulations regarding increased

credit or deduction amounts available for

taxpayers satisfying prevailing wage and

registered apprenticeship (collectively,

PWA) requirements established by the

Inflation Reduction Act of 2022 (IRA).

These proposed regulations would affect

taxpayers intending to satisfy the PWA

requirements for increased Federal income

tax credits or deductions. These proposed

regulations would also affect taxpayers intending to satisfy the prevailing

wage requirements for increased Federal

income tax credit amounts that do not have

associated apprenticeship requirements.

Additionally, these proposed regulations

would affect taxpayers who initially fail

to satisfy the PWA or prevailing wage

requirements and subsequently comply

with the correction and penalty procedures in order to be deemed to satisfy the

PWA or prevailing wage requirements.

Finally, the proposed regulations address

specific PWA or prevailing wage recordkeeping and reporting requirements. The

proposed regulations would affect taxpayers intending to claim increased credit or

deduction amounts pursuant to the IRA,

including those intending to make elective payment elections for available credit

amounts, and those intending to transfer

increased credit amounts. This document

also provides notice of a public hearing on

the proposed regulations.

number) or by email to publichearings@

irs.gov (preferred).

DATES: Written or electronic comments

and requests for a public hearing must be

received by October 30, 2023. A public

hearing on these proposed regulations is

scheduled to be held on November 21,

2023, at 10 a.m. ET. Requests to speak

and outlines of topics to be discussed

at the public hearing must be received

by October 30, 2023. If no outlines are

received by October 30, 2023, the public hearing will be cancelled. Requests to

attend the public hearing must be received

by 5 p.m. ET on November 17, 2023. The

public hearing will be made accessible to

people with disabilities. Requests for special assistance during the hearing must be

received by November 16, 2023.

SUPPLEMENTARY INFORMATION:

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically via the Federal eRulemaking Portal at https://www.regulations

(indicate IRS and REG-100908-23) by

following the online instructions for submitting comments. Requests for a public

hearing must be submitted as prescribed

in the “Comments and Requests for a

Public Hearing” section. Once submitted

to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The

Department of the Treasury (Treasury

Department) and the IRS will publish for

public availability any comments submitted to the IRS’s public docket. Send

paper submissions to: CC:PA:LPD:PR

(REG-100908-23), Room 5203, Internal

Revenue Service, P.O. Box 7604, Ben

Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed

regulations, the Office of Associate

Chief Counsel (Passthroughs & Special

Industries) at (202) 317-6853 (not a tollfree number); concerning submissions of

comments or the public hearing, Vivian

Hayes at (202) 317-6901 (not a toll-free

Background

I. Overview

This document contains proposed

regulations to amend the Income Tax

Regulations (26 CFR part 1) under sections 30C, 45, 45L, 45U, 45V, 45Y, 45Z,

48C, 48E, and 179D of the Internal Revenue

Code (Code) and proposed amendments to

the Income Tax Regulations (26 CFR part

1) under sections 45Q and 48 (proposed

regulations). The Inflation Reduction Act

of 2022 (IRA), Public Law 117-169, 136

Stat. 1818 (August 16, 2022), amended

sections 30C, 45, 45L, 45Q, 48, 48C,

and 179D to provide increased credit or

deduction amounts for taxpayers who satisfy certain requirements and added sections 45U, 45V, 45Y, 45Z, and 48E to the

Code to provide new credits, which also

contain provisions for increased credit

amounts for taxpayers who satisfy certain

requirements. Increased credit amounts

are available under sections 30C, 45,

45Q, 45V, 45Y, 45Z, 48, 48C, and 48E,

and an increased deduction is available

under section 179D, for taxpayers satisfying certain prevailing wage and registered apprenticeship (PWA) requirements.

Increased credit amounts are available

under sections 45L and 45U for taxpayers

satisfying certain prevailing wage requirements.1 The IRA includes correction and

penalty provisions available in certain situations if taxpayers have failed to satisfy

the PWA requirements, and they are not

otherwise eligible for the increased credit

or deduction because they do not qualify

for an exception.

The increased credit amounts are also

generally available under sections 45, 45Y,

48, and 48E with respect to certain facilities with a maximum net output (or capacity for energy storage technology under

The increased credit provisions in sections 45L and 45U do not contain apprenticeship requirements. For simplicity, where possible, the preamble to the proposed regulations uses the acronym PWA to refer to the prevailing wage and apprenticeship requirements generally, including the prevailing wage requirements in sections 45L and 45U.

Bulletin No. 2023–39

931

September 25, 2023

section 48E) of less than one megawatt

(One Megawatt Exception). Additionally,

increased credit and deduction amounts

are available under sections 30C, 45, 45Q,

45V, 45Y, 48, 48E and 179D if beginning

of installation or beginning of construction (BOC) occurs before January 29,

2023 (BOC Exception).

II. Prior Guidance

On October 24, 2022, the Treasury

Department and the IRS issued Notice

2022-51, 2022-43 I.R.B. 331, requesting

comments on aspects of the increased

credits and deduction amounts enacted

by the IRA, including the PWA provisions. Section 3.01 of Notice 2022-51

requested comments regarding the applicability of subchapter IV of chapter 31

of title 40 of the United States Code,

which is commonly known as the DavisBacon Act; the special correction and

penalty procedures generally provided

for under section 45(b)(7)(B); any documentation or substantiation that should

be required to show compliance with

the prevailing wage requirements; and

any other topics relating to the prevailing wage requirements that may require

guidance. Section 3.02 of Notice 2022-51

requested comments addressing factors to

be considered in regard to the appropriate duration of employment of individuals for construction, alteration, or repair

work for purposes of the Participation

Requirement; clarification regarding the

Good Faith Effort Exception; factors to

be considered in administering and promoting compliance with the Good Faith

Effort Exception; whether methods exist

to facilitate reporting requirements for the

Good Faith Effort Exception; documentation or substantiation taxpayers maintain

or could create to demonstrate compliance

with the apprenticeship requirements or

the Good Faith Effort Exception; and any

other topics relating to the apprenticeship

requirements that may require guidance.

Comments received in response to Notice

2022-51 were considered in the drafting

of these proposed regulations.

On November 30, 2022, the Treasury

Department and the IRS published Notice

2022-61. 87 FR 73580, corrected in 87 FR

75141 (Dec. 7, 2022). Notice 2022-61 provided guidance on the PWA requirements

that generally apply under sections 30C,

45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48,

48C, and 48E, and 179D. Additionally,

Notice 2022-61 established the 60-day

period described in sections 30C(g)(1)(C)

(i), 45(b)(6)(B)(ii), 45Q(h)(2), 45V(e)(2)

(A)(i), 45Y(a)(2)(B)(ii), 48(a)(9)(B)(ii),

48E(a)(2)(A)(ii)(II) and (a)(2)(B)(ii)(II),

and 179D(b)(3)(B)(i). Specifically, Notice

2022-61 started the 60-day period applicable for determining if taxpayers qualify for

the increased credit or deduction amounts

by satisfying the BOC Exception. To be

eligible for the BOC Exception, as indicated in Notice 2022-61, taxpayers must

have begun construction or installation of

a facility (as defined in Notice 2022-61)

before January 29, 2023. Finally, Notice

2022-61 provided guidance for determining the beginning of construction under

sections 30C, 45, 45Q, 45V, 45Y, 48, and

48E, and the beginning of installation

under section 179D.

III. Inflation Reduction Act

A. In general

Prior to enactment of the IRA, the

Code provided for certain temporary credits and deductions with respect to energy

related facilities, projects, equipment,

and investments under sections 30C, 45,

45L, 45Q, 48, 48C, and 179D. Congress

had extended these provisions multiple

times and for varying types of qualified

facilities, energy projects, equipment, and

investments. The IRA further amended

these sections, generally adjusting the

credit or deduction amounts, expiration

dates, and qualifying activities. Under the

IRA, Congress also enacted new credits

under sections 45U, 45V, 45Y, 45Z, (production tax credits) and 48E (investment

tax credit).

The IRA provides increased credit or

deduction amounts that generally apply

for taxpayers who satisfy (i) certain PWA

requirements regarding the construction, installation, alteration, or repair of

a qualified facility, qualified property,

qualified project, or qualified equipment,

or with respect to certain facilities, (ii)

the One Megawatt Exception, or (iii) the

BOC Exception. Generally, if a taxpayer

satisfies the PWA requirements or meets

the One Megawatt Exception or the BOC

Exception, the amount of credit or deduction determined is equal to the otherwise

determined amount of the underlying

credit or deduction multiplied by five.

B. PWA provisions

1. In General

The principal PWA requirements are set

forth in section 45(b)(6), (7), and (8). In general, section 45(b)(6) provides the increased

credit amount for taxpayers satisfying the

PWA requirements or meeting one of the

exceptions, section 45(b)(7) provides the

prevailing wage requirements (Prevailing

Wage Requirements), and section 45(b)(8)

provides the apprenticeship requirements

(Apprenticeship Requirements).2

Section 45 provides a credit for taxpayers producing and selling electricity from

renewable resources to unrelated persons

during the taxable year (section 45 credit).

The section 45 credit is generally equal to

0.3 cents multiplied by the kilowatt hours

of electricity (i) produced by the taxpayer

from qualified energy resources and at a

qualified facility during the 10-year period

beginning on the date the facility was originally placed in service, and (ii) sold by

the taxpayer to an unrelated person during

the taxable year. If a taxpayer satisfies the

PWA requirements, the One Megawatt

Exception, or the BOC Exception, then

the credit determined under section 45(a)

for electricity produced at a qualified

facility is multiplied by five.

2. Prevailing Wage Requirements

Under section 45(b)(6), in the case of

a qualified facility that satisfies the PWA

The prevailing wage requirements in sections 30C(g), 45L(g), 45Q(h), 45U(d), 45V(e), 48(a)(10), 48C(e), and 179D(b) are substantially similar to the requirements provided under

section 45(b)(7). Sections 45Y(g)(9) and 45Z(f)(6)(A) adopt by cross-reference the Prevailing Wage Requirements under section 45(b)(7). Section 48E(d)(3) adopts by cross-reference the

Prevailing Wage Requirements under section 48(a)(10). Section 48(a)(10) provides for a special 5-year recapture rule that applies for purposes of the prevailing wage requirements with

respect to sections 48 and 48E.

September 25, 2023

932

Bulletin No. 2023–39

requirements of section 45(b)(7) and (b)

(8), the One Megawatt Exception, or the

BOC Exception, the credit under section

45(a) “shall be equal to such amount multiplied by five.” Section 45(b)(7)(A) provides that with respect to any qualified

facility, the taxpayer shall ensure that any

laborers and mechanics employed by the

taxpayer or any contractor or subcontractor in – (i) the construction of such facility,

and (ii) with respect to any taxable year,

for any portion of such taxable year that

is within the 10-year period beginning

on the date the qualified facility is originally placed in service, the alteration or

repair of such facility, shall be paid wages

at rates not less than the prevailing rates

for construction, alteration, or repair of a

similar character in the locality in which

such facility is located as most recently

determined by the Secretary of Labor, in

accordance with subchapter IV of chapter

31 of title 40, United States Code.

3. Correction and Penalty Related to

Failure to Satisfy Prevailing Wage

Requirements

Under section 45(b)(7)(B), a taxpayer

who is not eligible for the One Megawatt

Exception or the BOC Exception and

fails to satisfy the Prevailing Wage

Requirements under section 45(b)(7)(A) is

“deemed” to have satisfied those requirements if, for “any laborer or mechanic

who was paid wages at a rate below the

[required prevailing rate] for any period”

during any year of the construction, alteration, or repair of the facility, the taxpayer

makes a correction payment to the laborer

or mechanic and pays a penalty to the

Secretary of the Treasury or her delegate

(Secretary). Under section 45(b)(7)(B)(i)

(I), the amount of the correction payment

is the sum of (i) the difference between

the amount of wages paid to the laborer or

mechanic during the period and the amount

of wages required to be paid to the laborer

or mechanic during that period in order to

meet the Prevailing Wage Requirements;

and (ii) interest on the amount under (i) at

the underpayment rate established under

section 6621 (determined by substituting “6 percentage points” for “3 percentage points” in section 6621(a)(2)) for the

applicable period.

Under section 45(b)(7)(B)(i)(II), the

amount of the penalty is “$5,000 multiplied by the total number of laborers and

mechanics who were paid wages at a rate

below the [prevailing wage] rate described

in [section 45(b)(7)(A)] for any period”

during the year. Deficiency procedures do

not apply “with respect to the assessment

or collection” of this penalty pursuant to

section 45(b)(7)(B)(ii).

Under section 45(b)(7)(B)(iii), if the

Secretary determines that the failure to

satisfy the Prevailing Wage Requirements

is due to “intentional disregard” of those

requirements, then the correction payment

to the laborer or mechanic is three times

the amount that would otherwise be determined under section 45(b)(7)(B)(i)(I), and

$10,000 is substituted for $5,000 in calculating the penalty under section 45(b)(7)

(B)(i)(II).

Section 45(b)(7)(B)(iv) provides that,

“pursuant to rules issued by the Secretary,

in the case of a final determination by

the Secretary with respect to any failure . . . to satisfy [the Prevailing Wage

Requirements],” the correction and penalty provisions do not apply, “unless the

payments . . . are made by the taxpayer on

or before the date which is 180 days after

the date of such determination.”

4. Apprenticeship Requirements

Under section 45(b)(8), in order to

satisfy the Apprenticeship Requirements,

certain requirements with respect to

labor hours, apprentice-to-journeyworker

ratios, and participation by apprentices

must be satisfied.3

a. Labor Hours Requirement

Section 45(b)(8)(A)(i) provides that

“[t]axpayers shall ensure that, with respect

to construction of any qualified facility,

not less than the applicable percentage of

the total labor hours of the construction,

alteration, or repair work (including such

work performed by any contractor or

subcontractor) with respect to such facility shall, subject to [section 45(b)(8)(B)]

be performed by qualified apprentices”

(Labor Hours Requirement).

For purposes of the Labor Hours

Requirement, section 45(b)(8)(A)(ii) provides that the applicable percentage is: (i)

in the case of a qualified facility the construction of which begins before January

1, 2023, 10 percent, (ii) in the case of

a qualified facility the construction of

which begins after December 31, 2022,

and before January 1, 2024, 12.5 percent,

and (iii) in the case of a qualified facility

the construction of which begins after

December 31, 2023, 15 percent.

Section 45(b)(8)(E)(i) defines “labor

hours” as the “total number of hours

devoted to the performance of construction, alteration, or repair work by any

individual employed by the taxpayer or

by any contractor or subcontractor, and

exclud[ing] any hours worked by foremen, superintendents, owners, or persons

employed in a bona fide executive, administrative, or professional capacity (within

the meaning of those terms in part 541 of

title 29, Code of Federal Regulations).”

Section 45(b)(8)(E)(ii) defines “qualified apprentice” as “an individual who is

employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship

program, as defined in section 3131(e)

(3)(B).” Section 3131(e)(3)(B) defines a

registered apprenticeship program as an

apprenticeship program registered under

the Act of August 16, 1937 (commonly

known as the National Apprenticeship

Act, 50 Stat. 664, chapter 663, 29 U.S.C.

50 et seq.) that meets the standards of subpart A of part 29 and part 30 of title 29 of

the Code of Federal Regulations.4

b. Ratio Requirement

Under section 45(b)(8)(B), the Labor

Hours Requirement is subject to any

applicable requirements for apprentice-to-journeyworker ratios of the U.S.

Sections 30C(g)(3), 45Q(h)(4), 45V(e)(4), 45Y(g)(10), 45Z(f)(7), 48(a)(11), 48C(e)(6), 48E(d)(4), and 179D(b)(5) cross-reference the apprenticeship requirements in section 45(b)(8).

Sections 45L and 45U do not have apprenticeship requirements.

Effective November 25, 2022, 29 CFR part 29 is no longer divided into subparts A and B because subpart B (Industry Recognized Apprenticeship Programs) was rescinded in a final rule

published on September 26, 2022 (87 FR 58269).

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September 25, 2023

Department of Labor (DOL) or the applicable State apprenticeship agency (Ratio

Requirement).

c. Participation Requirement

Under section 45(b)(8)(C), each taxpayer, contractor, or subcontractor who

employs four or more individuals to perform construction, alteration, or repair

work with respect to the construction of

a qualified facility must employ one or

more qualified apprentices to perform

such work (Participation Requirement).

5. Exceptions to Apprenticeship

Requirements

a. In general

Under section 45(b)(8)(D)(i), a taxpayer is not treated as failing to satisfy the Apprenticeship Requirements

in section 45(b)(8) if: (i) the taxpayer

satisfies the requirements described

in section 45(b)(8)(D)(ii) (Good Faith

Effort Exception), or (ii) in the case of

any failure by the taxpayer to satisfy the

Labor Hours Requirement under section 45(b)(8)(A) and the Participation

Requirement under section 45(b)(8)(C),

the taxpayer makes a penalty payment

to the Secretary (Apprenticeship Cure

Provision).

b. Good Faith Effort Exception

Under the Good Faith Effort Exception

provided by section 45(b)(8)(D)(ii), a

taxpayer is deemed to have satisfied

the Apprenticeship Requirements with

respect to a qualified facility if the taxpayer has requested qualified apprentices

from a registered apprenticeship program,

as defined in section 3131(e)(3)(B), and:

(i) such request has been denied, provided that such denial is not the result

of a refusal by the taxpayer or any contractors or subcontractors engaged in the

performance of construction, alteration,

or repair work with respect to such qualified facility to comply with the established standards and requirements of the

registered apprenticeship program, or (ii)

the registered apprenticeship program

fails to respond to such request within

five business days after the date on which

such registered apprenticeship program

received such request.

c. Apprenticeship Cure Provision

Under section 45(b)(8)(D)(i)(II), if

the Good Faith Effort Exception does

not apply, then the taxpayer will not be

treated as failing to satisfy the Labor

Hours Requirement or the Participation

Requirement if the taxpayer makes a

penalty payment to the Secretary in an

amount equal to the product of $50 multiplied by the total labor hours for which

the Labor Hours Requirement or the

Participation Requirement was not satisfied with respect to the construction,

alteration, or repair work on the qualified

facility. Under section 45(b)(8)(D)(iii), if

the Secretary determines that the failure

was due to intentional disregard of the

Labor Hours Requirement or Participation

Requirement, then the penalty amount

increases to $500 multiplied by the total

labor hours for which the requirement was

not satisfied.

C. One Megawatt Exception

Under the One Megawatt Exception in

section 45(b)(6)(B)(i), a qualified facility

that has a maximum net output of less than

one megawatt (as measured in alternating

current) is eligible for the increased credit

amount. A qualified facility’s nameplate

capacity determines whether the facility meets the One Megawatt Exception.

Similar exceptions apply for a qualified

facility under sections 45Y(a)(2)(B)(i)

and 48E(a)(2)(A)(ii)(I) with a maximum

net output of less than one megawatt (as

measured in alternating current); a qualified project under section 48(a)(9)(B)(i)

with a maximum net output of less than

one megawatt of electrical (as measured

in alternating current) or thermal energy;

and energy storage technology under section 48E(a)(2)(B)(ii)(I) with a capacity of

less than one megawatt.

D. Beginning of Construction Exception

Under the BOC Exception in section 45(b)(6)(B)(ii), a qualified facility

the construction of which began prior to

the date that is 60 days after the Secretary

publishes guidance with respect to the

requirements of section 45(b)(7)(A) and

(8) is eligible for the increased credit

amount in section 45(b)(6). On November

30, 2022, the IRS and the Treasury

Department published Notice 2022-61,

providing guidance with respect to the

PWA requirements in section 45(b)(7)

(A) and (8), including initial guidance for

determining the beginning of construction for section 45 and other credits and

the beginning of installation under section 179D. Therefore, if a taxpayer began

construction or installation of a facility5

before January 29, 2023, then the taxpayer

is eligible for the increased credit amount

without satisfying the PWA requirements,

provided the taxpayer is otherwise eligible for the credit. Similar exceptions apply

under sections 30C, 45Q, 45V, 45Y, 48,

48E, and 179D.

For purposes of determining when

construction or installation begins, Notice

2022-61 incorporates by reference the

notices issued under sections 45, 45Q, and

48 (collectively, IRS Notices).6 The IRS

Notices describe two methods of establishing that construction of a facility has

begun: (i) starting physical work of a significant nature (Physical Work Test), and

(ii) paying or incurring five percent or

more of the total cost of the facility (Five

Percent Safe Harbor).

The IRS Notices, as clarified and

modified by Notice 2021-41, 2021-29

I.R.B. 17, provide that for purposes of

the Physical Work Test and Five Percent

Safe Harbor, taxpayers must demonstrate

either continuous construction or continuous efforts (Continuity Requirement)

regardless of whether the Physical Work

Test or the Five Percent Safe Harbor was

used to establish the beginning of construction. Whether a taxpayer meets the

Continuity Requirement under either test

is determined by the relevant facts and

circumstances.

Notice 2022-61 defines “facility” as qualified facility, property, project, or equipment.

Notice 2013-29, 2013-20 I.R.B. 1085 (section 45); Notice 2020-12, 2020-11 I.R.B. 495 (section 45Q); Notice 2018-59, 2018-28 I.R.B. 196 (section 48).

September 25, 2023

934

Bulletin No. 2023–39

The IRS Notices, as subsequently

clarified and modified, also provide for

a “Continuity Safe Harbor” under which

a taxpayer will be deemed to satisfy the

Continuity Requirement provided a qualified facility is placed in service no more

than four calendar years after the calendar year during which construction of

the qualified facility began for purposes

of sections 45 and 48, and no more than

six calendar years after the calendar year

during which construction of the qualified facility or carbon capture equipment

began for purposes of section 45Q. For

purposes of the Continuity Safe Harbor,

certain offshore projects and projects built

on Federal land under sections 45 and 48

satisfy the Continuity Requirement if such

a project is placed into service no more

than 10 calendar years after the calendar

year during which construction of the

project began.

Until the Treasury Department and the

IRS issue further guidance on determining

when construction or installation begins,

taxpayers may continue to rely on the

guidance provided in Notice 2022-61 and

the IRS Notices. Specifically, to determine

when construction begins for purposes of

sections 30C, 45V, 45Y, and 48E, principles similar to those under Notice 201329 regarding the Physical Work Test and

Five Percent Safe Harbor apply, and taxpayers satisfying either test will be considered to have begun construction. In

addition, principles similar to those provided in the IRS Notices regarding the

Continuity Requirement for purposes of

sections 30C, 45V, 45Y, and 48E apply.

Whether a taxpayer meets the Continuity

Requirement under either test is determined by the relevant facts and circumstances. Similar principles to those under

section 3 of Notice 2016-31 regarding the

Continuity Safe Harbor also apply for purposes of sections 30C, 45V, 45Y, and 48E.

Taxpayers may rely on the Continuity

Safe Harbor with respect to those sections,

provided the facility is placed in service

no more than four calendar years after the

calendar year during which construction

began.

For purposes of section 179D, installation of energy efficient commercial

building property has begun if a taxpayer

generally satisfies principles similar to

the two tests described in section 2.02 of

Bulletin No. 2023–39

Notice 2022-61 regarding the beginning

of construction under Notice 2013-29

(Physical Work Test and Five Percent Safe

Harbor). The relevant facts and circumstances will ultimately determine whether

a taxpayer has begun installation.

For purposes of sections 45, 45Q,

and 48, the IRS Notices will continue to

apply under each respective Code section, including application of the Physical

Work Test and Five Percent Safe Harbor,

and the rules regarding the Continuity

Requirement and Continuity Safe Harbors.

IV. Davis-Bacon Act

The Davis-Bacon Act (40 U.S.C. 3141

et seq.) (DBA), enacted in 1931, requires

the payment of minimum prevailing

wages determined by the DOL to laborers and mechanics working on contracts

entered into by Federal agencies and the

District of Columbia that are in excess

of $2,000 and are for the construction,

alteration, or repair of public buildings

and public works. The Copeland Act,

Public Law 73-324 (40 U.S.C. 3145), was

enacted in 1934 to add a requirement that

contractors working on contracts covered

by the DBA submit weekly certified payroll records to the contracting agency for

work performed on the contract. Congress

has included DBA requirements in other

laws, often referred to as the Davis-Bacon

Related Acts (Related Acts), under which

Federal agencies provide assistance for

construction projects through grants,

loans, insurance, and other methods.

The Wage and Hour Division of the

DOL is responsible for administering the

DBA and has adopted regulations for the

determination of prevailing wages as well

as compliance with and enforcement of

DBA labor standards requirements under

29 CFR parts 1, 3, and 5.

Section 3142 of the DBA requires that

Federal agencies entering into contracts

covered by the DBA include the requirements of the DBA in the contract, including

the requirement to incorporate the applicable wage determinations that set forth

the prevailing wages to be paid to laborers

and mechanics performing work, and the

Copeland Act, 40 U.S.C. 3145, sets forth

the requirement to submit certified weekly

payroll records to the contracting Federal

agency. Under regulations implementing

935

the DBA (29 CFR parts 1 and 5), the contracting agency and the Wage and Hour

Division have responsibility to ensure

compliance with prevailing wage requirements by engaging in periodic audits or

investigations of contracts, including

examination of payroll data.

The Wage and Hour Division determines the wage rates that are “prevailing”

for purposes of section 3142(b) of the

DBA for each classification of covered

laborers and mechanics on similar projects in the geographic area in which work

is to be performed. A prevailing wage is

the combination of the basic hourly rate

and any fringe benefit rate listed on the

wage determination. The Wage and Hour

Division generally makes its determinations of the prevailing rates based on

survey information provided by contractors and other interested parties. The prevailing wage determinations made by the

Wage and Hour Division are published

on the DOL-approved website for wage

determinations (currently https://www.

sam.gov).

Under the DBA, contracting agencies

follow specified procedures for incorporating wage determinations into covered

contracts. The applicable prevailing wage

determination generally applies for the

duration of the contract.

In accordance with the DBA, certain

apprentices may be paid wages at a lower

wage rate than journeyworker laborers

and mechanics. Under 29 CFR 5.5(a)(4),

an apprentice from a registered apprentice

program may be paid at not less than the

rate specified in the registered program

for the apprentice’s level of progress in

the apprenticeship program, expressed

as a percentage of the journeyworker

hourly rate specified in the applicable

wage determination. Apprentices may

also be paid bona fide fringe benefits in

accordance with the provisions of the

registered apprenticeship program, but

if the registered apprenticeship program

does not specify bona fide fringe benefits,

apprentices must be paid the full amount

of bona fide fringe benefits listed on the

wage determination for the applicable

classification.

Sections 3143 and 3144 of the DBA

also provide for certain enforcement

authority and remedies to ensure compliance with payment of prevailing wage

September 25, 2023

rates. When a contracting agency or the

Wage and Hour Division finds there has

been an underpayment of wages, the contracting agency and the Wage and Hour

Division can seek to recover the underpayments from the contractor responsible, including but not limited to the

prime contractor. If the underpayment of

wages to laborers and mechanics is not

promptly remedied, then the contracting

agency may withhold payments that are

otherwise due under the contract or under

another contract with the same prime contractor in order to compensate the laborers and mechanics for the underpayments.

Contractors who have been found to have

disregarded their obligations to employees and subcontractors, including by violating prevailing wage requirements, may

also be subject to debarment from future

Federal contracts under 40 U.S.C. 3144(b)

and 29 CFR 5.12.

Explanation of Provisions

I. Overview

A. Incorporation of certain DBA

guidance

Under section 45(b)(7)(A), the

increased credit is available with respect

to a qualified facility if a taxpayer ensures

that laborers and mechanics are “paid

wages at rates not less than the prevailing

rates. . . in accordance with [the DBA].”

The phrase “in accordance with” means

“in agreement or harmony with; in conformity to; according to.”7 In interpreting

the “in accordance with” language, the

Treasury Department and the IRS propose

to incorporate in these regulations certain

requirements of the DBA that are relevant

for the purposes of section 45(b)(7)(A)

and the intent of the IRA, and that are necessary for, and consistent with, sound tax

administration.

Under the DBA, a contractor must

agree to pay prevailing wages at the commencement of the project as a condition

of a Federal contract award. Conversely,

under section 45, the requirements related

to payment of prevailing wages are generally triggered at the beginning of construction and continue during the entire

course of a project, but the requirement

becomes binding only when a tax return

claiming the increased credit is filed. The

Code does not require taxpayers who do

not seek an increased credit under section 45(b)(6) to pay prevailing wages in

the construction, alteration, or repair of a

facility.

The proposed regulations seek to strike

the appropriate balance in determining

when DBA requirements are relevant for

purposes of the PWA requirements and

when they are not. The proposed regulations would incorporate DBA statutory

and regulatory guidance that is relevant

for purposes of claiming the increased

tax credit and consistent with sound tax

administration. For example, the proposed

regulations would largely adopt DBA

guidance relating to wage determinations

and the meaning of pertinent terms such

as “laborer” and “mechanic”; “construction, alteration, or repair”; “wages”; and

“employed”. The proposed regulations

would not adopt DBA guidance if the

result of doing so would not be in furtherance of sound tax administration or the

aims of the IRA. For example, the proposed regulations would not incorporate

the rules under the DBA regarding provisions required to be included in contracts,

those provisions related to the reporting

of certified payroll records by contractors

to contracting agencies, and the various

enforcement processes that are available

to the DOL and the contracting agencies

to address noncompliance. Additionally,

the DBA’s $2,000 monetary coverage

threshold has not been incorporated.8

The statutory language of the IRA does

not reflect any intent to include exceptions from the PWA requirements, other

than the One Megawatt Exception and

the BOC Exception. Consequently, the

Treasury Department and the IRS have not

proposed a rule exempting Tribal governments or the Tennessee Valley Authority

(TVA) from the PWA requirements in section 45. The Treasury Department and the

IRS request comments on the need for any

exceptions, including for Tribal governments or the TVA, from the PWA requirements in addition to those expressly

described in the statute. Such comments

should detail the specific circumstances

requiring the proposed exception as well

as how its design would limit its application only to those circumstances.

In addition, the Treasury Department

and the IRS will hold Tribal consultation

specifically to address the prevailing wage

and apprenticeship requirements in these

proposed regulations, which will inform

the development of the final regulations.

See part VI. of the Special Analyses

section.

B. Applicability of PWA requirements to

the taxpayer

The proposed regulations would provide that in order to earn the increased

credit under section 45(b)(6) by satisfying the PWA requirements, the taxpayer would be solely responsible for:

(i) ensuring that the relevant laborers and

mechanics are paid wages not less than the

prevailing rate whether employed directly

by the taxpayer, or by a contractor, or a

subcontractor, and (ii) ensuring that the

Apprenticeship Requirements are satisfied. The proposed regulations would

also provide that the taxpayer would be

solely responsible for the PWA recordkeeping requirements, the correction and

penalty provisions under the Prevailing

Wage Requirements, and the Good Faith

Effort Exception and penalty provisions

under the Apprenticeship Requirements.

However, nothing in these proposed regulations is intended to supersede requirements that might otherwise apply to a

taxpayer, contractor, or subcontractor by

State or Federal law.

Generally, the proposed regulations

would define the term “taxpayer” to

mean any taxpayer as defined in section 7701(a)(14), including applicable

entities described in section 6417(d)(1)

(A). This will generally be the entity

that claims the credit (as increased under

In accordance with, Oxford English Dictionary, https://www.oed.com/search/dictionary/?scope=Entries&q=in+accordance+with (last visited Aug. 8, 2023); see Accordance, MerriamWebster’s Collegiate Dictionary (11th ed. 2006) (“agreement, conformity”).

The Treasury Department and the IRS interpret the One Megawatt Exception as addressing small business taxpayers who would be excluded under the $2,000 minimum contract requirement

under the DBA.

September 25, 2023

936

Bulletin No. 2023–39

section 45(b)(6)), or makes an election

under section 6417 with respect to such

credit amount on a Federal income tax

return. The section 45 credit, including

the increased credit amount available

under section 45(b)(6), is an eligible credit

subject to the newly enacted section 6418.

Section 6418 allows “eligible taxpayers” to elect to transfer certain credits to

unrelated taxpayers rather than using the

credits against their Federal income tax

liabilities. In the case of credits transferred under section 6418, these proposed

regulations would provide that the term

“taxpayer” also means the eligible taxpayer that determines the eligible credit to

be transferred and makes a transfer election under section 6418 to transfer any

specified credit portion (including 100

percent) of an eligible credit determined

with respect to any eligible credit property

of such eligible taxpayer for any taxable

year.

Section 6418(a) provides that, in the

case of an eligible taxpayer that elects to

transfer all (or any specified portion) of

an eligible credit determined with respect

to the taxpayer for any taxable year to an

unrelated transferee taxpayer, the transferee taxpayer specified in such election

(and not the eligible taxpayer) is treated as

the taxpayer with respect to such credit (or

such portion thereof).

The Treasury Department and the IRS

published proposed regulations in the

Federal Register (88 FR 40496 (June 21,

2023)) that would implement the statutory

provisions of section 6418 (6418 Proposed

Regulations). As explained in the 6418

Proposed Regulations, the Treasury

Department and the IRS view inclusion

of the word “determined” as instructive.

Only credits determined with respect to

an eligible taxpayer can be transferred by

the eligible taxpayer. The 6418 Proposed

Regulations would provide that Code sections relating to the determination of an

eligible credit, such as sections 49 and

50(b), generally impact the amount of an

eligible credit that an eligible taxpayer can

transfer. A transferee taxpayer is generally

not subject to those Code sections, but

a transferee taxpayer is subject to Code

sections that would limit the amount of an

eligible credit that is allowed, such as sections 38(c) and 469. In making a transfer

election, the 6418 Proposed Regulations

also would require an eligible taxpayer

to report the determined credit as part

of the taxpayer’s return, including filing

properly completed credit source forms, a

properly completed Form 3800, General

Business Credit, and a schedule showing

the amount of eligible credit transferred

for each eligible credit property.

The 6418 Proposed Regulations also

would apply with respect to the entire

credit determined under section 45, where

the amount of credit determined would

include increased credit amounts available under section 45(b)(6). As the rules

for determining an eligible credit apply

to the eligible taxpayer and not the transferee taxpayer under section 6418, these

proposed regulations would provide consistency with respect to the rules relating

to the determination of the section 45

credit. Thus, while a transferee taxpayer

would claim a transferred eligible credit

(or portion thereof) on a tax return, the

requirements of section 45 relevant to

determining the credit, including the correction and penalty provisions described

in section 45(b)(7)(B) and 45(b)(8)(D),

would remain with the eligible taxpayer

who determined the credit. The Treasury

Department and the IRS request comments on the application of the PWA

penalty and cure provisions, including to

transferees and eligible taxpayers, in the

context of transferred credits.

II. Prevailing Wage Requirements Under

Section 45(b)(7)(A)

A. In general

Section 45(b)(7)(A) requires that taxpayers who are seeking an increased

credit ensure that laborers and mechanics

employed by the taxpayer, or any contractor or subcontractor in the construction, alteration, or repair of a facility are

paid wages at rates that are not less than

the prevailing rates determined by the

DOL in accordance with the DBA.9 The

proposed regulations would provide that

a taxpayer would satisfy the Prevailing

Wage Requirements with respect to the

construction, alteration, or repair of a

facility by ensuring that all laborers and

mechanics employed by the taxpayer, or

any contractor or subcontractor, in the

construction, alteration, or repair of a

facility are paid wages at rates that are not

less than the prevailing rates determined

by the DOL in accordance with the DBA.

The proposed regulations would largely

incorporate the definitions of contractor and subcontractor from the DBA and

would provide that: (i) a contractor would

be any person that enters into a contract

with the taxpayer for the construction,

alteration, or repair of a qualified facility,

and (ii) a subcontractor would be any contractor that agrees to perform or be responsible for the performance of any part of a

contract entered into with the taxpayer (or

contractor) with respect to the construction,

alteration, or repair of a facility.

Consistent with the DBA and 29

CFR 5.2, and solely for purposes of the

Prevailing Wage Requirements, the proposed regulations would provide that a

laborer or mechanic would be considered

employed by the taxpayer, contractor, or

subcontractor if the individual performs

the duties of a laborer or mechanic for

the taxpayer, contractor, or subcontractor (as applicable), regardless of whether

the individual would be characterized as

an employee or an independent contractor for other Federal tax purposes. The

definition of employed for purposes of

the Prevailing Wage Requirements would

generally be different and broader than

the definition used elsewhere in the Code,

for example with respect to employment

taxes, as well as the associated reporting

and withholding obligations. Laborers and

mechanics who are independent contractors for employment tax purposes may be

considered employed for purposes of the

Prevailing Wage Requirements. Whether

an individual is considered employed

for purposes of the Prevailing Wage

Requirements and these proposed regulations is not relevant when determining

whether an individual is an employee

The requirement to pay prevailing wages with respect to alteration or repair applies for any portion of a taxable year that is within the 10-year period beginning on the date the qualified

facility is placed in service.

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September 25, 2023

or an independent contractor for other

Federal tax purposes.

B. Determining the prevailing wage rate

1. In General

Under the proposed regulations, prevailing wage rates would be determined

by the DOL in accordance with the DBA

when they are issued and published by

the DOL as a general wage determination or when issued to a taxpayer as part

of a supplemental wage determination or

pursuant to a request for a wage rate for

an additional classification. The proposed

regulations would require taxpayers to

use the general wage determination in

effect when the construction of the facility begins but would not require taxpayers

to update the applicable prevailing wage

rates during construction of the facility in

the event a new general wage determination is published by the DOL after construction of the facility begins. However,

a new general wage determination would

be required to be used when a contract is

changed to include additional, substantial

construction, alteration, or repair work not

within the scope of work of the original

contract, or to require work to be performed for an additional time period not

originally obligated, including where an

option to extend the term of a contract

for the construction, alteration, or repair

is exercised. This is consistent with DOL

guidance under the DBA, which generally

requires the contracting agency to incorporate the applicable wage determinations

as part of the contract that is awarded to

the contractor with the applicable rates

valid through the duration of the contract.

The proposed regulations also would provide that taxpayers would need to update

the applicable wage rate(s), as necessary,

with respect to any alteration or repair of

a facility that begins after the facility has

been placed in service. Taxpayers would

do this by ensuring that wages are paid for

such alteration or repair based on the general wage determination in effect when the

alteration or repair begins.

2. General Wage Determinations

The proposed regulations would provide that a general wage determination

September 25, 2023

would be one issued and published by

the DOL that includes a list of wage and

bona fide fringe benefit rates determined

to be prevailing for laborers and mechanics for the various classifications of

work performed with respect to a specified type of construction in a geographic

area. Generally, the DOL determines the

prevailing rate based on wage rate data

submitted by contractors, contractors’

associations, labor organizations, public

officials, and other interested parties. In

general, the proposed regulations would

provide that taxpayers would need to use

the general wage determination(s) published by the DOL under the DBA on a

DOL approved website, to determine the

applicable prevailing wage rates. The current approved website for publishing general wage determinations is https://www.

sam.gov.

The proposed regulations would

largely incorporate the definition of wages

from 29 CFR 5.2 for the Prevailing Wage

Requirements. Under 29 CFR 5.2, wages

are defined as the basic hourly rate of pay;

any contribution irrevocably made by a

contractor or subcontractor to a trustee or

to a third person pursuant to a bona fide

fringe benefit fund, plan, or program; and

the rate of costs to the contractor or subcontractor that may be reasonably anticipated in providing bona fide fringe benefits

to laborers and mechanics pursuant to an

enforceable commitment to carry out a

financially responsible plan or program,

which was communicated in writing to the

laborers and mechanics affected. Whether

amounts are wages for purposes of the

Prevailing Wage Requirements is not relevant in determining whether amounts are

wages or compensation for other Federal

tax purposes.

3. Supplemental Wage Determinations

and Rates for Additional Classifications

The proposed regulations would provide special procedures for the limited

circumstances in which a general wage

determination does not provide an applicable wage rate(s) for the work to be

performed on the facility. These circumstances include when no general wage

determination has been issued for the

geographic area or for the specified type

of construction, or when the Secretary of

938

Labor has issued a general wage determination for the relevant geographic area

and type of construction, but one or more

labor classifications necessary for the construction, alteration, or repair work that

will be done on the facility by laborers or

mechanics is not listed as part of that determination. The proposed regulations would

provide that under these circumstances,

a taxpayer, contractor, or subcontractor

would need to request a supplemental

wage determination or request a prevailing wage rate for an additional classification from the DOL. A taxpayer satisfies

section 45(b)(7)(A) by ensuring that

laborers and mechanics are paid wages at

rates not less than the rates determined by

the DOL pursuant to a request for a supplemental wage determination or pursuant

to a request for a prevailing wage rate for

an additional classification.

The DOL has advised the Treasury

Department and the IRS that most taxpayers will likely not need to use the process

for requesting a supplemental wage determination or request a rate for an additional

classification because of the availability of

general wage determinations. The request

for a prevailing wage rate for an additional

classification would only be appropriate

when the work to be performed by the

classification is not performed by a classification in the applicable general wage

determination and the classification is

used in the area by the construction industry. In addition, a prevailing wage rate for

an additional classification would only be

approved when the proposed wage rate,

including any bona fide fringe benefits,

bears a reasonable relationship to the wage

rates contained in the general wage determination. A request for a prevailing wage

rate for additional classification would not

be permitted to be used to split, subdivide,

or otherwise avoid application of classifications listed in a general wage determination. Under the proposed regulations, the

procedures for requesting a supplemental

wage determination or a prevailing wage

rate for an additional classification from

the DOL would correspond to the provisions of 29 CFR 1.5(b) and 5.5(a)(1)(iii).

The Treasury Department and the IRS

expect that the construction of some facilities may span two or more adjacent geographic areas, and more than one general

wage determination could apply to the

Bulletin No. 2023–39

facility. In such circumstances, a taxpayer

would be able to satisfy the Prevailing

Wage Requirements by ensuring that

laborers and mechanics are paid wages at

the highest rate for each classification provided under the general wage determinations. A taxpayer would also be permitted

to request a supplemental wage determination with respect to the facility and pay

the rates determined by the DOL pursuant

to the request.

The proposed regulations would also

provide a special rule for qualified facilities located offshore so taxpayers would

not need to request a supplemental wage

determination for offshore facilities. In

lieu of requesting a supplemental wage

determination for a facility located in an

offshore area within the outer continental shelf of the United States, a taxpayer,

contractor, or subcontractor would be

permitted to rely on the general wage

determination for the relevant category of

construction that is applicable in the geographic area closest to the area in which

the qualified facility will be located.

The process for requesting a supplemental wage determination or a prevailing

wage rate for an additional classification

provided for in the proposed regulations would be consistent with the process described in Notice 2022-61 while

addressing the different context of the

PWA regime wherein taxpayers, contractors, and subcontractors, rather than a

contracting agency, will seek additional

wage rates for purposes of complying

with the Prevailing Wage Requirements

of section 45. Under the DBA, the request

for a project wage determination applicable under 29 CFR 1.5(b) or for a conformance under 29 CFR 5.5(a)(1)(iii) is

made by the contracting agency rather

than the contractor and will often occur

after the contracting agency and the contractor have conferred about the need for

the project wage determination or for

the conformance of an additional classification. Because there is no contracting agency in the tax credit regime, the

proposed regulations would set forth an

analogous process for taxpayers, contractors, and subcontractors to request

a supplemental wage determination, or

a request for a prevailing wage rate for

an additional classification, by submitting the request and supporting material

Bulletin No. 2023–39

directly to the Wage and Hour Division

of the DOL.

The proposed regulations would provide that the request for a supplemental wage determination or a request for

a prevailing wage rate for an additional

classification would need to include information consistent with the information

that is required to be provided by a contracting agency when requesting a project

wage determination or a conformance for

purposes of the DBA. This information

would include a description of the type

of work to be performed, the geographic

area where the facility is located, the

start date for the construction, alteration,

or repair of the facility, the labor classification(s) needed for performance of the

work on the facility for which wage rates

are not available on an applicable general

wage determination, pertinent wage payment information that may be available

with respect to the classifications, and any

information the taxpayer wants the DOL

to consider for determining the applicable classifications and prevailing wage

rates. After review, the Wage and Hour

Division will notify the taxpayer as to the

labor classifications and wage rates to be

used for the type of work in question in

the geographic area in which the facility

is located.

The proposed regulations would adopt,

by cross reference, the review and appeal

procedures available to any interested

party under the DBA with respect to

wage determinations generally. Any interested party would be able to seek reconsideration and review of a supplemental

wage determination, or a prevailing wage

rate for an additional classification, by

the DOL Administrator of the Wage and

Hour Division and appeal any decision

of the Administrator of the Wage and

Hour Division to the DOL Administrative

Review Board.

In general, the Treasury Department

and the IRS expect that supplemental

wage determinations and requests for prevailing wage rates for an additional classification will be requested no more than

90 days prior to the beginning of the construction, alteration, or repair of the facility, as applicable. However, the Treasury

Department and the IRS recognize that

taxpayers may not reasonably determine

until after construction, alteration, or

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repair begins that a supplemental wage

determination or request for a prevailing

wage rate for an additional classification is necessary. In these instances, the

Treasury Department and the IRS would

expect taxpayers, contractors, or subcontractors to make a request as soon as

practicable after determining the need for

a supplemental wage determination or

prevailing wage rate for additional classifications. The proposed regulations would

provide that when a supplemental wage

determination or a prevailing wage rate

for an additional classification is issued

by the DOL after construction, alteration,

or repair of the facility has begun, the

applicable prevailing rates would apply

retroactively to the date that the applicable construction, alteration, or repair work

that is the subject of the request began.

The taxpayer would be required to ensure

that wages (including bona fide fringe

benefits where appropriate) are paid at

appropriate prevailing wage rates to all

laborers and mechanics performing work

on the project from the first day on which

work is performed in the classification.

The Treasury Department and the IRS

request comments on the proposed procedures for requesting supplemental wage

determinations and prevailing wage rates

for additional classifications.

C. Paying wages in accordance with an

applicable wage determination

1. In General

Under the proposed regulations, the

applicable wage determination for a

type of construction in a geographic area

would provide the prevailing wage rates

that apply to laborers or mechanics for

the construction, alteration, or repair of a

facility in that geographic area. The proposed regulations would provide that for

purposes of satisfying the Prevailing Wage

Requirements, all laborers and mechanics would need to be paid in the time and

manner consistent with the regular payroll practices of the taxpayer, contractor,

or subcontractor, as applicable. For purposes of satisfying section 45(b)(7)(A),

the proposed regulations would provide

that a taxpayer would need to ensure that

the wages paid to laborers and mechanics

employed by the taxpayer, contractor, or

September 25, 2023

subcontractor on the construction, alteration, or repair of the facility must be “not

less than the prevailing rates. . . in the

locality in which such facility is located.”

The proposed regulations would define the

terms: (i) laborer and mechanic, (ii) types

of construction, (iii) construction, alteration, or repair, and (iv) locality, generally

consistent with the DBA definitions.

The proposed regulations would define

the terms “laborer” and “mechanic” as

those individuals whose duties are manual or physical in nature. Laborers and

mechanics would include apprentices

and helpers. Working forepersons who

devote more than 20 percent of their time

during a workweek to laborer or mechanic

duties and who do not meet the criteria for

exemption under 29 CFR part 541 would

also be considered laborers and mechanics for the time spent conducting laborer

and mechanic duties. However, laborers

and mechanics would not include individuals whose duties are primarily administrative, executive, or clerical, and persons

employed in a bona fide executive, administrative, or professional capacity as those

terms are defined in 29 CFR part 541. The

Treasury Department and the IRS request

comments on the treatment of working

forepersons or owners performing the

duties of laborers and mechanics under

certain circumstances, and other executive or administrative personnel who also

perform duties of a manual or physical

nature, in the construction, alteration, or

repair of a qualified facility.

The proposed regulations would provide that the type of construction would

be the general category of construction

as established by the DOL for the publication of general wage determinations.

Specific types of construction currently

include building, residential, heavy, and

highway. The Treasury Department and

the IRS contemplate that the construction,

alteration, or repair of most facilities eligible for the increased credit under section 45(b)(6) would be either building or

heavy construction.

The proposed regulations would provide that the term construction, alteration,

or repair would generally mean construction, prosecution, completion, or repair

as provided under 29 CFR 5.2. Under

this definition, construction, alteration,

or repair would mean all types of work

September 25, 2023

performed at the location of the facility

and includes, but is not limited to: constructing, altering, remodeling, installing

of items fabricated offsite; painting and

decorating; and manufacturing or furnishing of materials, articles, and supplies or

equipment at the location of the facility.

Additionally, the proposed regulations

would provide that construction, alteration, or repair would not include maintenance work that occurs after the facility

is placed in service. Under the proposed

regulations, maintenance would be work

that is ordinary and regular in nature and

designed to maintain existing functionality of a facility as opposed to an isolated

or infrequent repair of a facility to restore

specific functionality or adapt it for a

different or improved use. Further, the

proposed regulations would provide that

this definition of construction, alteration,

or repair would be solely for purposes of

the PWA requirements and has no bearing

on any other provision under the Code,

including any determination of construction, alteration, repair, or maintenance

under section 162 or 263.

The proposed regulations would provide that a locality or geographic area

would be the county, independent city,

or other civil subdivision of the State

in which the facility or secondary site

is located. Geographic area would also

include offshore areas, including areas

located within the outer continental shelf

of the United States, and the U.S. territories. If construction, alteration, or

repair is performed in multiple counties,

independent cities, or other civil subdivisions, then the geographic area would also

include all counties, independent cities, or

other civil subdivisions in which the work

will be performed.

Under section 45(b)(7)(A)(ii), the prevailing wage rates that are required to be

paid with respect to such construction,

alteration, or repair are determined by

reference to “the prevailing rates for construction, alteration, or repair of a similar

character in the locality in which such

facility is located.” The proposed regulations would also use the DBA’s “site of

the work” definition to clarify the scope of

the requirement under section 45(b)(7)(A)

to pay prevailing wage rates. Under the

DBA, the requirement to pay prevailing

wages is limited by statute to laborers and

940

mechanics “employed directly on the site

of the work.” 40 U.S.C. 3142. By comparison, section 45(b)(7)(A)(i) and (ii)

requires the payment of prevailing wages

generally in the “construction of [a qualified] facility” and the “alteration or repair

of such facility.” Over the years, the DOL

has updated its rules to address developments in the construction industry that

have enabled contractors to build large

portions of a building or project on one or

more secondary sites away from the primary site of the work. The DBA rules now

provide that a secondary construction site

is considered part of the site of the work,

if a significant portion of a building or

work is constructed at the secondary site

for specific use in the designated building

or work and the site either was established

specifically for the performance of the

covered contract or project or dedicated

exclusively, or nearly so, to the covered

contract or project. 29 CFR 5.2.

The Treasury Department and the IRS

view the DBA’s site of the work requirement to be helpful for purposes of interpreting the language in section 45(b)(7)

(A) that the applicable prevailing wage

rates for the construction, alteration, or

repair of the facility are rates not less than

those prevailing “in the locality in which

such facility is located.” As with certain

construction subject to the DBA, the

Treasury Department and the IRS expect

that taxpayers similarly may use multiple construction sites in the construction,

alteration, or repair of a facility and in

certain cases prefabricate large portions

of the facility offsite for later installation

at the facility’s location. Some of these

secondary sites will be dedicated solely to

the construction of a facility while others

may service multiple clients and facilities. While the language of section 45(b)

(7)(A) could be interpreted to support an

expansive reading of construction such

that all construction of a facility, wherever located and however small, is subject to the Prevailing Wage Requirements,

such a reading would result in significantly broader coverage than under the

DBA and likely would entail substantial

compliance costs and discourage taxpayers from seeking the increased credits

or deduction available under the IRA.

Thus, the Treasury Department and the

IRS understand the DBA approach to

Bulletin No. 2023–39

“site of the work” to strike an appropriate balance between the requirements of

section 45(b)(7)(A) and existing construction practices and thus propose to largely

adopt the DBA approach for purposes of

defining the scope of the Prevailing Wage

Requirements.

Therefore, under the proposed regulations, taxpayers would be subject to the

requirement to ensure that laborers and

mechanics are paid not less than prevailing

wage rates with respect to the construction, alteration, or repair at the locality

in which the facility is located, which

would be defined to include any secondary sites where a significant portion of the

construction, alteration, or repair of the

facility occurs, provided that the secondary site either was established specifically

for, or dedicated exclusively for a specific

period of time to, the construction, alteration, or repair of the facility.

Under 29 CFR 1.6(b)(1), the prevailing wage rate that applies to laborers or

mechanics engaged in the construction,

alteration, or repair work at a secondary

site is determined by the geographic area

of the secondary site. The proposed regulations would similarly provide that when

a secondary site is established specifically

for, or dedicated exclusively for a specific

period of time to, the construction, alteration, or repair of the facility, the prevailing wage rate applicable to laborers and

mechanics engaged in the construction,

alteration, or repair of the facility at the

secondary site would be determined by

the applicable wage rate for that laborer or

mechanic classification based on the geographic area of the secondary site.

2. Wages for Apprentices

Section 45(b)(8)(E)(ii) provides generally that a qualified apprentice is an individual who is employed by the taxpayer,

contractor, or subcontractor and who is

participating in a registered apprenticeship

program, as defined in section 3131(e)(3)

(B). For purposes of the DBA, an apprentice may also include an individual in the

first 90 days of probationary employment

as an apprentice in a registered apprenticeship program, who is not individually registered in the program, but who

has been certified by the DOL’s Office of

Apprenticeship or a State apprenticeship

Bulletin No. 2023–39

agency (where appropriate) to be eligible for probationary employment as an

apprentice.

A registered apprenticeship program

is a program that has been registered by

the DOL’s Office of Apprenticeship or a

recognized State apprenticeship agency,

pursuant to the basic standards and

requirements in 29 CFR parts 29 and 30.

Program registration is evidenced by a

Certificate of Registration or other written

indicia of registration.

The proposed regulations would adopt

29 CFR 5.5(a)(4)(i) allowing the payment

of wages that differ from the applicable

prevailing wage rate to apprentices who

are participating in a registered apprenticeship program. The proposed regulations

would also provide that the calculation

of the apprentice wage rate would be in

accordance with 29 CFR 5.5(a)(4)(i).

For purposes of determining whether

apprentices may be paid the apprentice

wage rate rather than the full prevailing

wage for other laborers and mechanics

of the same classification, the proposed

regulations would provide the apprentice must be participating in a registered

apprentice program as demonstrated

by a written apprenticeship agreement

with the registered apprenticeship program containing the terms and conditions of the employment and training of

the apprentice. The terms and conditions

of the agreement would be required to

comply with 29 CFR 29.7. The registered apprenticeship program would be

required to be registered with the DOL or

a recognized State apprenticeship agency

in accordance with 29 CFR parts 29 and

30. If the apprentice is working in a classification that is not in an occupation that

is part of the registered apprenticeship

program, to satisfy the Prevailing Wage

Requirements, the apprentice would need

to be paid the full prevailing wage for

laborers or mechanics for that classification in that location.

The proposed regulations would provide that taxpayers and contractors or subcontractors who employ apprentices who

are not in a registered apprenticeship program or who employ apprentices in excess

of applicable ratios permitted by the registered apprenticeship program would need

to pay those apprentices the full prevailing wage rate listed for the classification

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of the work performed in the applicable

wage determination.

D. Correction and penalty provisions

1. General Rule

Under section 45(b)(7)(B)(i) and the

proposed regulations, taxpayers would

cure a failure to meet the Prevailing Wage

Requirements by making the correction

and penalty payments described in Section

III.B.3. Section 45(b)(7)(B)(i) provides

that “[i]n the case of any taxpayer which

fails to satisfy the requirement under subparagraph (A)… such taxpayer shall be

deemed to have satisfied such requirement

under such subparagraph with respect to

such facility for any year if, with respect

to any laborer or mechanic who was paid

wages at a rate below the [prevailing rate]

for any period during such year,” the taxpayer makes the applicable correction

payments and pays the penalty. The phrase

“[i]n the case of any taxpayer which fails

to satisfy the requirement under subparagraph (A)…for any period” suggests that

a failure to pay prevailing wages immediately triggers the applicability of the

correction and penalty provisions if the

increased credit is claimed on a return

after a facility is placed in service. The

proposed regulations would require the

payment of prevailing wages at the time

work is performed with respect to the construction, alteration, or repair of a facility

in order to claim the increased credit. The

proposed regulations would also provide

that the requirement becomes binding

only when the increased credit is claimed

on a return. This is consistent with tax

administration regarding the underlying

credit.

Thus, the correction and penalty payment requirements of section 45(b)(7)

(B)(i) would become applicable to a taxpayer upon the occurrence of the taxpayer’s failure to satisfy the Prevailing Wage

Requirements of section 45(b)(7)(A),

which occurs whenever wages are paid to

a laborer or mechanic below the prevailing wage rates. That failures will occur,

and the obligation to make correction

and penalty payments will have arisen,

during the course of the construction,

alteration, or repair of a qualified facility

must be viewed in the context of taxpayers

September 25, 2023

not needing to satisfy the Prevailing

Wage Requirements in the absence of

an increased credit being claimed on a

return. Thus, the proposed regulations

would provide that the obligation to make

correction payments and pay the penalty

would not become binding until a return is

filed claiming the increased credit, and the

proposed regulations would not require

payment of the correction payment or the

penalty until the time the increased credit

is claimed. The earliest time that a taxpayer

can make a penalty payment to the IRS is

at the time of filing a tax return claiming

the increased credit. However, taxpayers

would retain the option of making correction payments to laborers and mechanics at any time after the initial payments

were made and in advance of the filing of

a tax return claiming the increased credit

in order to limit the amount of additional

interest the taxpayer must pay at the elevated rates set forth in section 45(b)(7)(B)

(i)(I)(bb).

In general, taxpayers would be obligated to make any necessary correction

payments to any laborer and mechanic on

or before the date a return is filed claiming an increased credit amount. A taxpayer would also be obligated to make

any penalty payments owed with respect

to a failure to meet the Prevailing Wage

Requirements at the time a return is filed

claiming the increased credit amount.

Under the proposed regulations, whether

taxpayers make the necessary correction

payments and pay the penalty amounts

promptly is one of the facts and circumstances that would be considered for

purposes of the increased penalties for

intentional disregard. The proposed regulations would also provide a deadline for

a taxpayer’s ability to use the correction

and penalty provisions to rectify a failure to comply with the Prevailing Wage

Requirements when the IRS makes a final

determination that a taxpayer has failed to

satisfy the Prevailing Wage Requirements.

Under section 45(b)(7)(B)(iv), once the

IRS makes a final determination that a taxpayer has failed to satisfy the Prevailing

Wage Requirements, the taxpayer must

make the correction and penalty payments

within 180 days after the final determination to be eligible to for the increased

credit. The proposed regulations would

clarify that this final determination would

September 25, 2023

come in the form of a notice sent by the

IRS.

As provided in section 45(b)(7)(B)(ii),

under the proposed regulations, deficiency

procedures would not apply to any penalty

payment required to be made in connection with a failure to meet the Prevailing

Wage Requirements. The proposed regulations would clarify that although deficiency procedures would not apply to the

penalty payment, deficiency procedures

would apply to any determination by the

IRS disallowing a taxpayer’s claim for the

increased credit.

2. Special Circumstances Involving

Correction and Penalty Payments

Section 45(b)(7)(B)(i) states that a taxpayer will be deemed to satisfy the prevailing wage requirement “if, with respect

to any laborer or mechanic who was paid

wages at a rate below the rate described

in such subparagraph for any period

during such year, such taxpayer— makes

payment to such laborer or mechanic…”

in the amount of the correction payment

and makes the required penalty payment

to the IRS. The Treasury Department and

the IRS are aware that the construction

of a qualified facility may occur over the

course of several years and some taxpayers who fail to meet the Prevailing Wage

Requirements may be unable to locate all

laborers and mechanics to which the correction payment must be made. However,

section 45(b)(7)(B)(i) does not excuse

taxpayers from the requirement to make

the correction payment, even if the taxpayer is unable to locate the laborer or

mechanic. The proposed regulations

would not provide for an exception to the

statutory requirement.

The Treasury Department and the

IRS expect that taxpayers will be able to

establish correction payments even when

a former laborer or mechanic cannot be

located. In general, States have developed

specific rules for the payment of wages to

former laborers and mechanics who cannot be located. These rules can include diligence requirements to locate the laborer

or mechanic, information reporting obligations to relevant State agencies on the

amount of unclaimed wages, and requirements to remit any unclaimed wage

amounts to State control as unclaimed

942

property after defined holding periods.

Taxpayers may also be able to establish

that correction payments were made by

demonstrating compliance with any withholding and information reporting requirements with respect to the payments. The

Treasury Department and the IRS request

public comments concerning appropriate

rules for situations in which laborers and

mechanics who are owed wages cannot be

located and how taxpayers may establish

that they have made the correction payment described in section 45(b)(7)(B)(i)

(I).

The Treasury Department and the

IRS expect that some taxpayers will

have made requests to the DOL for a

supplemental wage determination or a

prevailing wage rate for an additional

classification. It is possible that the

DOL’s response to these requests will not

be issued until after laborers and mechanics have started working on the facility.

The laborers and mechanics who are the

subject of the requests will have already

been engaged in the construction, alteration, or repair, and may have already

been paid wages below the rates later

determined to be prevailing by the DOL.

In this circumstance, the proposed regulations would provide that the taxpayer

would not be considered to have failed to

meet the Prevailing Wage Requirements

with respect to any mechanics or laborers whose wage rate was subject to the

request and who were paid below the prevailing wage rate before the determination by the DOL if the taxpayer requests

the supplemental wage determination or

prevailing wage rate for an additional

classification before the beginning of

construction (or as soon as practicable

after the start of construction) and makes

a correction payment within 30 days

of the determination to each laborer or

mechanic equal to the difference between

the amount of wages paid to such laborer

or mechanic before the determination

and the amount of wages required by the

Prevailing Wage Requirements to be paid

to such laborer or mechanic during such

period. This exception is intended to mitigate a rule that would require taxpayers

to make correction and penalty payments

for failures to pay a prevailing wage rate

that could not be timely determined by

the taxpayer.

Bulletin No. 2023–39

As previously described, for purposes

of transfers pursuant to section 6418, the

proposed regulations would clarify that

the requirement to make correction and

penalty payments would continue to apply

to an eligible taxpayer who (i) transfers

an increased credit amount under section 45(b)(6) as part of a specified credit

portion and (ii) fails to meet the prevailing wage requirement of section 45(b)(7)

(A) with respect to such increased credit

amount. Additionally, the proposed regulations would provide that the obligation to

satisfy the Prevailing Wage Requirements

would not become binding on an eligible

taxpayer until the earlier of: (i) the filing

of the eligible taxpayer’s return for the

taxable year for which the specified credit

portion is determined with respect to the

eligible taxpayer, or (ii) the filing of the

return of the transferee taxpayer for the

year in which the specified credit portion

is taken into account.

The proposed regulations would also

provide that a taxpayer who determines

the underlying credit amount would have

no obligation to comply with the correction and penalty provisions if the IRS

later determines that the taxpayer was not

entitled to the increased credit amount.

Additionally, if the taxpayer does not correct and, therefore, is not subsequently

granted the increased credit amount, no

penalty is assessed under section 45(b)(7)

(B).

3. Intentional Disregard

Section 45(b)(7)(B)(iii) provides that if

the failure to ensure that the laborers and

mechanics are paid at the prevailing wage

rate is found to be due to intentional disregard, then the amount of the correction

payment is tripled and the amount of the

penalty payment is doubled. The proposed

regulations would provide that failures to

meet the Prevailing Wage Requirements

would be due to intentional disregard if

they are knowing or willful, which is a

determination that must be made by considering all relevant facts and circumstances. The proposed regulations would

provide a non-exhaustive list of facts that

may be relevant to this determination.

The proposed regulations would

explain that the facts and circumstances

would include consideration of whether

Bulletin No. 2023–39

the failure was part of a pattern of conduct and whether the taxpayer has been

required to pay the penalty in previous

years. The Treasury Department and

the IRS believe that failures that occur

despite a taxpayer exercising reasonable diligence weigh against a finding of

a knowing or willful failure. Under the

proposed regulations, taxpayers would

demonstrate reasonable diligence by taking appropriate steps to determine the

applicable classifications and wage rates

and by seeking to promptly correct any

failures when discovered. Last, the proposed regulations would seek to draw

from behavior that is generally required

of contractors under the DBA and that the

Treasury Department and the IRS believe

would be best practices of taxpayers

seeking to comply with the Prevailing

Wage Requirements. These behaviors

would include posting prevailing wage

rates in a prominent place for the duration of the construction, alteration, or

repair or otherwise notifying employees

of the applicable prevailing wage rates;

incorporating provisions in any contracts

entered with contractors that require

payment of prevailing wage rates by

the contractors and any subcontractors;

and undertaking quarterly, or more frequent, reviews of wages paid to laborers

and mechanics to ensure that prevailing wages are being paid. The Treasury

Department and the

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