On May 28, New York Gov. Kathy Hochul signed a budget bill that brings significant changes to both New York State and New York City’s tax landscape.1 Most notably, the budget bill decouples both the state and city income tax regimes from various provisions of the One Big Beautiful Bill Act (OBBBA), updates New York City’s Internal Revenue Code (IRC) Sec. 951A inclusion rules for apportionment purposes, and implements New York City Mayor Zohran Mamdani’s proposed pied-à-terre tax.
New York state income tax changes
New York State and New York City, for corporate income tax purposes, are rolling conformity jurisdictions, meaning both jurisdictions automatically adopt changes made to the IRC and only decouple from sections of the IRC as specified.2
Sec. 174A conformity
The enactment of the OBBBA permitted the immediate expensing of domestic research and experimental (R&E) expenditures under newly created IRC Sec. 174A. Following enactment of the New York budget bill, the Empire State now decouples from Sec. 174A.3 New York State now requires taxpayers to amortize all R&E expenditures incurred prior to 2025 under their Tax Cuts and Jobs Act (TCJA) schedules that became effective in 2022, meaning a five-year period for domestic R&E expenditures, and a 15-year period for foreign R&E expenditures.
In addition, New York State will not recognize federal elections permitting accelerated pre-2025 domestic R&E expenditures to be deducted either immediately or over a two-year period. Therefore, taxpayers deciding to accelerate pre-2025 R&E deductions for federal income tax purposes will need to separately track R&E expenses for New York State purposes.
For R&E expenditures incurred in 2025 and thereafter, under the New York budget bill, taxpayers must amortize both foreign and domestic R&E amounts over a period of 60 months. This is achieved through an addback of current-year IRC Sec. 174 / 174A amounts, followed by an amortization of those amounts over a term of 60 months as if IRC Sec. 174A(c) applied.4
Sec. 168(n) conformity
In further modifying its conformity to the OBBBA, New York State now also decouples from Sec. 168(n), which provides for a full federal income tax deduction for qualified production property expenses (qualifying property for which construction begins between Jan. 20, 2025 and Dec. 31, 2028, and which is placed in service by the end of 2030).5
New York State’s decoupling from Secs. 168(n) and 174A is applicable for New York State’s corporate, personal, and insurance corporation tax regimes.6 These decoupling provisions apply retroactively for tax years beginning in 2025 and thereafter. Although these provisions are retroactive and calendar-year taxpayers may have already filed extensions for the 2025 tax year, the budget bill contains rules providing that penalties and interest will not accrue as a result of these retroactive modifications.7
Additional state legislative updates
Charitable deductions
The budget bill also permits the deductibility of certain charitable contributions even if the IRS revokes an organization's tax-exempt status.8 Under this new provision, deductions made to an organization whose charitable status was revoked are permitted, provided that:
- The organization met the definition of an exempt organization under N.Y. Tax Law Sec. 1116(a)(4), or was approved for IRC Sec. 501(c) tax-exempt status before Jan. 1, 2025; and
- The revocation was unrelated to the organization’s charitable mission and the organization continues to meet the statutory requirements of Sec. 501(c)(3) and related regulations.
These changes are effective for tax years beginning in 2026 and thereafter.
Corporate Top Marginal Rate Extension
Additionally, New York State further extended the applicability of the 7.25% top marginal corporate tax rate for taxpayers with business income over $5 million for tax years beginning in 2027, 2028, and 2029.9 Additionally, the capital base tax rate of 0.1875% is extended through the same period (tax years beginning 2027 through 2029).
New York city income tax changes
The budget legislation also enacted several changes to New York City’s various income tax regimes.
Sec. 174A conformity
Most significantly, New York City now decouples from IRC Sec. 174A.10 Unlike New York State, New York City does not decouple from the federal treatment of foreign R&E expenditures. Instead, the City requires taxpayers to add back any Sec. 174A expenses and amortize domestic R&E expenditures under Sec. 174 over a five-year period, using a midpoint-of-the-taxable-year convention to begin the five-year period (unlike New York State).
In addition, New York City requires domestic R&E deductions made in 2022–2024 to follow what had been deducted under TCJA for these years. In practical terms, taxpayers with a New York City filing requirement must analyze Secs. 174 and 174A from three different perspectives: Federal, New York State, and New York City.11
Sec. 163(j) conformity
Also differing from New York State, New York City now decouples from IRC Sec. 163(j) as amended under the OBBBA.12 Prior to the OBBBA, a taxpayer’s Sec. 163(j) limitation was calculated by determining adjusted taxable income (ATI) based on an EBIT (earnings before interest and taxes) calculation. Under the OBBBA, ATI is calculated based on a tax-basis EBITDA (earnings before interest, taxes, depreciation, and amortization) framework which generally increases a taxpayer’s allowable interest deduction.
New York City now requires taxpayers to determine ATI under an EBIT-based calculation. Accordingly, taxpayers will not be able to utilize additional amortization resulting from the City’s decoupling from Sec. 174A to increase their Sec. 163(j) limitation, resulting in a more limited interest deduction for New York City tax purposes.
Other OBBBA conformity
Outside of these two key provisions, New York City also decouples from IRC Secs. 168(n) and 179.13 By decoupling from IRC Sec. 179, New York City requires taxpayers to utilize TCJA-era expensing limitations of IRC Sec. 179 as in effect for the 2024 tax year.
New York City’s decoupling provisions for IRC Secs. 163(j), 168(n), 174, and 179 are applicable across New York City’s corporate income tax, unincorporated business tax, and banking tax regimes and are effective retroactively to Jan. 1, 2025.14 Similar to New York State, the budget bill contains provisions stating that penalties and interest for New York City purposes will not accrue due to these retroactive modifications.
New York city IRC Sec. 951A apportionment inclusions
The budget bill also modifies New York City’s IRC Sec. 951A inclusion rules by replacing references to net global intangible low-taxed income (GILTI) with the inclusion amount under IRC Sec. 951A less the allowable IRC Sec. 250 deduction. The OBBBA rebranded the GILTI regime as “net CFC tested income” (NCTI).
Further, the budget bill adds language clarifying that this net inclusion amount is excluded from the numerator of the New York City receipts factor but is included in the denominator. These changes are applicable to C corporations and S corporations for tax years beginning in 2025 and thereafter.15
New York city pied-à-terre tax
In a closely watched tax development, the signed budget bill enacted Mayor Mamdani’s proposed pied-à-terre tax. New York City is now authorized to impose a temporary real property surcharge on certain residential property that is not considered a primary residence, for fiscal years beginning on and after July 1, 2026, with a sunset date of June 30, 2031.16
The tax currently is designed with a phase-in valuation structure for fiscal years beginning before July 1, 2028, with a second valuation structure for fiscal years beginning on and after July 1, 2028. The disparity between the phase-in valuation structure and the second valuation structure is due to New York City not currently utilizing comparable sales to develop a market value for condos and cooperatives (co-ops). Instead, New York City uses artificially lower assessed valuations that do not reflect market value.
Properties subject to the surcharge include “class one property” (including one- to three-family residential real property) as well as “class two property” (including residential condos / co-op dwelling units). For the first two fiscal years in which the surcharge is in effect, the surcharge applies to class one properties valued at $5 million or more (with surcharges that range from 0.8 to 1.3% based on value), and to class two properties valued at $1 million or more (with surcharges that range from 4.0 to 6.5% based on value).
To be subject to the surcharge, the covered property must be owned by a person that is not using the property as a primary residence. The surcharge is not imposed on owners that are currently leasing the property to others under bona fide arrangements for a term of at least one year or who have immediate family members living in the property.
Notably, this bill provides the New York City Department of Finance (“Department”) with broad administrative authority. The Department is empowered to make an annual initial determination that a property with a value at or above the applicable threshold is not a primary residence (meaning the owner would tentatively be liable for the surcharge).
For the fiscal year beginning July 1, 2026, the Department must provide this determination to the owner by Aug. 30, 2026 via a notice, which provides the owner with an opportunity to submit proof of primary residence. After considering such proof, the Department then determines whether the property or co-op unit is not a primary residence.
Further, there is a level of “retroactive effect” in that the use of a covered property as a primary residence is measured as of the taxable status date, which is the Jan. 5 that immediately precedes the fiscal year in which the surcharge is imposed. That means for the fiscal year beginning July 1, 2026, the Department will determine primary residence status based on the owner’s activities as of Jan. 5, 2026. The Department has quickly drafted proposed rules that will be the subject of a public hearing on July 9.17
Commentary
After significant negotiations that extended well past the annual April 1 deadline, New York state and city have finally adopted a budget through 2027. As both the State and City were projecting significant deficits, it should not be surprising that tax increases were sought as a primary driver to raise revenue.18
However, the timing of decoupling creates numerous complexities for 2025 and 2026 tax-year compliance purposes.
As indicated above, this bill brings significant changes that will affect corporate and pass-through entity taxpayers’ 2026 estimated payments for both New York State and New York City purposes. However, potentially more significant considerations exist for the 2025 tax year. Unlike static conformity states that effectively decoupled from the OBBBA throughout 2025, the State and City effectively conformed to the OBBBA (specifically the key provisions of IRC Secs. 174/174A and 163(j)) throughout the entirety of the 2025 tax year. Accordingly, taxpayers likely made 2025 estimates and extension payments without accounting for these significant decoupling provisions.
As a result of the retroactive applicability of these decoupling provisions, numerous compliance issues will result for the 2025 tax year. While corporate taxpayers may have underpaid 2025 state income tax due, these taxpayers can simply pay the difference on their return. However, partnerships do not have this luxury. New York State does not permit partnerships to remit additional nonresident withholding tax due on a timely filed return. Accordingly, as the deadline for 2025 estimates and extensions is well past, partnership taxpayers with significant New York State presence may have under-withheld on behalf of their nonresident partners.
Under-withholding can create significant compliance headaches, especially in tiered partnership structures. While New York State appears to have recognized this issue by providing relief from penalties and interest, the bill does not provide relief by allowing for partnerships to true up payments.
Outside of payments, the differences between New York State and New York City conformity to the OBBBA create a significant compliance burden for taxpayers. As noted above, taxpayers with both a State and City filing requirement will effectively need to perform three versions of IRC Secs. 174/174A calculations, a Federal, State, and City version. Each version requires the taxpayer to track R&E carryforwards under different deduction schedules, particularly if foreign R&E is implicated.
Further, the State and the City’s differences in the treatment of Sec. 174 and 174A may impact how a taxpayer performs their Sec. 163(j) calculation, which may result in a different interest expense limitation for Federal, State, and City purposes. Moreover, these retroactive changes may create reporting considerations for ASC 740 purposes.
Finally, the newly enacted pied-à-terre tax is expected to introduce significant interpretive and administrative uncertainties, particularly with respect to determining whether a property qualifies as a “primary residence” and how certain property types — most notably co-op units — will be valued. While the statute provides that a property generally qualifies as a primary residence if it is occupied for a majority of days during the year, this standard is not completely consistent with New York’s statutory residency tests, and instead focuses on the use of the specific property rather than the taxpayer’s presence in New York City.
As a result, taxpayers may face challenges substantiating primary residence status, particularly in cases involving multiple residences, partial-year use, or changes in ownership during the year.
These uncertainties are compounded by the Department’s broad administrative authority to issue initial determinations and require supporting documentation, with hastily drafted rules that will serve as guardrails for this process. Questions remain regarding the types of documentation that will be sufficient to rebut a determination that a property is not a primary residence, especially where third-party use (e.g., tenants or family members) is involved.
In addition, the statute’s reliance on a valuation framework that differs for co-ops and condominiums — combined with the transition to a comparable sales methodology in future years — may present implementation challenges and give rise to valuation disputes.
1 N.Y. S.B. 9009C (enacted May 28, 2026).
2 See N.Y. TAX LAW § 208.9; N.Y.C. ADMIN. CODE § 11-602.8.
3 N.Y. TAX LAW § 208.9(a)(25), (b)(29).
4 IRC Sec. 174A provides in pertinent part that at “the election of the taxpayer … [IRC Sec. 174A(a)] shall not apply and . . . [the taxpayer shall] be allowed an amortization deduction of such expenditures ratably over such period of not less than 60 months as may be selected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures).” Sec. 174A(a) permits a taxpayer to immediately expense domestic R&E expenditures.
5 N.Y. TAX LAW § 208.9 (a)(24), (b)(28).
6 See N.Y. TAX LAW §§ 612 and 1503 for parallel New York State personal and insurance tax provisions.
7 N.Y. S.B. 9009C Part F, § 7.
8 N.Y. TAX LAW § 615(g).
9 N.Y. TAX LAW § 210(1)(a).
10 N.Y.C. ADMIN. CODE § 11-602.8(a)(20), (b)(25).
11 See N.Y.C. ADMIN. CODE §§ 11-506, 604, 641, and 652 for parallel New York City unincorporated business tax, general banking corporation tax, and business corporation tax provisions.
12 N.Y.C. ADMIN. CODE § 11-602.8(b)(26).
13 N.Y.C. ADMIN. CODE § 11-602.8(a)(18), (19), (b)(23), (24).
14 See generally N.Y.C. ADMIN. CODE §§ 11-506, 11-602, 11-641.
15 N.Y.C. ADMIN. CODE §§ 11-604(3)(a)(2)(E), 11-654.2(5-a).
16 N.Y. S.B. 9009C, Part HH.
17 NYC Department of Finance, “Rule Relating to Surcharge on Certain Non-Primary Residences,” issued June 5, 2026.
18 See Report on the State Fiscal Year 2027 Executive Budget and The City of New York Executive Budget Fiscal Year 2027.
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