New York State and New York City taxpayers should be aware of several individual and business tax provisions included in the fiscal year 2026-2027 budget. These changes may affect 2025 and 2026 income tax return filings and may require additional planning for research and development expenditures, depreciation, childcare credits, rebate checks, tipped income, non-primary residences, business interest limitations, and Section 179 expensing.
The following overview organizes the original tax update into clearer sections for taxpayers, business owners, and advisors reviewing the potential impact of these provisions. Additional related resources from Bowers and approved professional outlets are included where they support the topic.
NYS Tax Provisions
On May 28, 2026, Gov. Hochul signed the New York State fiscal year 2026-2027 budget into law. Contained within the budget bill are a number of important changes that will affect both NYS and New York City individual and business taxpayers, potentially for both 2025 and 2026 income tax return filings.
The NYS tax provisions include changes related to Federal IRC Section 174, qualified production property, the Child and Dependent Care Credit, POWER Credit rebate checks, and tipped income. Taxpayers reviewing these provisions may also want to consider broader tax services and planning support as filing positions are evaluated.
Decoupling from Federal IRC Section 174
Decoupling from Federal IRC Section 174 applies to research and experimental expenditures, also referred to as R&E. This provision takes effect for taxable years beginning on or after January 1, 2025.
NYS taxpayers must add back R&E expenditures claimed on their federal returns, including any catch-up deductions. For R&E expenditures incurred from 2022-2024, the remaining unamortized R&E expenses may be deducted as a NYS subtraction modification and continue to be amortized over the remaining 60-month period.
For R&E expenditures incurred on or after January 1, 2025, R&D expenditures must be amortized over a 60-month period for NYS purposes, beginning with the month in which the taxpayer first realizes benefits from such expenditures. NYS addition and subtraction modifications will be utilized to add back R&D expenditures and to subtract the related amortization.
No interest or penalty shall accrue on returns under a valid extension that are filed within the period of extension or amended returns filed for taxable years beginning on or after January 1, 2025, and before January 1, 2026, that solely report the modifications required by this bill.
Because this change may create differences between federal and state reporting, taxpayers may need to pay close attention to addition and subtraction modifications. Businesses with research and development expenditures should keep records that support the timing, treatment, and amortization of these amounts.
Decoupling from Federal Treatment of Qualified Production Property
New York State also decouples from the Federal treatment of Qualified Production Property. This requires taxpayers to add back amounts deducted depreciation that resulted solely from a special accelerated depreciation election made qualified production property.
A depreciation deduction is allowed as if the taxpayer had not made an election to accelerate depreciation deduction for federal tax purposes. This creates another area where state tax treatment may differ from federal treatment.
For businesses that rely on depreciation deductions, the provision may affect how deductions are tracked for state purposes. Reviewing fixed assets, depreciation records, and related elections can help taxpayers understand how these differences may flow through future filings.
Child and Dependent Care Credit
The Child and Dependent Care Credit takes effect for taxable years beginning on or after January 1, 2026. Children under age 13 and spouses or dependents physically or mentally incapable of self-care that live with the taxpayer for more than half the year qualify.
This credit is calculated based on the qualifying childcare expenses and NY adjusted gross income. This credit is fully refundable.
Because the credit is based on qualifying childcare expenses and NY adjusted gross income, taxpayers may need to retain documentation that supports eligibility. Families with qualifying children, spouses, or dependents should review how the credit may apply beginning with the 2026 taxable year.
POWER Credit Rebate Checks
Protecting Our Wallets Energy Rebate, also referred to as POWER Credit rebate checks, provides one-time checks issued to NYS taxpayers based on 2024 NY adjusted gross income to provide relief for rising energy costs.
Taxpayers must have been full-year NYS residents in 2024, have timely filed a 2024 NYS tax return, and not been claimed as a dependent. Married filing joint taxpayers are to receive $200 if NY adjusted gross income is $150,000 or less and $150 if NY adjusted gross income is between $150,000 and $300,000.
Single taxpayers are to receive $100 if NY adjusted gross income is $150,000 or less. The NYS tax department will determine eligibility automatically.
The automatic eligibility determination means taxpayers should focus on whether their 2024 return was timely filed and whether their filing status, residency, dependency status, and NY adjusted gross income meet the stated requirements.
No Tax on Tips for New Yorkers
The No Tax on Tips for New Yorkers provision allows a subtraction on up to $25,000 of tipped income for tax year 2026, consistent with federal tax guidance.
This provision applies specifically to tipped income and is limited by the amount stated in the budget bill. Taxpayers with tipped income should review their records and reporting to determine whether the subtraction may apply for tax year 2026.
For broader tax planning context, professional tax discussions from Accounting Today often cover developments affecting individuals, businesses, and advisors. These outside resources can help place tax changes in a larger compliance and planning context.
NYC Tax Provisions
The NYC tax provisions include changes that may affect non-primary residences, business interest deduction limitations, Section 179 expensing, and the treatment of R&D expenditures under Section 174. These provisions may create additional differences between federal, state, and city tax reporting.
Businesses and property owners reviewing NYC tax changes may also benefit from related Bowers resources, including client accounting and advisory services, especially when tax changes affect accounting records, reporting, and planning.
NYC Additional Tax on Non-Primary Residences
The NYC Additional Tax on Non-Primary Residences takes effect beginning July 1, 2026 on a covered property that is not a primary residence. Covered property includes residential homes valued at over $5 million and residential co-ops or condos valued at over $1 million.
Properties not subject to tax include rental apartment buildings, commercial property, hotels, vacant land, condos that include more than three units under the same ownership, and residential homes, condos, or co-ops that are occupied by an immediate family member.
Tax rates from 2026-2027 for residential homes are as follows:
- $5 million – $15 million: .8%
- $15 million – $25 million: 1.05%
- $25 million or more: 1.3%
Tax rates from 2026-2027 for residential co-ops and condos are as follows:
- $1 million – $3 million: 4%
- $3 million – $5 million: 5.25%
- $5 million or more: 6.5%
Tax rates from 2028-2031 for residential homes, co-ops, and condos are as follows:
- $5 million – $15 million: .8%
- $15 million – $25 million: 1.05%
- $25 million or more: 1.3%
Property owners should pay close attention to whether a property is considered a covered property, whether it is a primary residence, and whether any exclusion applies. The effective date of July 1, 2026 is also important for determining when the additional tax begins.
NYC Changes to Business Interest Deduction Limitation
NYC changes to the business interest deduction limitation adjust the calculation of the federal interest deduction to remove certain cushions that increased the allowable interest expense.
Taxpayers must add back the increase in the federal interest deduction that is specifically attributable to additional adjusted taxable income resulting from depreciation, amortization, or depletion. This prevents taxpayers from using higher non-cash expenses like depreciation to artificially inflate the 30% adjusted taxable income, or ATI, threshold that limits the federal interest deduction under federal law.
This provision may require taxpayers to identify the portion of a federal interest deduction increase that is attributable to additional adjusted taxable income. Businesses with debt, depreciation, amortization, or depletion should review how the calculation may affect NYC reporting.
For businesses considering how interest expense, depreciation, and tax planning affect broader financial decisions, Harvard Business Review provides related perspective on making tax planning part of risk management.
NYC Changes to Section 179 Expensing
NYC changes to Section 179 expensing provide that the taxpayer is allowed a deduction based on the dollar limitations in effect for the last tax year beginning before January 1, 2025.
The increased deduction for years on or after January 1, 2025 will be added back. This means that taxpayers may need to track the difference between the federal Section 179 deduction and the NYC amount allowed under the stated limitation.
Businesses that use Section 179 expensing should review the timing of asset purchases and deductions. They should also consider how NYC addbacks may affect taxable income and filing calculations.
NYC Decoupling from Federal IRC Section 174
NYC decoupling from Federal IRC Section 174 takes effect for taxable years beginning on or after January 1, 2025. Similar to New York State, R&D expenditures incurred on or after January 1, 2025 must be amortized over a 60-month period for NYS purposes.
However, the NYC provisions differ from the NYS provisions in that NYC explicitly incorporates the midpoint rule. The amortization deduction must be amortized over a five-year period beginning with the midpoint of the taxable year in which the expenditures are paid or incurred.
The NYC provisions do not explicitly detail a separate look-back mechanism for R&D expenditures incurred from 2022-2024 in the same way the NYS provisions do. This difference may require careful review when comparing state and city treatment of research and development expenditures.
For companies with R&D expenditures and broader accounting needs, Bowers’ services page provides additional context on tax, accounting, advisory, and assurance support.
Planning Considerations for Taxpayers
Although the changes are new and the NYS Department of Taxation and Finance has yet to clarify the nuances of some of these changes, taxpayers should review and plan for the impact of these laws. The provisions affect both individual and business taxpayers, and some changes may apply to 2025 filings while others begin in 2026.
One planning consideration is the need to track federal, state, and city differences separately. Several of the provisions described above require addbacks, subtraction modifications, or separate amortization calculations.
Another planning consideration is documentation. Taxpayers may need support for R&E expenditures, depreciation, childcare expenses, tipped income, residency, filing status, and property classification.
Business taxpayers may also need to review how these provisions affect accounting records, tax return workpapers, and planning estimates. Changes involving Section 174, business interest deductions, Section 179 expensing, and qualified production property may require careful coordination between tax and accounting teams.
Individual taxpayers may need to focus on effective dates and eligibility. The Child and Dependent Care Credit begins for taxable years beginning on or after January 1, 2026, POWER Credit rebate checks are based on 2024 NY adjusted gross income, and tipped income relief applies to tax year 2026.
Taxpayers with complex ownership structures, high-value properties, or business operations in NYC may need to review how NYC provisions interact with state and federal treatment. For property-related planning and valuation matters, business valuation resources may be relevant when ownership, value, and planning overlap.
For additional professional tax and accounting news, Inside Public Accounting provides industry coverage that can help taxpayers and advisors follow broader developments affecting firms, businesses, and tax professionals.
FAQ
The following questions summarize the main points from the NYS and NYC tax provisions described above. They are intended to help readers identify which changes may be most relevant to their filing and planning needs.
When do the NYS Section 174 changes take effect?
The NYS decoupling from Federal IRC Section 174 takes effect for taxable years beginning on or after January 1, 2025. NYS taxpayers must add back R&E expenditures claimed on their federal returns, including any catch-up deductions.
How are NYS R&E expenditures treated for 2022-2024?
For R&E expenditures incurred from 2022-2024, the remaining unamortized R&E expenses may be deducted as a NYS subtraction modification and continue to be amortized over the remaining 60-month period.
Who may qualify for the Child and Dependent Care Credit?
Children under age 13 and spouses or dependents physically or mentally incapable of self-care that live with the taxpayer for more than half the year qualify. The credit is calculated based on qualifying childcare expenses and NY adjusted gross income and is fully refundable.
What is the POWER Credit rebate?
The POWER Credit rebate provides one-time checks issued to NYS taxpayers based on 2024 NY adjusted gross income to provide relief for rising energy costs. Eligibility is determined automatically by the NYS tax department.
When does the NYC additional tax on non-primary residences begin?
The NYC Additional Tax on Non-Primary Residences takes effect beginning July 1, 2026 on a covered property that is not a primary residence. Covered property includes residential homes valued at over $5 million and residential co-ops or condos valued at over $1 million.
How does NYC treatment of Section 174 differ from NYS treatment?
The NYC provisions differ from the NYS provisions in that NYC explicitly incorporates the midpoint rule. The amortization deduction must be amortized over a five-year period beginning with the midpoint of the taxable year in which the expenditures are paid or incurred.