New York State 2026-2027 Budget:  Important Tax Changes

On May 28, 2026, Gov. Hochul signed the New York State (“NYS”) 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 (“NYC”) individual and business taxpayers, potentially for both 2025 and 2026 income tax return filings.

NYS Tax Provisions

Decoupling from Federal IRC Section 174 (research & experimental expenditures [“R&E”]):

• 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.

Decoupling from Federal treatment of Qualified Production Property

• 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.

Child and Dependent Care Credit

• Takes effect for taxable years beginning on or after January 1, 2026.

• Children under age 13 and spouses/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.

Protecting Our Wallets Energy Rebate (“POWER”) Credit Rebate Checks

• One-time checks issued to NYS taxpayers based on 2024 NY adjusted gross income to provide relief for rising energy costs.

• 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 to receive $200 if NY adjusted gross income is $150,000 or less. $150 if NY adjusted gross income is between $150,000 and $300,000.

• Single taxpayers to receive $100 if NY adjusted gross income is $150,000 or less.

• The NYS tax department will determine eligibility automatically.

No Tax on Tips for New Yorkers

• Subtraction allowed on up to $25,000 of tipped income for tax year 2026, consistent with federal tax guidance.

NYC Tax Provisions

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
  • Residential Co-ops or condos valued at over $1 million

• Properties not subject to tax
  • Rental apartment buildings
  • Commercial property
  • Hotels
  • Vacant land
  • Condos that include more than three units under the same ownership
  • Residential homes, condos, co-ops that are occupied by an immediate family member

• Tax Rates from 2026-2027:
  • Residential homes
    • $5 million – $15 million: .8%
    • $15 million – $25 million: 1.05%
    • $25 million or more: 1.3%
  • Residential co-ops and condos:
    • $1 million – $3 million: 4%
    • $3 million – $5 million: 5.25%
    • $5 million or more: 6.5%

• Tax Rates from 2028-2031
  • Residential homes, co-ops, and condos
    • $5 million – $15 million: .8%
    • $15 million – $25 million: 1.05%
    • $25 million or more: 1.3%

NYC Changes to Business Interest Deduction Limitation

• Adjusts 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 (“ATI”) threshold that limits the federal interest deduction under federal law.

NYC Changes to Section 179 Expensing

• 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.

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, R&D expenditures 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.

Although the changes are new and the NYS Department of Taxation and Finance has yet to clarify the nuances of some of these changes, do not hesitate to reach out to your Bowers advisor to review and plan for the impact of these laws.