20 May 2025 New York governor signs budget legislation that includes various tax changes affecting businesses and individuals
On May 9, 2025, Governor Kathy Hochul signed into law revenue legislation (A. 3009-C/S. 3009-C), hereafter Final Bill), which is a necessary component of the 2025–2026 New York State (NYS) budget. Enactment of the Final Bill follows an April 29, 2025 announcement by the governor and legislative leaders of a $254 billion budget agreement. The Final Bill includes a variety of tax law changes that will affect corporate and individual taxpayers across various industries. Most notably, the Final Bill:
This Tax Alert discusses the significant tax proposals that were included in the Final Bill from (1) the Revenue Article VII Legislation proposed by the Governor in the Executive Budget Bill issued on January 21, 2025 (A.3009-A/S.3009-A, referenced here as the Executive Bill) (see Tax Alert 2025-0418), (2) the Assembly's Revenue Article VII Legislation (A.3009-B, referenced here as the Assembly Bill), and (3) the Senate's Revenue Article VII Legislation (S.3009-B, referenced here as the Senate Bill). This Tax Alert does not discuss every tax change in the Final Bill, including changes to certain tax credits (such as the film and post-production credits, and digital gaming media production credit). The summaries follow the order of the Final Bill. The Final Bill provides a one-time "inflation refund credit" for tax year 2025 for certain individual taxpayers who were full-year residents in tax year 2023. The "inflation refund credit" is up to $400 for joint filers with 2023 adjusted gross incomes of $300,000 or less (married filing jointly), and up to $200 for single filers earning $150,000 or less (single, married filing separately, head of household).1 The credit amount will be treated as an overpayment of tax that can be credited or refunded. This provision became effective immediately upon enactment. Part B - Provides a middle-class tax cut and extends the temporary PIT high-income surcharge for five years The Final Bill reduces PIT rates for each of the first five income tax brackets by 0.2 percentage points.2 The PIT rate reductions will be phased in over a two-year period, in 2026 and again in 2027. The Final Bill also extends the temporary PIT high-income surcharge through tax year 2032. The surcharge applies a 10.3% rate on income over $5 million and a 10.9% rate on income over $25 million. These provisions took effect immediately upon enactment. The Final Bill gradually increases the statewide limitation on the aggregate amount of Low-Income Housing Tax Credits that may be allocated to eligible low-income buildings from $172 million to $187 million beginning April 1, 2025, with subsequent annual increases of $30 million through April 1, 2029. Previously, Tax Law Section 210-B required the recipient of a state historic tax credit to be the same taxpayer as the recipient of the equivalent federal tax credit, and creditable projects were limited to census tracts at or below the state median family income, unless located in a state park, state historic site, or other state-owned land (collectively "state land") under the jurisdiction of the Office of Parks, Recreation, and Historic Preservation (NYS Parks). The Final Bill allows the transfer of state historic tax credits to other taxpayers upon approval by the Commissioner of the NYS Parks, without regard to how any tax credit authorized under IRC Section 47 may be allocated. The transferee is not permitted to transfer the credit thereafter. The Final Bill also expands the eligibility of projects to include certain qualified affordable housing rehabilitation projects where the taxpayer has entered into an agreement of at least 30 years with the state, federal, or other authorized affordable housing agency, even where those projects are on land outside of the jurisdiction of NYS Parks. These changes took effect immediately and apply to tax years beginning on and after January 1, 2026. Part F - Applies a waiting period restriction to institutional real estate investors investing in single- and two-family residences and limits their interest and depreciation deductions The Final Bill includes two provisions aimed at increasing the availability of single- and two-family homes in NYS. Subpart A adds Article 16 to the NY Real Property Law and imposes a mandatory 90-day waiting period before "covered entities" can "purchase, acquire, or offer to purchase or acquire any interest in" single- or two-family residences (the Executive Bill proposed a 75-day waiting period). The 90-day waiting period commences when the residence is listed for sale to the general public and restarts if the seller changes the asking price. Although the provisions generally apply to residential property consisting of one or two dwelling units, the waiting period requirements do not apply to a single- or two-family residence, if the residence (1) is to be the principal residence of any person who owns an interest in an institutional real estate investor or (2) was constructed, acquired, or operated with government funding sources. A "covered entity" is defined as "an institutional real estate investor or an entity that receives funding from an institutional real estate investor to purchase a single-family residence or two-family residence." An "institutional real estate investor" is defined as an entity or combined group that:
And
Land banks, IRC Section 501(c)(3) tax-exempt entities, community land trusts, and creditors or loan servicers acquiring ownership of real property in full or partial satisfaction of a secured debt are excluded from the definition of "covered entities." Failure to abide by the waiting period may result in civil damages and penalties of up to $250,000. A covered entity is required to disclose its status as such to the seller at the time an offer is made using a notarized form, included under Tax Law Section 521(5), that must subsequently be filed with the Attorney General's Office. Failure to provide this disclosure may result in civil damages and penalties up to $10,000. The Attorney General is tasked with enforcement, including through injunctive and declaratory relief and by imposing civil damages and penalties. The requirements under Subpart A will take effect on the 120th day after enactment, which is September 6, 2025. Subpart B amends Article 9-A, Article 22, and Article 33 of the Tax Law to disallow depreciation and interest deductions for institutional real estate investors (and their partners) on "covered properties," which are similar to the single- and two-family residences to which Subpart A applies: a "covered property" is defined as "a residential property consisting of no more than two dwelling units located in" NYS. Subpart B does not carve out properties that are to be principal residences for owners of the institutional real estate investors or those properties constructed, acquired, or operated with government funding sources. Under Subpart B, institutional real estate investors (using a nearly identical definition as in subpart A) are not permitted any interest expense or depreciation deductions with respect to covered properties that are permitted under the Internal Revenue Code. An interest expense deduction, however, is permitted for interest paid or accrued in the tax year in which a covered property is sold to an individual for use as a principal residence or to a nonprofit organization, the principal purpose of which is creation, development, or preservation of affordable housing. The requirements under Subpart B apply to tax years beginning on or after January 1, 2025. The Final Bill extends through 2039 the Excelsior Jobs Program, which was scheduled to sunset at the end of 2029. The Final Bill also expands the program for the semiconductor industry, with enhanced benefits for semiconductor supply chain businesses, and creates two programs under new Article 17-A — the semiconductor research and development (R&D) project program and the semiconductor manufacturing workforce training incentive program. For semiconductor supply chain projects, the amount of each component of the Excelsior Jobs Program is as follows:
The credit amount available under the semiconductor R&D project program equals 15% of the cost or other basis for federal income tax purposes of the qualified investment in semiconductor R&D projects in NYS. Taxpayers are able to claim the credit for up to 10 years. The semiconductor manufacturing workforce training incentive program provides a credit equal to 75% of wages, salaries or other compensation, training costs and wrap around services, up to a maximum of $25,000 per employee receiving eligible training. The credit is capped at $1 million for eligible non-semiconductor manufacturing businesses and $5 million for eligible semiconductor manufacturing businesses. The aggregate amount of credit allowed per year is capped at $20 million. These provisions took effect immediately and apply to tax years beginning on or after January 1, 2025. The Final Bill clarifies that using the NYS Department of Taxation and Finance's (Department) online services system to access taxpayer information, including notices and other documents, does not, in and of itself, give a taxpayer the right to a hearing before the Division of Tax Appeals, unless the accessed information is an electronically delivered notice of determination, in lieu of physical mailing, for which a hearing is specifically authorized by statute.3 The language of these amendments is intended to avoid the result reached by the NYS Supreme Court, Appellate Division, Third Department in Dumpling Cove, LLC v. Commissioner of Taxation and Finance, 230 A.D.3d 927 (3rd Dept. 2024), in which a majority of the court held that by directing a taxpayer to view their account balance on the Department's website, the Department effectively treated the online account as a notice, thereby conferring the taxpayer's right to a hearing. These changes took effect immediately. The Final Bill authorizes the Department to electronically file "all warrants and warrant-related records" issued by the Department with the NYS Department of State to effectuate liens and judgments against real, personal or other property in NYS that is owned by the person or persons named in the warrant. The Department of State is required to make tax warrants and warrant related records available to the public, searchable by the name of the person or persons listed in the tax warrant. The Commissioner is authorized to execute instruments via electronic signature in lieu of a wet signature pursuant to the state technology law. These provisions are intended to streamline the process for recording NYS tax warrants and warrant-related records. The provisions will take effect on July 1, 2025, and will apply to warrants and warrant-related records filed, or deemed to have been filed, on or after July 1, 2025. The Final Bill increases the estimated tax threshold for corporate taxpayers. Currently, Article 9-A taxpayers are required to make estimated tax payments if their estimated corporate franchise tax for the current year can reasonably be expected to exceed $1,000.4 Beginning with tax year 2026, the $1,000 threshold is increased to $5,000. This change took effect immediately. Part U, Part BB and Part CC - Provide enhanced credits for employing persons with disabilities and veterans Part U of the Final Bill increases the credit for hiring persons with disabilities to the first $5,000 in qualified first-year wages earned by each qualified employee for tax years beginning on or after January 1, 2025. For previous tax years, the credit was equal to 35% of the first $6,000 in qualified first-year wages earned by each qualified employee. Similarly, where the federal work opportunity tax credit applies, the credit for hiring persons with disabilities is increased to $5,000 in qualified second-year wages earned by each qualified employee. For previous tax years in which the federal work opportunity tax credit applied, the credit was equal to 35% of the first $6,000 in qualified second-year wages earned by each qualified employee. This provision took effect immediately. Parts BB and CC of the Final Bill extend to tax year 2028 the workers with disabilities tax credit and the hire a vet tax credit that were previously set to expire in 2025. The Governor's budget bill proposed a statutory framework for requiring partnerships (including limited liability companies and other entities that report income as partnerships for tax purposes) to report and pay tax on any adjustments to income, gain, loss, deduction or credit occurring for federal income tax purposes under the Bipartisan Budget Act of 2015 (BBA). The BBA, among other things, implemented a new framework for auditing partnerships and assessing and collecting tax at the partnership and partner levels. The Final Bill differs substantially from the initial proposal and reflects a willingness by the Department to consider comments and engage with the public on the mechanics of tax reporting and payment requirements. The Final Bill also includes BBA reporting and payment provisions for New York City's (NYC) business taxes. At the New York State level, the Final Bill adopts a new section 659-a of the Tax Law, and amends sections 211, 653, 659, 681, 682, 683, 685, 687, 688, 1312, and 1515. New section 659-a and related amendments implement new requirements that partnerships and their partners must follow for reporting a federal change or correction to any item of income that was/is required to be reported on a partnership return, including a partner's distributive share of income. These requirements apply when the partnership (1) receives an adjustment under IRC Section 6225, (2) makes a federal election for alternative payment under IRC Section 6226, or (3) makes an administrative adjustment request under IRC Section 6227. The Department may provide for a de minimis exception to the reporting requirements. A state report will be required regardless of whether the change is required to be reported on an amended federal return. The report is generally due within 90 days of a federal change or correction, together with (1) a notification to the direct partners, and (2) an amended NYS partnership return (as well as a group return, if applicable). For payments of additional tax due, the statute defaults to imposing the obligation on the ultimate direct and indirect taxpayer partners, who have 180 days after the final determination to report and pay tax with respect to their share of the changes. An automatic 60-day extension applies upon written notice, and it appears applicable to both the 90-day reporting period and the 180-day payment period. Penalties and interest apply from the original due date for the reviewed year. Refunds arising from BBA adjustments must be requested by the ultimate direct and indirect taxpayer partners, by the later of the generally applicable statutory deadline or no later than one year from the date the adjustment report was due (it is unclear whether that is a reference to the due date for the partnership or taxpayer partner). The partnership representative may elect for the partnership to pay the additional tax, which in turn requires the partnership to determine (1) the tax classification of the direct and indirect taxpayer partners (i.e., corporate taxpayers under Article 9-A or Article 33, individual New York State nonresidents, individual New York State residents and individual NYC residents), and (2) the amount of income sourced to New York according to those respective classifications, with Article 9-A apportionment rules applying to the corporate direct and indirect partners. The tax rate for the tax on the adjustment with respect to each classification is the highest rate applicable to each classification. Where the partnership cannot determine the tax classification and New York-sourced portion of income, loss, deduction or credit attributable to any partner's distributive share, it must pay tax on the full amount of the adjustment with respect to that share at the highest applicable individual tax rate. The option to pay at the partnership level tiers up to pass-through partnership partners at each tier if the immediately preceding tier did not elect to pay. Many nuances apply to the election for payment at the partnership level, including with regard to making estimated tax payments. Overall, a partnership election to pay may not be advisable where a significant share of additional income would be allocated to NYS by reason of insufficient information to source by taxpayer partner classification. The new reporting requirements are effective retroactively upon becoming law, with the caveat that partnerships and partners have one year from the effective date to report adjustments that preceded the effective date. The new reporting requirements do not tie into the pass-through entity tax (PTET), and it appears that, as before, no amended return or other report will be permitted or required under the PTET beyond the generally applicable time period for amending PTET returns. At the NYC level, the Final Bill amends sections 11-501, 11-509, 11-523, 11-527, 11-529, 11-601, 11-605, 11-646, 11-655, 11-672, 11-678, 11-680 to implement reporting and payment requirements under NYC's business taxes applicable to partnerships, federal C corporations, and federal S corporations. Generally, taxpayers have 90 days to report an adjustment, whether it is a partnership that directly undergoes an adjustment or a direct or indirect owner that ultimately shares in an item of income, loss, deduction or credit from that partnership. The effective dates for the NYC reporting requirements are unique and presumably reflect the need to create new forms and processes. In any event, Subpart B is effective 90 days after becoming law, and adjustments preceding that date must be reported within 270 days after the effective date. In 2017, Tax Law Section 1701 was amended to authorize the Department to use the FIDM system until April 1, 2025, for collection of fixed and final tax debts with or without a warrant being filed. The Final Bill extends the Department's authority to use warrantless bank account data matching for five years, until April 1, 2030. This change took effect immediately. The Final Bill separates the Metropolitan Commuter Transportation District into two zones and adjusts the rate employers will pay for the Metropolitan Commuter Transportation Mobility Tax (MCTMT), with increases for most large employers and decreases for small employers.5 These amendments to the MCTMT are consistent with the amendments proposed in the Executive Bill (see Tax Alert 2025-1044), and apply to tax quarters beginning on and after July 1, 2025. For employers in Zone 1 (Bronx, Kings, New York, Queens, and Richmond counties), the tax rates are as follows based on quarterly payroll expenses:
For employers that are not local government employers in Zone 2 (Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester counties), the tax rates are as follows based on quarterly payroll expenses:
In calendar years beginning on and after January 1, 2026, for individuals whose net earnings from self-employment attributable to the MCTD is greater than $150,000, the tax rate is 0.60% in Zone 1 and 0.34% in Zone 2. Several tax proposals that had been considered as part of the budget process did not make it into the Final Bill. These proposals, which could be considered by the Legislature in the future, include:
See Tax Alert 2025-0418 for an analysis of these provisions. Taxpayers should consider modeling the impact of these amendments on their NYS and NYC tax liabilities and consider adjusting their upcoming estimated tax payments. Partnerships and their partners should carefully examine and apply the requirements of the new partnership audit regime, which will affect risk assessment, tax payment, and reporting procedures for partnership audit adjustments going forward. In addition, institutional real estate investors should be aware of the nuanced limitations on purchasing single- and two-family residences and the corresponding disclosure requirements to avoid significant penalties for noncompliance. These taxpayers should also be cognizant of the circumstances in which depreciation and interest deductions in relation to those properties will be disallowed.
Document ID: 2025-1100 | ||||||||
