Governor Kathy Hochul on January 21, 2026, kicked off the first step in New York State's budget process by releasing her proposed New York State (NYS) fiscal year 2026–2027 revenue legislation (S.9009 and A.10009) (hereafter, Governor's Bill).¹ The Governor's Bill currently does not include any new or increased tax rates for individuals or businesses, consistent with the Governor's public position. The provisions discussed in this Tax Alert are proposed and the subject of negotiations between the Governor's office, the NYS Senate and the NYS Assembly that will take place over the next few months.

The budget process will continue with 30-day amendments to the Governor's Bill from the Governor, "one house" bills from the Assembly and Senate with new and amended provisions, and then the final negotiated budget legislation, which is intended to be enacted on or around March 31, 2026 (which is NYS's fiscal year-end).

This Tax Alert summarizes the relevant provisions in the Governor's Bill that are of interest to business taxpayers.

Decoupling

The Governor's Bill would decouple from select federal tax changes enacted by the "One Big Beautiful Bill Act" (OBBBA).² The changes would be retroactive so that the federal provisions are not applicable for tax years beginning on or after January 1, 2025. Mechanically, the changes would operate by disallowing the current expense allowed for federal income tax purposes and then allowing an alternative amount for NYS and New York City (NYC) purposes. The Governor's Bill does not include any penalty or interest relief for tax liabilities that arise from a retroactive application of the decoupling provisions below. While no specific time limit applies to the retroactive application of a tax law, New York has a judicially developed three-factor test for evaluating whether retroactivity violates due process. Those factors include: 1) the public purpose, 2) the length of retroactivity, and 3) the taxpayer's reasonable reliance on prior law.³ Because taxpayers may have underpaid tax liabilities due to retroactive application of the decoupling provisions, it is possible that the current provisions, if enacted, may be challenged.

Qualified production activity (IRC Section 168(n))

The OBBBA created a 100% depreciation allowance for US nonresidential real property used as an integral part of a qualified production activity. The Governor's Bill (Part F) would decouple from this provision for NYS corporate franchise tax, personal income tax and insurance tax purposes.⁴ The Governor's Bill (Part G) also would decouple from this provision for various NYC taxes, including the general corporation tax, business corporation tax and unincorporated business tax.⁵ The applicable depreciation would be computed under the depreciation provisions (i.e., IRC Section 167) in effect before the enactment of the OBBBA. The NYC portion of the legislation makes some modifications to the proposed state language, including specifying that such property would not be treated as IRC Section 1245 property.⁶ While the NYC personal income tax is not currently included in this decoupling measure, we would expect that to change in the final legislation.

Domestic research and experimentation expenses (IRC Sections 174A/59(e))

The OBBBA made a number of changes to the federal treatment of domestic research and experimental (R&E) expenditures. For expenditures occurring in tax years beginning after December 31, 2024, taxpayers may expense the full amount of domestic R&E or amortize over different periods under new IRC Section 174A(c) or 59(e). Small businesses may elect to apply the provision retroactively for domestic R&E expenditures incurred after December 31, 2021. All taxpayers may elect to accelerate certain unamortized domestic R&E expenditures (incurred and capitalized in tax years beginning after December 31, 2021, and before January 1, 2025) over one or two years, beginning with the 2025 tax year. Under IRC Section 174A(c), amortization begins in the month the taxpayer first realizes benefits from the expenditures. The changes do not apply to foreign R&E expenditures, which are deductible over a 15-year period.

The Governor's Bill would decouple NYS and NYC from the federal accelerated deductions for pre-2025 domestic R&E expenditures and the ability to immediately deduct domestic R&E expenses in the year incurred. For tax years beginning on or after January 1, 2025, all domestic and foreign R&E expenses would be deductible over the same five-year period for NYS tax purposes. The NYC tax legislation for businesses would apply only to domestic R&E expenses and would require amortization over a five-year period beginning with the midpoint of the tax year in which the expenditures are paid or incurred. As a result, if the Governor's Bill is enacted, there would be different R&E calculations for federal, NYS and NYC tax purposes.⁷ To illustrate the potential mismatch between NYS and NYC, if a taxpayer spends $100 in Year 1 on domestic R&E, and does not begin to realize the benefits of the research until April 1, Year 2,the taxpayer would not have any deduction in Year 1, and would have a $15 deduction in Year 2 ($100/60 x 9 = 15), for NYS purposes. For NYC purposes, the taxpayer would have a Year 1 deduction of $10 ($100/5 x 50% = $10), and a Year 2 deduction of $20.

Interest expense provisions (IRC Section 163(j)(8) and related provisions)

The OBBBA made permanent the addback of depreciation, amortization and depletion in computing the 30% limitation in deducting business interest expense under IRC Section 163(j), effective for tax years beginning after December 31, 2024. As result, the limitation reverted to using earnings before interest, taxes, depreciation, depletion, and amortization (EBITDA). This change may lead to higher deductions than the earnings before interest and taxes (EBIT) approach. The NYC provisions would decouple from the inclusion of depreciation and amortization in the adjusted taxable income (ATI) calculation (which means NYC would include the expense in ATI) and require taxpayers to use the pre-OBBBA EBIT approach for NYC income taxes.⁸ The Governor's Bill does not include a parallel provision for NYS tax purposes.

IRC Section 179 expense provisions

The OBBBA increased the IRC Section 179 deduction limits for tax years beginning after 2024. The NYC provisions would decouple from the federal change and revert to the NYC limitations in effect before the OBBBA. NYC previously decoupled from prior versions of IRC Section 179.⁹ The Governor's Bill does not include a parallel provision for NYS tax purposes.

Pass-through entity tax

Currently, NYS and NYC require the annual pass-through entity tax (PTET) election to be made by March 15 of the tax year for which the election would be in effect; however, many taxpayers lack sufficient information at that time to estimate the potential impact of the election on the business and its partners/shareholders.

The Governor's Bill (Part H) would make the following changes to the elective PTET regime:

• Extend the PTET annual election due date from March 15 to September 15 of the tax year for which the election would be in effect
• Adjust the estimated tax requirements for eligible entities that make the election between March 15 and before June 15 to 50% of the required estimated payment, and 75% for eligible entities that make the election between June 15 and on or before September 15
• Extend these changes to the NYC PTET election¹⁰

This proposal is similar to legislation introduced during each of the past two years but which has failed to pass.

These amendments would be effective for tax years beginning on or after January 1, 2027.

NYS corporate franchise tax rates (Article 9-A)

For taxpayers with business income over $5 million, the Governor's Bill (Part E) would extend the current top corporate franchise tax rate of 7.25% through tax years beginning before January 1, 2030 (currently January 1, 2027). The Governor's Bill would also extend the current 0.1875% capital base rate for three years, through tax years beginning before January 1, 2030 (currently January 1, 2027). The capital base was scheduled to expire this year.¹¹ These provisions would not apply to NYC income taxes.

Real estate transfer tax

The Governor's Bill (Part M) would amend NY Tax Law Sections 1201 and 1402 and NYC Admin. Code Sections 11-2102 to extend for three years, until September 1, 2029, the 50% tax rate reduction in NYS's real estate transfer tax and NYC's real property transfer tax for qualifying transfers to real estate investment trusts.¹² The reduced tax rates are currently set to expire in 2026. These provisions would take effect immediately. This special benefit has consistently been extended since it was originally enacted in 1996. The application of the benefit, however, has been the source of litigation because the qualifying criteria require calculations that refer to estimated market value for property tax purposes, rather than fair market value, and the disconnect between those two values magnifies the benefit (and makes qualifying much easier).

Other provisions

Eliminate income taxes on tipped wages (Part B)

Furthering the Governor's affordability agenda, the Governor's Bill seeks to eliminate the NYS income tax on tipped wages — up to $25,000 per year — for single filers earning up to $150,000 and joint filers earning up to $300,000. Beginning with the 2026 tax year, tax filers would be entitled to reduce their NYS adjusted gross income by the same amount authorized by the equivalent federal deduction.¹³

Modify the vendor registration program (Part N)

The Governor's Bill outlines the parameters for a four-year Certificate of Authority (COA) re-registration program for sales tax vendors to be completed by December 31, 2030, and would provide incentives to encourage delinquent taxpayers to settle fixed and final debt before reregistration. As part of the reregistration program, the Commissioner of Taxation and Finance would determine the order in which current sales tax vendors must reregister in order to provide proper oversight and efficient administration of the program. All vendors would be required to pay fixed and final debts in full before obtaining a new COA. To incentivize vendors to resolve their outstanding debt before the start of the reregistration program, the Department of Taxation and Finance would apply a discount that fully eliminates the associated penalties and reduces by half the associated interest for all vendors who pay in full by December 31, 2026.

Establish a sales tax exemption for electric vehicle (EV) charging stations (Part O)

The Governor's bill would create a sales and use tax exemption for the retail sale of electricity (used to recharge an electric vehicle) by a commercial EV charging station. According to the memorandum in support of the Governor's Bill, this exemption would help to lower the administrative costs and burdens of owning and operating commercial EV stations and incentivize the continuous development and expansion of the State's public EV charging infrastructure. The resale exemption on the purchase of wholesale electricity by an EV charging station operator would no longer apply, newly subjecting these wholesale purchases to sales tax.¹⁴

Credit and exemption extenders (Parts I, P, Q, S, and U)

The Governor's Bill would extend with no other changes the following credit and exemption provisions:

• The commercial security tax credit for three years
• Sales and use tax vending machine exemption for three years
• The residential energy storage exemption for two years
• Alternative fuels exemption for five years
• The telecom assessment ceiling program for four years
• Investment tax credit refundability for farmers for five years

Implications

In the coming months, the proposed budget revenue bills are expected to undergo many changes. As it is early in the budget process, it remains unclear which provisions of the Governor's Bill will be included in the final budget.

While it is early in the budget process, affected taxpayers should review these proposed changes and determine how they would impact their New York tax obligations. It will be especially important for taxpayers to consider the decoupling provisions when making tax payments for tax year 2025. To reduce the chances of incurring future penalties and interest, taxpayers may wish to operate on the assumption the decoupling provisions will be enacted retroactively, resulting in more tax being due.

EY will be closely monitoring this development and will issue additional Alerts as warranted.