09 June 2026 New York budget bill extends corporate franchise tax rates, addresses certain OBBBA provisions and creates a pied-à-terre tax, among other changes
On May 28, 2026, New York Governor Kathy Hochul signed the 2026–2027 New York State (NYS) budget bills (A.10009-C and S.9009-C, hereafter, Budget Bill). This Tax Alert summarizes the significant tax proposals included in the Budget Bill that affect corporate and individual taxpayers across various industries.
The Budget Bill decouples from select federal tax changes enacted by the OBBBA,1 retroactive to tax years beginning on or after January 1, 2025. Mechanically, this decoupling operates by disallowing the current expense allowed for federal income tax purposes and then allowing an alternative amount for NYS and NYC purposes. The Budget Bill includes penalty and interest relief for tax liabilities resulting from a retroactive application of the decoupling provisions. Penalties and interest will not accrue on returns that are timely filed under a valid extension or amended returns filed for tax years beginning on or after January 1, 2025 (NYS) or on and after December 31, 2024 (NYC), and before January 1, 2026, that only report modifications required by the OBBBA changes in the Budget Bill. The OBBBA created a 100% depreciation allowance for US nonresidential real property used as an integral part of a qualified production activity. The Budget Bill (Part F) decouples from this provision for NYS corporate franchise tax, personal income tax and insurance tax purposes.2 The Budget Bill (Part G) also decouples from this provision for various NYC taxes, including the general corporation tax, business corporation tax and unincorporated business tax.3 The applicable depreciation is computed under the depreciation provisions (i.e., IRC Section 167) in effect before the enactment of the OBBBA. The NYC portion of the legislation differs from the state language, notably specifying that the property will not be treated as IRC Section 1245 property.4 The OBBBA made several changes to the federal treatment of domestic 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 under IRC Section 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 first tax year beginning after December 31, 2024. Under IRC Section 174A(c), amortization begins in the month the taxpayer first realizes benefits from the expenditures; under IRC Section 59(e), amortization begins in the year the expenses are paid or incurred. The changes do not apply to foreign R&E expenditures, which are deductible over a 15-year period beginning with the midpoint of the year in which such expenses are paid or incurred. NYS and NYC handle domestic and foreign R&E differently under the applicable provisions in the Budget Bill.NYS decouples from (1) the federal accelerated deductions for pre-2025 domestic R&E expenditures (i.e., the transition election under Section 70302(f) of the OBBBA, hereafter transition deduction), (2) the ability to immediately deduct domestic R&E expenses in the year incurred, and (3) the separate amortization of foreign R&E. The transition deduction is not allowed; instead, remaining R&E costs incurred before January 1, 2025, will be amortized under IRC Section 174 as in effect on January 1, 2022. For tax years beginning on or after January 1, 2025, all domestic and foreign R&E expenses are deductible over the same five-year period for NYS tax purposes, as if an election under IRC Section 174A(c) was in place. These decoupling provisions apply to all NYS business income taxes under Articles 9-A and 33, as well as the NYS and NYC personal income taxes and pass-through entity taxes. The NYC business income taxes (the business corporation tax, the general corporation tax, the banking corporation tax and the unincorporated business tax) do not specifically decouple from the transition deduction or from the federal treatment of foreign R&E, but they do decouple from IRC Section 174A. During the drafting process, the NYS Bar Association and others noted that the decoupling provisions for NYC did not incorporate the transition deduction through reference to the transition rule for R&E expenses in the OBBBA, or otherwise, and no changes were made to the text of the legislation. NYC has not separately articulated a separate basis for being decoupled from the transition deduction. Accordingly, taxpayers currently do not appear to have an obligation to add back the transition deduction for NYC business income tax purposes. However, NYC has effectively decoupled from the federal treatment of domestic R&E, with a notable difference from NYS being that taxpayers would use a mid-year convention for amortizing the relevant expenditures, rather than a placed in-service method. The Budget Bill makes no modification to the treatment of foreign R&E expenses for NYC business income tax purposes, meaning they will continue to conform to the IRC. As a result of these changes, there are different R&E calculations for federal, NYS and NYC tax purposes (and different R&E calculations for NYC personal income tax and pass-through entity tax (PTET), on the one hand, and business income taxes, on the other hand).5 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 a 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. For NYC tax purposes, the Budget Bill (Part G), decouples from the inclusion of depreciation and amortization in the adjusted taxable income (ATI) calculation (which means NYC will include the expense in ATI) and requires taxpayers to use the pre-OBBBA EBIT approach for NYC income taxes.6 The OBBBA increased the IRC Section 179 deduction limits for tax years beginning after 2024. For NYC business income tax purposes, the Budget Bill decouples from the federal change and reverts to the NYC limitations in effect before the OBBBA. NYC previously decoupled from prior versions of IRC Section 179.7 The Budget Bill does not include a parallel provision for NYS tax purposes. The Budget Bill (Part G) for NYC tax purposes replaces references to net global-intangible low-taxed income (GILTI) with: IRC Section 951A(a), less the amount of deduction allowed under IRC Section 250(a)(1)(B)(i) (i.e., net controlled foreign corporation tested income (net NCTI)). Thus, receipts constituting net NCTI are not included in the numerator of the receipts factor but are included in the denominator of the receipts factor. We understand that NYC views this change as confirming that taxpayers must include NCTI in their tax base. Part AA of the Budget Bill allows individuals that elect to be subject to tax at the corporate rate under IRC Section 962 to subtract from federal adjusted gross income (FAGI) the amount of any distribution included in FAGI under IRC Section 962(d). This change applies to tax years beginning on or after January 1, 2026. As background, IRC Section 962 permits an individual US shareholder to elect to be taxed at domestic corporate rates on its IRC Section 951(a) and Section 951A inclusions, which are then treated as taken into account by a domestic corporation for purposes of computing deemed paid foreign tax credits under IRC Section 960. IRC Section 962 is intended to treat an individual shareholder of a CFC as if they owned the CFC through a domestic corporation through the following two mechanisms. Under IRC Section 962(d), distributed previously taxed earnings and profits (PTEP) are included in the individual's gross income (despite IRC Section 959(a)(1)), to the extent it exceeds the tax paid on the amounts to which the IRC Section 962 election applies (taxable IRC Section 962 PTEP). IRC Section 961(a) then limits the basis increase for an income inclusion to which the election applies to the tax paid by the individual, and IRC Section 961(b)(1) limits the basis decrease to the amount excluded from gross income after application of IRC Section 962(d). The potential for double tax existed under prior NYS and NYC law because, absent the election under IRC Section 962, the PTEP would not be included in gross income; this change fixes that double tax consequence by creating a subtraction for the amount of that PTEP included in income under IRC section 962(d). For taxpayers with business income over $5 million, the Budget Bill (Part E) extends the current top corporate franchise tax rate of 7.25% through tax years beginning before January 1, 2030 (from before January 1, 2027). The Budget Bill also extends the current 0.1875% capital base rate for three years, through tax years beginning before January 1, 2030 (from before January 1, 2027). The Budget Bill (Part M) amends NY Tax Law Sections 1201 and 1402 and NYC Admin. Code Sections 11-2102 to extend for three years, until September 1, 2029 (from September 1, 2026), 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.8 These provisions took 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. The disconnect between those two values may potentially magnify the benefit by generally allowing a lower value to be used as the base, as well as making qualifying much easier. The Budget Bill adds a new property tax surcharge (often referred to as a "pied-à-terre tax"), on secondary homes (specifically, one- to three-family residential properties, residential condominium units, and residential cooperative dwelling units) in NYC that do not serve as a "primary residence" and meet a minimum value threshold.9 This surcharge is on top of the property tax that was already imposed. The new surcharge will be first imposed for the fiscal year beginning July 1, 2026, and is set to sunset on June 30, 2031. A property is a "primary residence" if used as a primary residence of an owner, an immediate family member of an owner, or a lessee or sub-lessee, provided the lessee or sub-lessee is a natural person and the lease is a bona fide lease negotiated in an arm's length transaction for a term of at least one year. The NYC Department of Finance (Department) will determine whether a dwelling is a primary residence or not (if it is not, then it is subject to the new surcharge), with the Department considering multiple factors, including whether the dwelling was occupied for a majority of days of the calendar year. The Budget Bill requires the Department to make its initial determinations on primary residences and to provide notice of such determination no later than August 30, 2026. Where the Department determines a property is not a primary residence, owners will have a limited opportunity to rebut this finding by submitting certain documentation to substantiate that the property is a primary residence.
The Budget Bill also authorizes the Department to promulgate rules to identify additional factors or documentation to be used in making the primary residence determination. The surcharge rates appear to apply to the relevant properties' market values (as determined by the Department) and are as follows:
On June 5, 2026, the Department issued for public comment proposed rules on the new pied-à-terre tax. The proposed rule defines key terms, describes the new pied-à-terre tax, describes the Department's process for making a determination of whether a property is a primary residence, provides guidance on the Department's audit and penalty imposition authority, and sets forth the process for taxpayers to appeal the Department's determination of primary residence and the assessment of tax and penalties. The Department will hold a remote hearing on the proposed rules on July 9, 2026, at 11:00 am (ET). Information on how to participate in the remote hearing and provide comments is available here. Comments are due by July 9, 2026. The Budget Bill (Part B) eliminates 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 will be entitled to reduce their NYS adjusted gross income by the same amount authorized by the equivalent federal deduction.10 The Budget Bill (Part N) 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 provides incentives to encourage delinquent taxpayers to settle fixed and final debt before reregistration. As part of the reregistration program, the NYS Commissioner of Taxation and Finance will determine the order in which current sales tax vendors must reregister to provide proper oversight and efficient administration of the program. All vendors will 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 NYS Department of Taxation and Finance will 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.
Tax changes that were considered, but are not part of the final Budget Bill, include proposals that would have:
Affected taxpayers should review these changes and consider how they may 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 and to be mindful of the different amortization periods that apply to NYS and NYC tax types. The new pied-à-terre surcharge is projected to generate about $500 million in annual revenue. Taxpayers should examine whether the new pied-à-terre surcharge could apply to their NYC property holdings and consider whether a "primary residence" determination for surcharge purposes could impact positions taken for other tax types. Moreover, it is unclear how this new law will stand up to potential legal challenges.
Document ID: 2026-1238 | ||||||||
