Included in New York’s recently enacted Fiscal Year 2027 State Budget, passed on May 27, 2026 (awaiting the Governor’s signature), lawmakers approved a significant tax change that directly affects how construction and specialty trade businesses treat certain research and development (R&D) costs for New York State and New York City (“NYS/NYC”) tax purposes. The change is retroactive, effective for tax years beginning on or after January 1, 2025, which means it impacts the 2025 returns many businesses are preparing right now.
The change stems from Parts F and G of the tax budget bill (“hereafter, the Budget Bill), which decouples NYS/NYC tax law from specific federal tax benefits enacted in the One Big Beautiful Bill Act (“OBBBA”). Most notably the Budget Bill decouples NYS and NYC from the immediate expensing of research and experimental (R&E) expenditures under Internal Revenue Code (IRC) Section 174A, along with certain accelerated depreciation and expensing provisions. (Part G applies specifically to the NYC corporate tax base). The Federal tax reforms were enacted to encourage investment and to fix the negative impact of some of the federal Tax Cuts and Jobs Act (“TCJA”) provisions.
Federal rules still govern federal filings. But because OBBBA restored immediate expensing of domestic R&E costs under Section 174A for tax years beginning after December 31, 2024, New York’s decision not to follow suit means the state and city now require a different — and less favorable — treatment than a federal return. This change will mean that NYS/NYC will become a more expensive state to do research and development work.
What Does “Decoupling” Mean?
New York generally conforms to the federal tax code on a “rolling” basis, automatically following federal changes as they take effect. Decoupling means the state has carved out specific federal provisions that it will no longer follow.
Under the enacted budget provisions:
- New York State and New York City will not conform to the federal treatment that allows R&E costs to be expensed immediately.
- Instead, R&E costs must be amortized — spread out and deducted — over a five-year period for state and city franchise, personal income, corporate income and insurance tax purposes. (New York City applies a mid-year convention, so its timing can differ slightly from the state’s, creating a potential three-way mismatch among the federal, state, and city returns requiring these items to be tracked and calculated separately.)
- Comparable decoupling applies to certain accelerated depreciation and expensing provisions, preventing those write-offs from being claimed in full at the state and city level.
- The Budget Bill does provide for interest and penalty relief for underpayments of tax associated with the decoupling from retroactive provisions of OBBBA.
The stated goal of the change is to protect state and city revenue from the cost of the recently enacted federal benefits; according to state budget estimates, the related depreciation changes alone are expected to preserve roughly $1.7 billion in business tax revenue.
Why This Matters to Construction and Specialty Trade Businesses
Many contractors do not think of themselves as performing “research and development.” In practice, however, construction activities often qualify as R&D under the tax code.
Examples may include:
- Developing new construction methods or sequencing techniques
- Engineering solutions to site‑specific challenges
- Designing custom systems or components
- Improving energy efficiency, materials usage, or project performance
If your business has historically claimed R&D deductions at the federal level, the state-and-city decoupling may increase taxable income in New York, even if your federal tax liability remains unchanged.
Key Impacts to Watch
For subcontractors and construction firms operating in New York, this change may result in:
- Higher New York State and City taxable income compared to federal returns
- Timing differences between when deductions are claimed federally and at the state and city levels
- Cash flow considerations, particularly for firms investing heavily in innovation or process improvement
- Additional compliance complexity, as separate calculations will now be required
These impacts apply not only to future R&D spending, but also to the treatment of certain previously incurred costs that are still being amortized.
Planning Ahead
This change reinforces the importance of proactive tax planning, especially for construction businesses operating on tight margins and long project cycles.
Now is an appropriate time to:
- Re-evaluate how R&D activities are identified and documented
- Build separate New York State and New York City amortization schedules for R&E costs, and, for pass-through entities such as S corporations and partnerships, track the adjustment at the entity level so it flows correctly to owners
- Model the state and city tax impact, including quarterly estimated payments, of current and upcoming projects
- Align budgeting and cash flow planning with longer amortization periods
Connect with your Grassi advisor to discuss how New York’s decoupling may affect your construction business and upcoming projects.
This article is provided for general informational purposes only and does not constitute tax, legal, or accounting advice.
