New York’s recently enacted Fiscal Year 2027 State Budget, signed into law on May 28, 2026, approved significant tax law changes for both personal and business taxes. Although the Bill preserves NY’s business tax rates, several major law changes could meaningfully impact 2025 tax returns and prospective tax planning. Below is a summary of the key provisions.
Rates Remain Unchanged
New York’s personal income and business tax rates remain unchanged in the Bill. The 7.25% corporate franchise rate on business income and the .1875% business capital tax also remain unchanged. The Bill also continued the reduced transfer tax rates for qualified real estate investment trusts through September 1, 2029.
Decoupling from OBBBA Federal Depreciation and R&E Deductions (retroactive to 2025)
Heading into the 2025 tax filing season, the question remained whether NYS, a rolling conformity state, would adopt the various changes in OBBBA. The Bill confirms that NYS will not conform to various provisions, which should affect how deductions are tracked for federal and state tax purposes.
Specifically, applicable to taxable years beginning on or after January 1, 2025, for New York State (NYS) corporate tax purposes, the entire net income must exclude any accelerated federal deduction for “qualified production property” under IRC §167.
In addition, NYS decouples from both IRC §174 (foreign R&E) and IRC §174A (domestic R&E), indicating that taxpayers must add back any deduction claimed under those provisions and instead amortize (i) post-2024 R&E expenditures over 60 months under a §174A(c)-style methodology, and (ii) pre-2025 R&E expenditures using the §174 deduction rules in effect as of 2022. 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.
Penalties and interest will not be imposed if a return has already been filed claiming the deduction. An amended return is required to be filed. Finally, penalties and interest will not be imposed for taxpayers who are underpaid as a result of the deduction.
NYC Decoupling for Depreciation, R&E, Sec. 179, and GILTI Receipts Factor Change
For NYC general corporation tax (“GCT”), unincorporated business tax (“UBT”) and financial corporation tax purposes, the Bill adds new addbacks for depreciation of qualified production property, IRC Sec. 179 deductions, and an increase in federal interest deduction attributable to depreciation, amortization, or depletion. The addback only applies to domestic R&E expenditures under IRC Sec. 174A, as foreign R&E is not subject to the addback.
As such, domestic R&E will be amortized over 60 months, computed from the midpoint of the year. This is a different method for NYS purposes, and taxpayers will now have to keep separate computations for R&E for federal, NYS and NYC tax purposes.
NYC also requires GILTI amounts to be removed from the sales factor numerator but included in the denominator. The Bill also provides similar interest and penalty relief for underpayments related to the decoupling of NYC taxes.
Sales Tax Registration Program
The Bill authorized NYS to enact a statewide sales tax vendor registration program to be completed by December 31, 2030. It will require currently registered vendors to revalidate their registration and provide updated information when necessary. Taxpayers should be on the lookout for notices from the State.
Section 962 Subtraction
This is a notable change for any taxpayer who is a shareholder of a controlled foreign corporation (“CFC”). Under IRC Sec. 962, a shareholder of a CFC may elect to be taxed as a corporation, using the lower corporate tax rates instead of individual rates on amounts includible as Subpart F income or global intangible low-taxed income (“GILTI”).
The benefit to the individual is not only being taxed at the lower corporate rate but also taking the foreign tax credit. When the CFC later makes a distribution out of earnings, that distribution is taxable to the individual shareholder.
Prior to the enactment of the bill, NYS had no subtraction for the distribution that occurred. As NYS’ starting point is federal adjusted gross income, the Sec. 962 amounts were taxed twice, once when recognized for federal tax purposes because NY does not conform to the corporate tax election, and then again in the year the dividend is distributed. It was a terrible result for NY residents who made the IRC Sec. 962 election.
For tax years after January 1, 2026, NYS now provides for a subtraction modification from NY adjusted gross income for “the amount of any distribution included in federal adjusted gross income pursuant to IRC Sec. 962. This subtraction could have a big impact on NY residents who are high-net-worth individuals who are considering an IRC Sec. 962 election.
NYC Pied a Terre Tax
Please see Grassi’s June 16, 2026, tax alert, which discussed how New York City will impose a new annual surcharge on certain residential properties that are not used as a primary residence, beginning July 1, 2026. Lawmakers approved the new pied-à-terre tax surcharge as part of New York State’s fiscal year 2027 budget, and it is expected to affect owners of higher-value second homes, including individuals, foreign investors and properties held through LLCs, corporations and trusts. This surcharge is in addition to existing property taxes and may significantly increase the annual cost of holding New York City real estate.
The tax is imposed on properties in NYC that are not the owner’s primary residence, as follows: (1) Class 1 covered properties with a “phase one market value” of $5 million or more; (2) condominium units with a phase one market value of $1 million or more; and (3) cooperative units with an imputed phase one market value of $1 million or more.
Connect with your Grassi advisor to discuss how New York’s Budget Bill may affect your business.
This article is provided for general informational purposes only and does not constitute tax, legal, or accounting advice.
