New York budget addresses federal conformity, rates and property tax

Executive summary

On May 28, 2026, Gov. Kathy Hochul signed into law New York State’s budget for fiscal year 2026–2027 (S.9009 and A.10009). The legislation includes several noteworthy state and New York City tax updates, including an extension of the temporary corporate income tax rate increase, provisions addressing conformity to the One Big Beautiful Bill Act (P.L. 119-21, OBBBA), and the widely publicized ‘pied-à-terre’ surcharge on certain luxury second homes located in New York City.

Corporate tax rate extension

Enacted by the state’s fiscal year 2021–2022 budget, New York increased the corporate income tax rate from 6.5% to 7.25% for most taxpayers with business income exceeding $5 million. This increase, originally scheduled to apply to tax years beginning on or after Jan. 1, 2021, and before Jan. 1, 2024, was subsequently extended through 2026. The current budget further extends the higher rate through tax years ending before Jan. 1, 2030.

In addition, the legislation maintains the capital base tax rate at 0.1875% for the same duration. Originally set to phase out by 2027, this rate is now likewise extended through tax years ending before Jan. 1, 2030.

Decoupling from select provisions of the OBBBA

The budget reflects a broader trend of state and local decoupling from recently enacted federal tax provisions under the OBBBA. Several key areas are addressed below.

Qualified production property (section 168(n))

The OBBBA introduced a 100% depreciation allowance for certain nonresidential real property used in qualified production activity. The budget legislation decouples from this provision for purposes of New York State and New York City taxes effective for tax years beginning on or after Jan. 1, 2025. As a result, taxpayers must compute depreciation using the rules in effect prior to the enactment of the OBBBA. New York joins at least a dozen other states that have also decoupled from section 168(n).

Research and experimentation (R&E) expenses (sections 174 and 174A)

For federal purposes, the OBBBA enacted new section 174A, which permits taxpayers to elect current expensing of domestic R&E expenditures paid or incurred for taxable years beginning on or after Jan. 1, 2025, while continuing to require that foreign R&E costs are capitalized and amortized over a 15-year period. For expenses incurred prior to Jan. 1, 2025, taxpayers may accelerate the domestic R&E deductions federally for the remaining capitalized amounts under applicable transition rules.

However, the New York budget decouples from sections 174 and 174A across various state taxes, requiring both domestic and foreign R&E expenses to be amortized over a 60-month (five-year) period. Additionally, the budget decouples the New York State franchise tax from the transition rules for costs incurred prior to Jan. 1, 2025, requiring taxpayers to continue to deduct both domestic and foreign R&E costs consistent with the amortization rules of section 174 as in effect on Jan. 1, 2022 under the Tax Cuts and Jobs Act (P.L. 115-97, TCJA).

For New York City tax purposes, including the Unincorporated Business Tax (UBT), Business Corporation Tax (BCT), and General Corporation Tax (GCT), the decoupling appears to apply only to domestic R&E expenses incurred on or after Jan. 1, 2025, and requires taxpayers to capitalize and amortize domestic R&E costs over a five-year period. Foreign R&E expenses must continue to follow the federal 15-year amortization period pursuant to section 174. The city also has not indicated that it will decouple from the federal transition rules that allow for accelerated deductions of domestic R&E costs incurred prior to Jan. 1, 2025.

Business interest expense (section 163(j))

New York City decouples from the updated federal rules under the OBBBA that modify the calculation of adjusted taxable income by allowing addbacks for depreciation, amortization and depletion. Instead, taxpayers must continue to calculate adjusted taxable income using earnings before interest and taxes (EBIT) only when determining the limitations for allowable interest expense deductions. These changes apply to taxable years beginning on or after Jan. 1, 2025. Similar changes were not enacted for New York State.

Election to expense certain depreciable business assets (section 179)

The city also decouples from federal changes that increase the deduction limits and phaseout thresholds under section 179. Taxpayers must compute the deduction using the rules in effect prior to enactment of the OBBBA. New York State has not decoupled from the changes made by the OBBBA to section 179.

Net CFC tested income (NCTI, section 951A)

New York City updated its statutory language for the treatment of global intangible low-taxed income (GILTI) to incorporate NCTI for purposes of the receipts factor. The revised language includes all amounts recognized under section 951A, reduced by the deductions allowed under section 250(a)(1)(B). This update aligns the statute with the current federal framework and ensures NCTI remains included in the receipts factor. These changes take effect immediately.

Interest and penalty relief

Although the decoupling provisions generally apply retroactively to tax years beginning on or after Jan. 1, 2025, the bill provides relief from interest and penalties in certain circumstances. Specifically, no interest or penalties will apply where a taxpayer, with a valid filing extension, timely files a return for the 2025 tax year, and the underpayment of tax is due only to changes attributable to the retroactive decoupling provisions.

Property tax provisions

Real estate transfer tax rate reduction

The budget extends the reduced real estate transfer tax rate applicable to conveyances of real property to existing REITs through Sept. 1, 2029.

New York City ‘pied-à-terre’ tax

The legislation imposes a surcharge, effective July 1, 2026, on certain New York City residential properties that are not used as a primary residence. Covered properties are divided into two classes: Class One (one- to three-family homes) and Class Two (condominiums and cooperative units).

To administer the surcharge, the New York City Department of Finance must annually determine whether a property qualifies as a primary residence. Property owners are afforded an opportunity to provide documentation supporting primary residence status.

The statute incorporates a two-phase valuation framework:

• Phase One (Fiscal Years 2026–2027):
  • Class One properties: Applies to properties with market values exceeding $5 million, with rates ranging from 0.8% to 1.3%, depending on value.
  • Class Two properties: Applies to properties with market values exceeding $1 million, with rates ranging from 4.5% to 6.5%.
     
• Phase Two (Fiscal Years 2028–2031):
  • Class Two properties will be valued based on comparable home sales, which may exceed current Department of Finance assessments, potentially increasing the taxable base.
  • A uniform rate structure will apply to both classes, ranging from 0.8% to 1.3%, depending on property value.

Provisions excluded from the final budget

Several notable provisions included in earlier drafts of the budget were ultimately omitted from the final legislation. These include proposed broad increases to corporate and personal tax rates, a reduction in the UBT paid credit for owners of unincorporated businesses, and changes to the state and city pass-through entity tax (PTET) regimes. The proposed PTET changes would have extended the election period and reduced available credits for investors.

Although certain New York City provisions were enacted as part of the state legislation, the city has not yet finalized its own budget and may consider additional changes.