Recent New York State and New York City budget legislation introduces significant tax changes affecting businesses and individuals across multiple areas. The most notable updates involve departures from federal tax treatment of research and experimentation (R&E) costs and qualified production property (QPP), many of which apply beginning in the 2025 tax year and may require amended filings. It also lets New York City impose a new annual "pied-à-terre" surcharge on high-value non-primary residences starting July 1, 2026.

Decoupling from Federal R&E Expenditure and QPP Rules

New York has decoupled from federal rules for R&E expenditures. Taxpayers must add back the federal immediate deduction allowed under IRC §174A and instead recover these costs over a five-year (sixty-month) period for New York purposes. This five-year recovery applies to both domestic and foreign R&E expenditures, a divergence from federal law, which recovers domestic R&E immediately and foreign R&E over fifteen years. For pre-2025 expenditures, New York continues the amortization that applied under IRC §174 as in effect on January 1, 2022, rather than conforming to the federal acceleration of those previously capitalized costs. These changes require a separate New York R&E schedule.

The state has also decoupled from federal full expensing of qualified production property under IRC §168(n). Instead, taxpayers must continue to compute depreciation under New York’s existing regime, which already departs from federal accelerated cost recovery. These changes create differences between federal and New York taxable income and require separate tracking. 

As these decoupling changes apply to the 2025 tax year, amended returns and/or additional payments of tax may be required. New York provides that no interest or penalties will apply to returns filed under a valid extension, or to amended returns for tax year 2025, provided such filings are made solely to reflect the required decoupling adjustments.

New York City Corporate Tax Decoupling

New York City has opted not to adopt certain federal expansions. Starting with tax year 2025, it retains prior limits on IRC §179 expensing (with inflation adjustments) and requires addbacks related to federal interest deduction changes under IRC §163(j), effectively limiting the benefit of increased federal deductions.

Individual Tax Relief: Qualified Tips Deduction

Starting in 2026, individuals may deduct up to $25,000 of qualified tip income from New York adjusted gross income, consistent with the federal deduction. Proper documentation will be important to support eligibility.

New York City Surcharge on Non-Primary Residences

New York City will impose an annual “pied-à-terre” surcharge on certain high-value residences that are not used as a primary residence, effective July 1, 2026 and scheduled to sunset June 30, 2031. Through June 30, 2028, the surcharge applies to Class 1 homes with a market value of $5 million or more at rates ranging from 0.8% to 1.3%, and to certain condominiums and cooperative units meeting the applicable $1 million valuation threshold at rates ranging from 4.0% to 6.5%. Beginning July 1, 2028, a single $5 million threshold and the 0.8% to 1.3% rate structure apply across covered property types. The surcharge is imposed in addition to existing New York City real property taxes.

Please contact us if you would like to discuss how these developments may affect you.
 

Published: 06/05/2026

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