New York’s budget includes significant tax changes including a new “pied-a-terre tax”

New York Governor Hochul signed the New York State budget bill, A.10009-C, on May 28, 2026 (the Legislation) which includes significant changes for both corporate and individual taxpayers. Key provisions are summarized below.

Extension of the New York State corporate franchise tax rate

The Legislation extends New York’s temporary Article 9-A income tax rate of 7.25% through tax years beginning before Jan. 1, 2030, for taxpayers with a business income base exceeding $5 million. It also extends the 0.1875% capital base rate through the same period. Both rates were previously scheduled to sunset for tax years beginning before Jan. 1, 2027.

OBBBA decoupling provisions

The Legislation decouples New York State and New York City from specified provisions of the One Big Beautiful Bill Act (OBBBA), retroactive to tax years beginning on or after Jan. 1, 2025. The decoupling provisions differ between New York State and New York City in several respects, as described below.

New York State:

The Legislation includes OBBBA decoupling provisions for New York State corporate franchise, personal income tax and insurance tax as follows:

IRC section 168(n) - Qualified production activity

Taxpayers must add back the OBBBA-enacted IRC section 168(n) 100% depreciation deduction for qualified production property but may claim a subtraction modification equal to the depreciation deduction that would have been allowable under IRC section 167(a) had the taxpayer had not made the IRC section 168(n) election.

IRC section 174/174A - Domestic and foreign R&E expenses

The Legislation decouples from the federal treatment of foreign and domestic research and experimental (R&E) expenditures for tax years beginning on or after Jan. 1, 2025. Specifically, New York State requires an addback for foreign and domestic R&E amounts deducted for federal purposes. A corresponding deduction is allowed as follows:

Foreign and domestic R&E expenses incurred or paid on or after Jan. 1, 2025, must be amortized over a five-year (60-month) period for New York State purposes. Notably, for federal purposes foreign R&E expenses are still required to be amortized over a 15-year period

Foreign and domestic R&E expenses incurred or paid on or before Jan. 1, 2025, must continue to be amortized under IRC section 174 as in effect on Jan. 1, 2022.

Note: New York State issued specific guidance for taxpayers reporting R&E deductions and section 168(n) depreciation deductions for tax year 2025. See: Notice N-26-1 (June 16, 2026).

New York City:

The Legislation also includes OBBBA decoupling provisions for New York City unincorporated business tax, business and general corporation tax, and financial corporation tax purposes, but not for New York City personal income tax purposes. Although many of the provisions align with the New York State provisions described above, several key differences remain:

IRC section 168(n) - Qualified production activity

The Legislation decouples from IRC section 168(n) but allows a New York City subtraction for depreciation that would have been allowable under IRC section 167(a), so that the federal IRC Section 168(n) depreciation, adjusted basis reduction, or other deduction or exclusion does not apply. Qualified production property is also not treated as IRC section 1245 property for these purposes.

IRC section 174/174A - Domestic and Foreign R&E expenses

The Legislation decouples from IRC section 174A by requiring domestic R&E expenses to be amortized over five years beginning with the midpoint of the taxable year in which such expenditures are paid or incurred, while foreign R&E expenses remain subject to the IRC’s 15-year amortization period.

IRC section 163(j) - Business Interest Expense

The Legislation decouples from the OBBBA changes to IRC section 163(j) that expanded the adjusted taxable income (ATI) base to add back depreciation and amortization expense (which otherwise would increase the allowable business interest deduction).

IRC section 179 Expenses

The Legislation decouples from the OBBBA increase to the IRC section 179 expensing limitation (from $1.25 million to $2.5 million for years after 2024). New York City retains the pre-OBBBA $1.25 million limitation, adjusted for inflation.

IRC section 951A – Net CFC Tested Income

The Legislation replaces references to global intangible low-taxed income (GILTI) with IRC section 951A(a) and provides that the amount included in income for federal purposes under section 951A(a) less the amount of the deduction allowed under IRC section 250(a)(1)(B)(i) is included in the denominator but not the numerator of the receipts fraction.

Penalty and interest relief associated with OBBBA decoupling

Because the OBBBA decoupling provisions apply to tax years beginning on or after Jan. 1, 2025, the Legislation provides penalty and interest relief for returns filed under a valid extension or amended returns that report only those modifications.

Sales and use tax reregistration program

The Legislation directs the Commissioner of Taxation and Finance to establish a sales and use tax reregistration program by Dec. 31, 2030. The Commissioner will issue a notice of expiration to holders of current certificates at least 180 days prior to expiration. A new certificate of authority must be filed at least 90 days prior to the date of expiration.

The Legislation also establishes a related sales and use tax penalty and interest discount program for eligible taxpayers. The program offers penalty and interest relief for liabilities paid before Dec. 31, 2026, and eligible taxpayers will be notified of their eligibility and applicable discount amounts.

New York City ‘pied-à-terre’ tax

Beginning July 1, 2026, the Legislation enacts a New York City property tax surcharge targeting luxury second homes in the city. The tax applies to covered properties that are not used as a primary residence and that exceed certain threshold amounts. The tax will be payable in the same manner as real property tax and is scheduled to sunset June 30, 2031.

Covered properties include class one properties (one-to-three family homes) that exceed $5 million based on the property’s assessed value as determined by the Department of Finance (DOF). Class one properties are subject to the following tax rates:

Class one properties:

Covered properties also include class two properties (condominiums and cooperative units). Due to differences in assessment methodology for condos and coops, threshold values and surcharge rates will be rolled out in two phases. During phase one, residential condominiums will be valued based on DOF’s assessed market value, while residential cooperatives will be valued using the unit’s imputed value. During phase two, class two property values will be determined by comparable sales data. Rate reductions in phase two are designed to account for the likely increase in values resulting from anticipated changes to the valuation methodology.

Class two properties:

Phase 1: July 1, 2026 – June 30, 2028

Phase 2: July 1, 2028 – June 30, 2031

Primary residence is defined as the use of a covered property as a primary residence by 1) one or more of the covered owners, or an immediate family member of one or more of the covered owners; or 2) one or more lessees, and any sub-lessees provided any such lease is a bona fide lease agreement negotiated in an arms-length transaction with a term of not less than one-year. Determination of whether covered property is a primary residence is determined as of Jan. 5 of the immediately preceding fiscal year.

The baseline factor is whether "such covered property... was occupied in aggregate for a majority of days during a calendar year by a covered owner..." but the DOF is not limited to this standard and is authorized to specify additional factors. The DOF will notify taxpayers by Aug. 30 of the applicability of the surcharge and provide an opportunity to submit proof the property was used as a primary residence.

On June 5, 2026, the NYC DOF issued proposed rules on the pied-à-terre surcharge for public comment, with comments due and a related public hearing scheduled for July 9, 2026.

What’s next?

The Legislation makes significant changes for New York taxpayers. The OBBBA decoupling provisions are likely to affect 2025 income tax compliance, and taxpayers should evaluate whether amended returns may be required. From a sales tax perspective, vendors should review historical liabilities to determine whether the penalty and interest discount program may apply, as well as any registrations subject to the reregistration program. Owners of New York City properties covered by the pied-à-terre tax should review the Legislation and proposed rules to assess how the surcharge may apply to their properties.

Please reach out to your Baker Tilly state tax team with any questions.