New York Just Split From the Federal R&D Break — and Made It Retroactive to 2025
What the budget actually changed
Governor Hochul signed the Fiscal Year 2027 state budget into law on May 28, 2026, after the Legislature passed it on May 27. Buried in Parts F and G of the tax bill is a change that reaches a lot of New York businesses without using the word that would warn them: decoupling. New York State and New York City are stepping away from two federal write-offs created by the One Big Beautiful Bill Act — the immediate expensing of research and experimental costs under Internal Revenue Code Section 174A, and certain accelerated depreciation and bonus provisions. Part G aims squarely at the New York City corporate tax base.
Here’s the mechanics in plain terms. On your federal return, OBBBA lets you deduct domestic R&E costs in full the year you spend them, starting with tax years after December 31, 2024. New York now says no — for state and city purposes, you spread those same costs over five years. New York City layers on a mid-year convention, so its timing doesn’t even match the state’s. You can end up with three different numbers for the same dollar of spending: one federal, one state, one city.
The retroactive piece is what stings
States decouple all the time. What makes this one land harder is the effective date: tax years beginning on or after January 1, 2025. That’s not next year’s problem. It’s the 2025 returns many businesses are finishing on extension this summer. If you already took the full federal R&E deduction on a 2025 return — or planned to — your New York State and City numbers now come out higher, even though your federal bill doesn’t move.
The Legislature softened the edge in one specific way. The budget provides interest and penalty relief for tax underpayments tied to the retroactive part of the decoupling, which is a fair acknowledgment that nobody could have paid 2025 estimates against a rule written in May 2026. Relief from penalties is not the same as relief from the tax. The added New York and City liability is real; you just won’t get punished for not having a time machine.
“We don’t do R&D” — yes, you probably do
The fastest way to miss this is to assume R&D means lab coats. The tax definition is broader than the dictionary one. A software shop writing new code, a manufacturer refining a process, an engineering firm solving a site-specific problem, a product company improving a design — all of that can sit inside Section 174/174A. Plenty of our closely held business clients have been claiming the federal R&E deduction without ever calling it “research.”
If that’s you, the decoupling raises your New York and City taxable income compared to your federal return, and it creates a timing mismatch you’ll carry for years as those costs amortize. The pain concentrates in two places: companies that spend heavily on development relative to their margins, and pass-through owners — S corporations and partnerships — where the adjustment has to be tracked at the entity level so it flows correctly onto the owners’ New York personal returns. Get the entity-level tracking wrong and the error multiplies across every K-1.
What this does to your books and your estimates
Three practical things change. You’ll need separate New York State and New York City amortization schedules for R&E costs, kept apart from the federal treatment and apart from each other because of the city’s convention. Your quarterly estimated payments for 2026 should reflect the higher state and city base now, not as a March surprise. And the bonus-depreciation piece matters too — New York won’t follow the full federal write-off there either, which compounds the gap for any business that bought equipment expecting to deduct it fast. We walk through the federal side of that in our guide to the 2026 bonus depreciation phasedown; New York just made the state half of the picture less generous.
The state’s motive isn’t hidden. Albany expects the depreciation changes alone to preserve roughly $1.7 billion in business tax revenue. New York decided it couldn’t afford to mirror the federal giveaway, so it didn’t. For owners, that means the federal incentive to invest in R&D and equipment is still there — it just stops at the New York line.
How The Reed Corporation helps
We’re already building the separate New York and City schedules into the 2025 returns we’re preparing, and re-running 2026 estimates so clients aren’t caught short. For pass-through owners, we track the decoupling adjustment at the entity level and follow it onto each owner’s return, which is where these things usually break. This is the kind of change that sits right between corporate tax compliance and forward tax strategy — you have to get the 2025 filing right and plan the next three years of amortization at the same time. If you claim federal R&D or bonus depreciation and you operate in New York, let’s look at your exposure before the extended returns go out.
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Frequently Asked Questions
What did New York decouple from?
New York’s FY2027 budget separates state and city tax law from two federal breaks in the One Big Beautiful Bill Act: the immediate expensing of research and experimental costs under IRC Section 174A, and certain accelerated and bonus depreciation provisions. On the federal return you can still deduct these costs quickly. For New York State and New York City, R&E costs must be amortized over five years instead, and the depreciation write-offs are limited. The change sits in Parts F and G of the budget bill, with Part G focused on the New York City corporate base.
Why does the retroactive date matter so much?
Because the change applies to tax years beginning on or after January 1, 2025 — returns being filed right now, often on extension. If you took the full federal R&E deduction for 2025, your New York State and City taxable income is now higher than your federal return for the same costs. The budget grants interest and penalty relief on underpayments tied to the retroactive part, so you won’t be penalized for not paying 2025 estimates against a rule that didn’t exist yet. The extra tax itself still applies.
My business isn’t a research lab. Does this affect me?
Quite possibly. The tax definition of research and experimental costs is broad — it reaches software development, process improvement, custom engineering, and product design, not just formal labs. Many businesses claim the federal R&E deduction without thinking of themselves as doing “research.” If you’ve been deducting those costs federally and you operate in New York, the decoupling raises your state and city income and creates a five-year timing mismatch. We help identify whether your spending falls inside the rules.
I own an S corporation. Where does this get handled?
At the entity level first. The decoupling adjustment is tracked on the S corporation or partnership return, then flows through to each owner’s New York personal return on the K-1. That’s the step most likely to go wrong, because an error at the entity level repeats on every owner’s return. Keeping the New York State and New York City amortization schedules separate — and separate from the federal treatment — is part of getting the pass-through reporting right. See our guides on the partnership return and New York resident vs. nonresident filing.
What should I do before my 2025 return goes out?
Three things. Confirm whether any of your costs count as R&E or were expensed under bonus depreciation. Build separate New York State and New York City amortization schedules for those costs. And re-run your 2026 estimated payments against the higher state and city base so you’re not surprised in the spring. If you’re a pass-through, make sure the entity-level adjustment is set up to flow correctly to owners. We’re doing exactly this on the returns we prepare — reach out before your extended filing is finalized.