Key Takeaways
- New York tax changes extend corporate rates, decouple from federal bonus depreciation and research and experimental expense rules and add sales tax re-registration.
- Connecticut budget provisions revise federal conformity, expand research and development tax credits and create small business health reimbursement credits.
- Taxpayers should assess 2026 New York, New York City and Connecticut tax impacts for income tax, sales tax, credits and compliance planning.
New York state and Connecticut have enacted budget legislation with several tax changes affecting businesses and individuals. Key provisions address corporate taxes, federal conformity, sales tax, tax credits and targeted individual tax relief. Read on for key changes taxpayers should know.
New York
Governor Kathy Hochul signed the fiscal year 2026-27 budget on May 28, 2026, which includes specific provisions for New York City.
Corporate Tax
- The 7.25% franchise tax rate for taxpayers with business income over $5 million and the 0.1875% capital base tax has been extended through tax years beginning before January 1, 2030.
IRC Conformity
- For qualified production property, both New York state and NYC decoupled from the One Big Beautiful Bill Act’s (OBBBA) reinstatement of 100% special “bonus” depreciation by limiting taxpayers to the standard depreciation deductions for property, as computed under IRC Section 167 and in place prior to OBBBA.
- NYS and NYC decoupled from IRC Section 174A enacted under OBBBA, which restored the full, immediate expensing of research and experimental (R&E) expenditures in the year incurred. Therefore, for tax years beginning on or after January 1, 2025, both domestic and foreign R&E expenses are amortized over five years for NYS purposes, while NYC requires domestic R&E expenses to be amortized over five years and foreign R&E expenses amortized over 15 years.
- On a related point, NYS and NYC decoupled from the provision of OBBBA that permits taxpayers to deduct the remaining unamortized balance of domestic R&E costs incurred as of December 31, 2024. These expenses are amortized based on Pre-OBBBA Section 174A rules, specifically, five years.
- NYC decoupled from the provision of OBBBA that amended Section 163(j) to not include the deductions for depreciation, amortization or depletion when calculating adjusted taxable income (ATI). Therefore, these deductions are included for NYC tax purposes.
- As a result of the retroactive decoupling, NYS and NYC are providing penalty and interest relief. Specifically, no penalties or interest will be imposed on returns that are either timely filed under a valid extension or filed as amended returns for tax years beginning on or after January 1, 2025, (for NYS purposes) or after December 31, 2024 (for NYC purposes), and before January 1, 2026, provided the returns only reflect modifications required by these OBBBA changes.
Personal Income Tax
- A one-time rebate check will be issued to assist taxpayers with the rising costs of utility bills. Joint filers with incomes below $150,000 will receive $200; for joint filers with incomes between $150,000 and $300,000 will receive $150; and single filers with incomes below $150,000 will receive $100.
- The state’s child and dependent care credit has been expanded to provide families up to $1,000 per child under the age of four beginning in 2026, and up to $500 for school-aged children beginning in 2027, an increase from the previous maximum of $330.
- NYS conformed to OBBBA’s elimination of the tax on tipped wages up to $25,000 for tax years beginning on or after January 1, 2026.
- Certain charitable contributions to organizations that maintain NYS tax exemption status remain deductible for NYS purposes, even if the IRS revokes the organization’s tax-exempt status.
Sales Tax
- All current sales tax vendors will be required to re-register (in a certain order to be determined by the state) by December 31, 2030. In order to obtain a new Certificate of Authority, all fixed and final debts as of September 1, 2026, will have to be paid. To incentivize compliance, delinquent vendors would receive full penalty abatement and a 50% reduction to accrued interest if the liability is fully paid by December 31, 2026.
- The existing sales tax exemption for certain food and drink purchased from a vending machine has been extended for three years.
Miscellaneous Taxes
- Introduction of a new annual “Pied-a-Terre” tax on second homes in New York City valued at $5 million or more. Condominiums and Co-ops will be subject to a two-phase approach to determine whether a property’s market value warrants being subject to the tax, with one valuation method being used from July 1, 2026, to July 1, 2028, and another method used for following time periods. One to three family houses will be based on comparable sales beginning July 1st. For more details see our recent article, What Co-op, Condo and Investment Property Owners Should Know About NYC’s Newly Passed Pied-à-Terre Tax.
- A property tax exemption on primary residences is available for veterans who are permanently and totally disabled due to military service.
- The state’s excise tax of 75% of the wholesale price has been expanded to cover “alternative nicotine” products, including nicotine pouches.
Connecticut
Governor Ned Lamont signed on May 22, 2026, Public Act 26-68, Connecticut’s FY 2027 budget bill.
Personal Income Tax
- Introduction of a new Caregiver Tax Credit for individuals who pay out-of-pocket costs to support activities for adult family members.
IRC Conformity
- For qualified production property, Connecticut decoupled from OBBBA’s introduction of 100% special “bonus” depreciation by limiting taxpayers to a 30-year depreciation life.
- Effective for tax year 2026, Connecticut will partially conform to IRC Section 174A enacted under OBBBA by allowing the full, immediate expensing of domestic research and experimental (R&E) expenditures in the year incurred. However, Connecticut decouples from the retroactive or accelerated recovery of prior IRC Section 174 amounts through deductions found in OBBBA. Lastly, Connecticut decoupled from immediate expensing and requires capitalization/amortization for tax years beginning on or after January 1, 2025, and before January 1, 2026.
Tax Credits
- For tax years starting on or after January 1, 2026, the legislation expands access to Connecticut’s research incentives and allows for certain pass-through entities to participate in Connecticut’s R&D Tax Credit program. Eligible pass-through entities may earn a credit equal to 6% of qualifying expenditures, subject to approval by the Department of Economic and Community Development.
- Effective for income and taxable years beginning on or after January 1, 2026, Connecticut creates an Individual Coverage Health Reimbursement Arrangement (ICHRA) for small businesses that allows eligible employers to claim a tax credit of up to $1,000 per covered employee.
Sales Tax
- Effective May 14, 2026, the annual back-to-school sales tax holiday is expanded by increasing the maximum exempt sales price from $100 to $300 per qualifying item.
- Sales tax on school supplies has been eliminated.
Next Steps
Businesses and individuals with tax exposure in New York State, New York City or Connecticut should review how the new budget provisions may affect their 2026 and future-year tax positions. In particular, multistate businesses should evaluate the impact of differing federal conformity rules, R&E expense treatment, depreciation provisions, sales tax compliance requirements and available tax credit opportunities.
Contact Us
If you have questions related to these changes or need assistance with state tax issues generally, contact your PKF O’Connor Davies client service team or:
Steven J. Eller, CPA, JD
Partner
seller@pkfod.com
Nicholas Rochedieu, JD
Partner
nrochedieu@pkfod.com