For tax years beginning after December 31, 2024 (i.e., most 2025 calendar-year filers), the federal landscape for research and experimental (R&E) expenditures changed again in a meaningful way. The One Big Beautiful Bill Act (OBBBA) created new IRC §174A, which is intended to allow an immediate deduction of domestic R&E expenditures. This is a major shift from the capitalization and amortization framework that had been implemented under the Tax Cuts and Jobs Act. Shortly after the OBBBA’s enactment, the IRS issued Revenue Procedure 2025-28 to implement the new rules, including procedures for making elections, filing amended or superseding returns, and changing accounting methods to comply with IRC §§174, 174A, and 280C.
The challenge for New York taxpayers specifically is that the state-level treatment may not align or conform with the federal-level treatment of these R&E expenditures. As a baseline, New York’s income tax calculation begins with the federal taxable income or adjusted gross income number and then makes some specific New York modifications. New York’s regulations also emphasize that these modifications exist specifically because certain items are treated differently for New York purposes than under the Internal Revenue Code. In other words, New York often “follows” the federal base by default, but it has long preserved the ability to depart from federal treatment through targeted additions, subtractions, or other statutory adjustments.
R&E is not new territory for New York adjustments. NY Tax Law §612 contains optional modification concepts tied to property used for research and development in the experimental or laboratory sense, along with accompanying rules that can require addbacks of federal deductions in later years when a New York modification is claimed. While these provisions are not the same as the modern federal §174/§174A regime, they underscore the practical point that New York has mechanisms to create state-specific R&E timing differences, which can persist for multiple years.
Importantly, Governor Hochul’s FY 2026–27 Proposed Executive Budget indicates that the State is considering explicit decoupling from the federal OBBBA R&E changes, potentially retroactively to tax years beginning on or after January 1, 2025.
In particular, the proposal described would decouple New York State from:
1. The federal accelerated deductions for certain pre-2025 domestic R&E expenditures, and
2. The federal ability to immediately deduct domestic R&E expenses in the year incurred under the new federal rules
Instead, for state tax purposes, the proposal would require both domestic and foreign R&E to be recovered over the same five-year period beginning with 2025 tax years. (Note: the budget also included a separate NYC-specific approach, using a midpoint convention for domestic R&E, which could create a three-way mismatch across the federal, state, and city jurisdictions.
For return preparation and filing strategy, the key takeaway is that NYS treatment is uncertain right now for many taxpayers with material R&E activity, because the State’s current starting point is federal income, but the policy direction being discussed is to override federal §174A outcomes. That creates a real risk that taxpayers who file 2025 New York returns using a “follow the federal result” posture could later face a change in law or administrative implementation that requires recomputing New York taxable income, potentially through an amended return process. For pass-through structures, that amended-return burden can compound quickly across tiers and owners.
Given that uncertainty, extensions are worth considering where practical in order to create time for the budget process to play out and for New York to clarify whether it will decouple (and, if so, how it will operationalize the required additions/subtractions on the New York return). Regardless or extension, amended filings may become necessary if New York ultimately enacts decoupling that is retroactive to 2025 or implements the change through later-issued instructions or guidance
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