New York City Issues Guidance on OBBBA Decoupling Adjustments for Business Taxes

The New York City Department of Finance (DOF) recently issued Finance Memorandum 26-2, providing guidance on the City’s decoupling from several federal tax provisions enacted as part of the One Big Beautiful Bill Act (OBBBA). The guidance outlines how taxpayers subject to the unincorporated business tax (UBT), general corporation tax (GCT), banking corporation tax (BTX), and business corporation tax (BCT) must report adjustments related to IRC Sections 168(n), 179, 174A, and 163(j) for tax years beginning after December 31, 2024.

Background

On May 28, 2026, New York enacted as part of the state’s 2026-2027 budget bill Part G of Chapter 59 of the Laws of 2026, decoupling New York City’s business taxes from four federal tax provisions enacted by the OBBBA:

• 100% depreciation for qualified production property under IRC Section 168(n);
• Increased IRC Section 179 expensing limitations;
• Immediate deduction of domestic research and experimental (R&E) expenditures under IRC Section 174A; and
• The permanent restoration of the EBITDA-based calculation for the federal IRC Section 163(j) business interest limitation.

The decoupling modifications to the business taxes apply to tax years beginning after December 31, 2024. Taxpayers that have already filed returns for an affected period should evaluate whether an amended New York City return is required to reflect the City's decoupling modifications. Finance Memorandum 26-2 explains each decoupling provision and provides instructions for reporting the new business tax modifications on calendar-year 2025 returns and returns for fiscal years beginning in 2025.

Key Guidance

New York City Decouples From Section 174A Immediate Expensing

The OBBBA allows taxpayers to immediately deduct domestic R&E expenditures under IRC Section 174A. For tax years beginning after December 31, 2024, however, New York City continues to require domestic R&E expenditures to be capitalized and amortized over five years, beginning at the midpoint of the tax year in which the expenditures are paid or incurred. Foreign R&E expenditures remain subject to the existing 15-year amortization period under IRC Section 174.

Accordingly, taxpayers must add back the federal deduction for domestic R&E expenditures and deduct the allowable New York City amortization on the applicable City return. Taxpayers must also attach a pro forma federal Form 4562, Part VI, reflecting the recomputed amortization deductions. Any federal balance-sheet or asset-value amount based on the Section 174A deduction must be adjusted to reflect only the deduction allowed for New York City purposes. 

Importantly, Finance Memorandum 26-2 also addresses the transition rules under Section 70302(f) of the OBBBA. Taxpayers that maintained capitalized domestic research expenditures before passage of the OBBBA and subsequently used the federal transition relief provisions can continue to claim those transition-rule deductions for New York City purposes. The memorandum expressly states that amounts deducted under the federal transition rules are not subject to the City’s Section 174A addback modification.

New York City Retains Pre-OBBBA Section 179 Limitations

IRC Section 179 generally allows taxpayers to deduct the cost of qualifying tangible personal property and some computer software placed in service during the tax year, subject to applicable dollar and taxable-income limitations. The OBBBA increased the federal maximum deduction from $1 million to $2.5 million and the phaseout threshold from $2.5 million to $4 million, effective for property placed in service in tax years beginning after December 31, 2024. 

For New York City business tax purposes, however, taxpayers must apply the pre-OBBBA limitations (as adjusted for inflation). For 2025, the maximum deduction is $1.25 million, and the phaseout begins when the cost of qualifying property exceeds $3.13 million. Any federal Section 179 deduction must therefore be added back and replaced with the deduction allowed under the City’s limitations; eligible excess deductions can be carried forward.

Therefore, taxpayers claiming IRC Section 179 deductions must report the federal Section 179 deduction and the allowable City deduction on the applicable forms and schedules and attach a pro forma federal Form 4562, Part I, reflecting the City limitations. 

New York City Rejects Federal Section 168(n) Expensing

The OBBBA added IRC Section 168(n), allowing a 100% depreciation deduction for the adjusted basis of qualified production property in the year the property is placed in service. For New York City business tax purposes, taxpayers must add back any depreciation deduction or exclusion claimed under Section 168(n) for tax years beginning after December 31, 2024.

Taxpayers must recalculate depreciation for New York City business tax purposes as if IRC Section 168(n) did not apply. Accordingly, any federal deduction or exclusion claimed under Section 168(n), including the related reduction in adjusted basis, must be added back. Taxpayers can instead claim depreciation for qualified production property under Section 167(a). For reporting purposes, taxpayers should include qualified production property on Form NYC-399Z, Schedule A1, when recalculating the allowable depreciation deduction.

Taxpayers also must adjust the federal balance-sheet value of the property to reflect the addback when reporting asset values on their New York City tax returns.

New York City Retains an EBIT-Based Section 163(j) Limitation

The OBBBA permanently restored the EBITDA-based adjusted taxable income calculation for the federal business interest expense limitation under IRC Section 163(j).  For New York City business tax purposes, taxpayers must add back the increase in the federal interest deduction attributable to this provision for tax years beginning on or after December 31, 2024. 

That increase equals the difference between adjusted taxable income calculated with and without the depreciation, amortization, and depletion exclusion under IRC Section 163(j)(8)(A)(v). Carryforwards of interest expense from tax years beginning before January 1, 2025, are not affected by the recalculation.

As a result, New York City effectively retains an EBIT-based interest limitation calculation, while federal law now generally applies an EBITDA-based approach. Taxpayers subject to the Section 163(j) limitation must prepare a pro forma federal Form 8990 reflecting the City’s recalculated limitation and determine any resulting excess business interest carryforwards under the City’s method (consistent with Finance Memorandum 18-11).

Interest and Penalty Relief

Recognizing the retroactive application of the legislation, the has provided limited penalty and interest relief. No interest or penalties will accrue on amended returns filed for tax years beginning after December 31, 2024, and before January 1, 2026, provided the amended returns report only the modifications required by Part G of Chapter 59 of the Laws of 2026 (Part G modifications). For amended reports including additional items, taxpayers might still qualify for abatement of the interest and penalties attributable to the additional tax liability resulting from the Part G modifications.

Taxpayers filing original returns under a valid extension or amended return that reports Part G modifications and results in additional tax liability must enter condition code “OB” on the applicable return and submit the corresponding worksheet identifying the tax attributable to those modifications. Taxpayers filing amended returns that report only Part G modifications must enter condition code “AB”; no worksheet is required. 

Finally, taxpayers subject to the UBT, GCT, or BTX (and presumably the BCT, if applicable) will not be subject to estimated tax penalties for 2026 attributable solely to an increase in 2025 tax liabilities resulting from the Part G modifications. However, estimated tax payments made after May 28, 2026, must reflect the Part G modifications.

Why This Matters

The guidance confirms that New York City generally decouples from several federal tax provisions enacted or reinstated by the OBBBA. Accordingly, taxpayers cannot automatically apply their federal treatment when calculating City taxable income for tax years beginning after December 31, 2024. Key areas of divergence include domestic research expenditures under Section 174A, the increased federal Section 179 expensing limits, 100% depreciation for qualified production property under Section 168(n), and the federal interest limitation rules under Section 163(j). The differences could materially affect City taxable income, deductions, asset values, and interest carryforwards beginning in 2025.

The guidance also clarifies the treatment of previously capitalized domestic R&E expenditures. Although new domestic research expenditures generally must continue to be amortized over five years for City tax purposes, taxpayers are not required to add back federal deductions taken under the OBBBA transition rules for preexisting IRC Section 174 balances. That clarification should reduce uncertainty and help taxpayers determine the appropriate City adjustments for existing R&E expenditure accounts.