Tax Provisions of Interest in the Proposed 2025-26 Budget Bill

On January 21, 2025, Governor Hochul unveiled the Executive Budget for fiscal year 2026. Overall, while it contains no new taxes or tax increases, the Executive Budget proposes some important changes to tax administration, extends certain revenue provisions that are due to sunset, and tweaks some existing credit programs.

Below are some highlights from the New York State Legislature’s proposed Revenue portions of the State’s 2025-26 Budget (the “Budget”).

Reporting of Federal Partnership Adjustments: Part V of the Budget would amend Articles 9-A, 22, 30, and 33 of New York’s Tax Law (the “Tax Law”) to establish new reporting requirements for federal partnership audit changes and administrative adjustments consistent with the centralized partnership audit regime that was established by Congress with the Bipartisan Budget Act of 2015.  Currently, individual or corporate taxpayers are required to report federal changes or corrections, including changes made pursuant to a federal audit  of a partnership in which they are a partner. But because the IRS treats partnership adjustments under the Bipartisan Budget Act of 2015 as additions to tax, payable by the partnership on behalf of its partners, existing New York law leaves some uncertainty as whether and when partners are required to report such adjustments. Proposed changes to the Tax Law, including a new  § 659-a, add reporting requirements by the partnership of such federal changes and require the partnership to pay the resulting tax due on behalf of the partners.

We’ll provide an in-depth overview of the new reporting requirements in a later article, with a discussion of how New York’s proposed regime compares to the Multistate Tax Commission’s model legislation on this topic.  Stay tuned!

Enact Pass-Through Entity Tax Flexibility: Part Q of the Budget would amend Tax Law Articles 24-A and 24-B to extend the deadline for qualifying entities to elect to pay the Pass-Through Entity Tax (PTET) and the New York City Pass-Through Entity Tax (NYC PTET) from March 15 to September 15 of a given year. Part Q would also make corresponding changes to the estimated payment deadlines. Notably, the proposed legislation would tie the validity of the election to the estimated payment requirements, so that theoretically a PTET election could be declared invalid if sufficient estimated payments were not made by the deadlines as outlined in Part Q.

This extension would afford more time for entities to better assess whether to make such elections and would allow for entities formed after March 15 to be able to participate in the program through September 15, while maintaining revenue neutrality over a multi-year period.

The changes to the estimated payment deadlines, which are similar for both the PTET and NYC PTET, can be summarized as follows: the later the PTET election is made, the higher the estimated tax payment required to be made at the time of the election. For example, for a PTET election that is made on or before March 15 of the taxable year to be valid, the electing partnership or S corporation is required to make estimated tax payments in four equal installments of 25% of the required annual payment on March 15, June 15, September 15, and December 15 in the calendar year prior to the year in which the due date of the return falls. However, for a PTET election to be valid that is made on or after June 15 but before September 15, for example, the electing entity must make an estimated tax payment with its election that represents 50% of the required annual payment. In this second scenario, the electing entity would then make further payments of 25% on September 15 and 25% on December 15. Similarly, for a PTET election made on September 15 to be valid, the electing entity must make an estimated tax payment of 75% of the required annual payment with its election, and then must make a further payment of 25% on December 15.  Note that estimated payments based on either 100% of the prior year’s PTET or 90% of the tax shown due on the current year’s PTET return. Audit Division guidance has indicated that an entity that did not make the NY PTET election the prior year must use the current year’s tax to calculate estimates.

Clarify Taxpayer Notification and Protest Rights: Part M of the Budget proposes to clarify that the protest rights afforded to taxpayers are the same whether the taxpayer is informed via electronic or mailed communications. Specifically, this bill states that use of a Tax Department system to access taxpayer information does not confer protest rights before the DTA, unless the accessed information is a type of notice for which a hearing is specifically authorized by the Tax Law, but is delivered electronically pursuant to Tax Law § 35 (i.e., in lieu of physical mailing). Notices related to past-due fixed and final liabilities do not confer protest rights either.

This proposal comes on the heels of a recent Third Department case, which held that the Tax Department’s use of its Online Services System (OLS) to display information about outstanding balances due qualifies as a written notice that confers hearing rights before the DTA (Dumpling Cove, LLC v. Commissioner of Taxation and Finance, 230 A.D.3d 927 [3d Dept. 2024]). The court concluded that “websites” were not contemplated in existing statutory language because they did not exist when the statute was enacted.

The Dumpling Cove decision effectively allows taxpayers to renew the period to challenge a Tax Department determination simply by viewing their outstanding balance via the OLS system, contrary to the protest periods set forth in the existing statute. Thus, Part M seeks to clarify  which notices are and are not statutory notices that confer protest rights, while maintaining the purpose and function of the OLS system.

Enact a One-Time Inflation Refund: Part A of the Budget proposes a one-time inflation refund tax credit against personal income tax for certain taxpayers for the 2025 year. The credit would only be applicable to taxpayers who were full-year residents in 2023 and whose New York adjusted gross income in 2023 was $300,000 or less. The amount of the credit would be between $300 and $500 and would be treated as an overpayment of tax to be credited or refunded in 2025, without requiring a separate application.

Provide a Middle-Class Tax Cut and Extend the Temporary Personal Income Tax (PIT) High Income Surcharge for Five Years: Part B of the Proposed Budget would provide a tax cut for the middle class and would extend the temporary personal income tax high income surcharge for five more years. 

Tax rates for single taxpayers (and married-filing-separately taxpayers) with incomes up to $215,400 would be reduced. And tax rates for married-filing-jointly taxpayers with incomes up to $323,200 (and for heads of households with incomes up to $269,300) would be reduced. The reductions in tax rates would come in two phases: a first cut applied to 2025 and a second cut starting in 2026.

The personal income tax temporary high-income surcharge was phased out by Chapter 59 of the Laws of 2022, for tax years starting after 2027. If the proposed legislation is passed, the surcharge would be extended through 2032. This change would aim to address affordability issues in the state while “simultaneously maintaining progressivity in the State’s personal income tax structure.”

Improve the Tax Warrant Process: Part N of the Budget would authorize the Tax Department to file all tax warrants and warrant-related records at the Department of State (DOS) to effect liens and judgments against the real, personal, and other property of debtors, and would require the Tax Department to file a copy of any warrant and/or warrant-related records with the clerk of the county named in the warrant.

Under current law, the Tax Department is required to file a tax warrant at DOS and in the office of the clerk of each county where the tax debtor owns real property, which establishes the State’s lien priority. Delays in filing of warrants can mean loss of lien priority, and delays in the county filing of lien satisfactions and other warrant-related documents can cause problems for taxpayers who have paid their tax debts but whose records have not been updated.

Part N seeks to streamline the process for recording tax warrants and warrant-related records by providing that the Tax Department’s filing of warrants and warrant-related records at DOS will establish the State’s liens against the tax debtor’s real, personal, or other property located in New York. According to the Memorandum in Support of the Budget Bill, “[t]he Tax Department would be required to file copies of all warrants with the clerks of counties where the tax debtor owns real property, as it does now, but any delays in the processing of these filings would no longer prejudice the State.”

Increase the Article 9-A Estimated Tax Threshold: Part R of the Budget proposes to increase the threshold for mandatory first installment of estimated tax payments for corporate taxpayers, from $1,000 of tax to $5,000.

Under current law, corporation tax filers under Tax Law Article 9-A are required to make a mandatory first installment of estimated tax if their tax for a prior year exceeded $1,000 and to make further quarterly payments if they reasonably expect their tax for the current taxable year to exceed $1,000. This low threshold is especially burdensome for small businesses and it’s unclear how much the increase to $5,000 will change that burden.

Make Permanent the Estate Tax Three-Year Gift Addback Rule: Part T of the Budget would make permanent the Chapter 59 of the Laws of 2014 provision that requires gifts (a) deemed taxable for federal gift tax purposes, and (b) which are made within three years of an individual’s date of death, to be included in the decedent’s New York gross estate. The purpose of this requirement is to deter New Yorkers from transferring large amounts of their wealth shortly before their death in order to reduce the value of their taxable New York estate. The current law is due to sunset on January 1, 2026.

Eliminate NYC PIT for Certain Filers: Part W of the Budget aims to add to Section 1310 of the Tax Law to establish a credit against personal income tax for certain New York City residents. To qualify, a taxpayer must (a) claim at least one dependent on their federal return, (b) have an income below the relevant threshold level, (c) not receive a New York State or City PTET credit, (d) not have certain types of disqualified income greater than $10,000, and (e) not file as “married filing separately” on federal tax returns. If the taxpayer would otherwise qualify but have an income that exceeds the threshold level, the taxpayer would still be eligible for a portion of the credit according to a formula that is provided in the bill. This provision of the Budget is intended to address the affordability issues for New York City residents.

The Budget also contained a number of provisions creating, extending, or modifying tax credit programs:

Enhance the Empire State Child Credit for Three Years: Part C of the Budget would expand eligibility for the Empire State Child Credit and would increase credit amounts for the years 2025-2027 in an effort to combat child poverty. The refundable credit amounts would be as follows: $1,000 for each qualifying child under the age of 4 in 2025-2027 years, and $330 for each child between the age of 4 and 17 in 2025 but $500 for a child between the age of 4 and 17 in 2026-2027. The threshold amounts for the taxpayer parents are $110,000 for married-filing-jointly taxpayers, $75,000 for head-of-household taxpayers, and $55,000 for single or married-filing-separately taxpayers.

Extend and Double the Low-Income Housing Credits: The Budget’s Part D proposes an increase to the State Low-Income Housing Tax Credit (SLIHC) statewide allocation limit for each year from 2025-2029, doubling the existing annual increase from $15 million to $30 million for each year from 2025 to 2029. Additionally, refunded bonds would be able to be paired with SLIHC at a 9% rate, the same rate as certain federal low-income housing tax credits.

Amend the State Historic Property Tax Credits: Part E of the Budget would allow taxpayers to transfer state historic property tax credits to other taxpayers upon approval from the Office of Parks, Recreation, and Historic Preservation. It would also remove the geographic limitations for the location of affordable housing projects supported by the state historic property tax credit.

Waiting Period Restriction and Deduction Limitations for Institutional Real Estate Investors: Part F of the Budget would prohibit certain institutional investors (who own 10 or more homes and have $50 million or more in assets) from purchasing single- or two-family homes until the home has been on the market for at least 75 days, and would require the investor to identify themselves to the seller as an entity covered by the waiting period requirement. It would also prohibit such institutional investors from claiming depreciation and interest deductions regarding such homes. Nonprofits, land banks, and community land trusts are exempt from the waiting period.              

Establish the CATALIST NY Program: Part G of the Budget would establish a new economic development program in New York called the CATALIST Program, standing for Companies Attracting Talent to Advance Leading Innovations and Scale Technologies in New York. Under the program, “New York State incubators” could apply to the Department of Economic Development to be “CATALIST Incubators” so that they could then nominate small businesses in their incubator to be eligible to waive state personal income taxes for eight of the business’s newly hired employees.

Extend and Amend the Excelsior Jobs Program: Part H of the Budget would extend the existing excelsior jobs program for 10 years, from 2029 to 2039, and expand it to create enhanced benefits for semiconductor supply chain business. The Jobs Retention Tax Credit Program would also be expanded under the bill to support small businesses at risk of leaving New York or closing due to the economic impact of an event leading to an emergency declaration by the Governor.

Extend and Amend the Film Tax Credit: Part I of the Budget would enhance the Empire State Film Production Tax Credit and the Empire State Post-Production Tax Credit program to ensure that New York State remains competitive in attracting and retaining the film industry. One example of a proposed enhancement is the creation of the Empire State Independent Film Production Credit, which would allow qualified independent productions to access tax credits through an expedited process.

Make a Technical Change to the Newspaper and Broadcast Media Jobs Program: Part J of the Budget would correct a drafting error in the Economic Development Law (COM). Specifically, in defining the term “independently owned,” the previous year’s bill erroneously restricted the credit under the broadcast and media jobs program so that parent, subsidiary, and affiliate companies were all subject to one credit limitation. For example, if a parent corporation had three subsidiaries, the $300,000 credit cap under COM § 495(3) would apply for each subsidiary or affiliate, something that was not clear in the original legislation.

Amend the Digital Gaming Media Production Credit Program: Part K of the Budget would provide that any unused amount of the empire state digital gaming media production credit allocated for a given year is carried over and added to the aggregate amount of credits available for allocation by the Department of Economic Development in subsequent years.

Extend the New York City Musical and Theatrical Production Credit for Two Years: Part L of the Budget would extend the New York City musical and theatrical production credit for two years—through December 31, 2027—and increase the aggregate available credit under the program for the next two years by $100 million.

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