If you’ve been holding a 2025 New York return because of the Section 174 / 174A issue, the wait is finally over.
New York State has issued Notice N-26-1, “Reporting certain depreciation and research and experimental deductions for tax year 2025.” Here is the official notice: New York Notice N-26-1.
That’s the good news.
The less fun news: New York’s answer is still amortization.
At the federal level, the One Big Beautiful Bill Act added new IRC Section 174A. For tax years beginning after December 31, 2024, Section 174A generally allows taxpayers to immediately deduct domestic research or experimental expenditures. Taxpayers may also elect to capitalize and amortize those domestic R&E costs instead.
That federal change was a big deal. After several years of mandatory capitalization and amortization under Section 174, many taxpayers expected 2025 to be the year domestic R&E costs became currently deductible again.
New York, however, did not fully follow the federal change. The state decoupled from the new federal treatment, which created a practical filing problem: taxpayers and preparers knew New York was going to be different, but they needed form-level instructions to know exactly how to report the difference.
Notice N-26-1 is that missing piece.
For New York State purposes, taxpayers generally cannot simply follow the federal R&E deduction. New York requires an addback/subtraction system for R&E expenditures, including separate tracking for pre-2025 and post-2024 amounts.
Instead, the notice says taxpayers must add back the full amount of the federal deduction claimed for foreign and domestic R&E expenditures, then claim the New York subtraction allowed under New York’s own amortization rules.
For taxable years beginning after December 31, 2024, New York generally requires 60-month amortization, determined as if the taxpayer had made the amortization election under IRC Section 174A(c).
In plain English: federal immediate expensing may be back, but New York still wants the deduction spread over time.
For foreign and domestic R&E expenditures paid or incurred before January 1, 2025, New York generally requires taxpayers to continue applying the prior federal Section 174 amortization framework, as if Section 174 as in effect on January 1, 2022, still applied.
So, there are really two buckets to track:
Notice N-26-1 gives the actual reporting mechanics.
For individuals, partnerships, estates, and trusts, the modifications are reported on Form IT-225 using:
New York S corporations report the modifications on Form CT-34-SH and provide shareholders the information needed to complete their New York returns.
The important practical point for pass-through owners: partners, shareholders, and beneficiaries generally should not be recomputing the entity’s New York R&E amortization themselves. The entity should compute the modification and provide the information needed for the owner-level New York return.
If a 2025 New York return was already filed without the required modifications, Notice N-26-1 says the taxpayer must file an amended return.
If the return has not yet been filed, the modifications should be reported on the timely filed return.
The notice also provides penalty and interest relief for taxpayers that timely file or amend a 2025 return to report these modifications. If a taxpayer receives a bill or notice that includes penalties or interest tied to these H.R. 1 modifications, the taxpayer should respond with a written explanation that the underpayment relates to the federal law changes addressed by the notice.
The filing uncertainty is over. Taxpayers who were waiting on New York’s Section 174 / 174A reporting instructions can now move forward.
But the substantive answer is not taxpayer-friendly: federal immediate expensing may help on the federal return, while New York State generally requires the deduction to be spread over time.
For businesses with meaningful R&E expenditures, especially software developers, manufacturers, engineering firms, life sciences companies, and other innovation-heavy businesses, this may create a real New York cash-tax cost and a new state/federal tracking requirement.
If your business has 2025 R&E expenditures, pass-through owners, multi-state filings, or a New York return that was already filed before this guidance came out, MSC can help model the state impact and get the reporting right. Don’t hesitate to reach out today!
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client.
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