On Oct.7, 2025, Michigan passed a new tax law that breaks away — or “decouples” — from several parts of recent federal tax changes made under the One Big Beautiful Bill Act (OBBBA). This means Michigan is choosing not to follow certain federal tax rules, which will affect how both individuals and businesses calculate their state taxes starting in 2025.
The law,H.B. 4961,also updates Michigan’sInternal Revenue Code (IRC) conformity date, the point in time a state aligns its tax code with thefederal tax rules,to Jan. 1, 2025— exceptin relation tothespecific OBBBA provisionsthe state opted to exclude,like bonus depreciation and R&D expensing.(More on that below.)This shift is important to know because, for those excluded items,taxpayers willuse the older version of the federal tax code (from Dec.31, 2024) when preparingtheirMichigan return.
Ifyou’reacorporation, pass-through entity, or individual taxpayer, these changeswillimpactyour deductions, taxable income, and planning strategies. Here,we’llbreak down what you need to know to stay ahead of the curve for the upcoming tax season.
How Does Michigan Handle Bonus Depreciation After OBBB?
Michigan’s new legislation creates different rules for bonus depreciation depending on the type of taxpayeryou are:
- ForCorporations:Ifyou’reaC-corporation, Michigandoesn’tallow the bonus depreciation from the federal OBBB. That meansyou’llneed to add back any bonus depreciation you claimed at the federal level, which could increase yourstatetaxes.
- For Individuals, S-corporations&Partnerships:Ifyou’rean individual or part of a flow-through entity (like an LLC), you can still claim bonus depreciation, but only at reduced rates:
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- 40% in 2025
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- 20% in 2026
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- 0% in 2027
Bottom line:Plan ahead, especially ifyou’rebuying new equipment or assets.
What Are Michigan’s Rules for Section 179 Expensing?
Michigan is sticking to its own, lower limits for Section 179expensing(the rule that lets you deduct the cost ofdepreciablebusiness assets like equipment). If you use the higher federal limits,you’llneed toadjust forMichigan and spread thosecosts outover time instead of deducting them all at once.
How Are Research and Experimental (R&E) Expenses Treated?
Michigan is also moving away from the federal OBBB rule that lets youimmediatelydeduct research and development (R&E) costs. Instead,you’llneed to spread those costs out.
That means, on your Michigan tax returns, your business must adhere to specific amortization periods (andmaintainseparate calculations for Michigan tax compliance purposes). The amortization schedule is:
- Five years for domestic R&E expenses
- Fifteen years for foreign R&E expenses
What Is the Business Interest Deduction Limitation in Michigan?
If you deduct business interest, Michigan’s stricter rules might mean a smaller deduction. The state limits deductions to 30% of earnings before interest and taxes (EBIT), which is less generous than the federal rule (based on EBITDA).
Also, if your business is part of a group, each memberof that unitary business grouphas tocalculate this limit separately for Michigan,which may result in a lower deductible amount compared to federal rules.
Does Michigan Conform to the Qualified Production Property Deduction?
No, Michigan does not conform to the federal special depreciation rules for qualified production property under Section 168(n). If you claim this special depreciation on your federal return, you must add it back when calculating your Michigan taxable income.
How to Prepare for These Michigan Tax Changes
These law changes add complexity, as a federal tax strategy may not produce the same results at the state level.Michigan’s decision to reject certain OBBB provisions meansyoumay owe state taxes even whenyouhave no federal tax liability.
To navigate thisnew environment, proactive planning is essential.
- Review Your Asset Strategy:Re-evaluate plans foracquiringbusiness assets, considering the phased-out bonus depreciation and lower Section 179 limits.
- Maintain Separate Records:Keep detailed, separatetaxrecordsthat clearly distinguish between Michigan and federal calculations. This is keyfor depreciation, R&E expenses, and interest deductions specific to Michigan tax law.
- Adjust Estimated Payments:Your required quarterly estimated tax payments may be affected. No guidance on relief for third-quarter payments has been issued, so prepare for potential adjustments.
- Consult a Tax Professional:Work with a qualified tax advisor to ensure compliance, understand long-term implications, andidentifyopportunities to mitigate your tax burden.
Frequently Asked Questions
Q: Whendothese new Michigan tax changes take effect?
A: These changes are effective for tax years beginning after December 31, 2024. This means they willimpactyour 2025 tax filing.
Q: Can I still claim any bonus depreciation in Michigan?
A: Only individual and flow-through entity (FTE) taxpayers can claim bonus depreciation, but at a reduced rate of 40% in 2025 and 20% in 2026. Corporate taxpayers cannot claim any bonus depreciation.
Q:Will this make my taxes harder to prepare?
Very likely. Michigan’s new tax rules— and the need for separate calculations and adjustments —add a layer of complexity, especially ifyou’verelied on federal strategies in the past.But with some planning and guidance, you can navigate these changes and avoid surprisescometax season.
Moving Forward with Confidence
Michiganhaschosen a different path from federal tax law, but with the right preparation,youcan navigate these changes successfully.Take actionnow to understand your obligations, implement the necessary tracking systems, andprotect your financial position.
TodeterminehowMichigan’s recent tax codeupdates will affect youor your organization— andtodevelop a strategy that minimizes your tax exposure in 2025 —contact aèƵ advisortoday.