Michigan’s 2025 Tax Decoupling: What it Means for You

By Jenny Minor, CPA, Senior Manager

In late 2025, Michigan enacted House Bill 4961 (Public Act 24), updating the state’s Internal Revenue Code (IRC) conformity date to January 1, 2025 and decoupling from several federal tax provisions enacted by the One Big Beautiful Bill Act (OBBBA). These changes have significant implications for how Michigan taxpayers — both businesses and individuals — calculate taxable income for state purposes.

What Changed — Key Decoupling Provisions

Michigan continues to use the federal tax code as the starting point for its state tax base, but decouples from select federal provisions to protect its revenue base. For tax years beginning after December 31, 2024, Michigan taxable income must be calculated as though the following federal provisions are not in effect or remain at pre-OBBBA rules:

Decoupled Provisions (Not Followed by Michigan)

• Qualified Production Property (QPP) 100% Depreciation — IRC §168(n):
  The federal 100% deduction for QPP (manufacturing/production real property) is not recognized in Michigan. State taxable income must be adjusted to remove this deduction and depreciate using the regular MACRS depreciation.
• Immediate R&E Expense Deduction — IRC §174A:
  Although OBBBA allows immediate expensing of domestic research and experimental costs, Michigan requires that these costs continue to be capitalized and amortized over five years.

Modified Federal Provisions (Applied at Pre-OBBBA Levels)

• Bonus Depreciation — IRC §168(k):
  Federal law reinstated 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.
  • C-Corporations – Michigan continues to disallow bonus depreciation for corporations and requires property to be depreciated under regular MACRS for state tax purposes.
  • Individuals and Flow-Through entities – What is new is that Individuals and Flow-Through entities (e.g. partnerships, S-corporations, LLCs, etc.), have to use the pre-2025 bonus phase-down schedule which reduces bonus depreciation percentage to 40% in 2025, 20% in 2026 and 0% in 2027 and future years.
• Business Interest Deduction — IRC §163(j):
  Michigan will apply 163(j) as it existed on December 31, 2024, requiring interest deduction limits to be based on Adjusted Taxable Income (ATI) including depreciation and amortization. This results in a more stringent limitation than the new federal rules that exclude depreciation/amortization from ATI.
• Section 179 Expensing:
  While federal law increased the expensing limit ($2.5M with $4M phaseout under OBBBA), Michigan retains the pre-OBBBA, lower limits for Section 179 deductions.

High-Level Comparison — Federal vs. Michigan

What This Means for Taxpayers – Increased Michigan Taxable Income

Decoupling generally increases Michigan taxable income relative to federal taxable income:

• 100% bonus depreciation accelerates deductions for federal tax but not for Michigan tax.
• R&E cannot be immediately deducted for Michigan — increasing taxable income.
• Section 179 limits are lower, potentially reducing upfront expense deductions.
• Interest deductibility is more limited under Michigan’s 163(j) calculation.

For many taxpayers — especially capital-intensive businesses — this could translate into higher state tax liabilities.

The Michigan Department of Treasury has issued a Notice indicating that Corporate CIT taxpayers may have underpayment penalties and interest waived as a result of the decoupling provisions for the 2025 tax year. There are specific requirements to qualify and instructions on how to draft a written request in the Notice. This is good news for Michigan corporate taxpayers that were not able to account for this increase in 2025 Michigan taxable income due to the timing of when Michigan released these decoupling provisions.

Planning Strategies

Here are proactive steps to manage the impact:

• Track Separate Schedules:
  Maintain separate Michigan and federal depreciation, Section 179, and Section 174/R&E schedules to ensure accurate state reporting and to help reconcile between federal and Michigan taxable income.
• Review Asset Depreciation and Timing:
  Since Michigan disallows 100% bonus depreciation, modeling out the benefit of applying Section 179 instead of bonus is beneficial. Also, timing asset acquisitions or placing property in service could influence Michigan tax outcomes differently than federal.
• Interest Deduction Optimization:
  Evaluate debt structures and interest expense planning under Michigan’s stricter ATI calculation.
• Coordinate Federal/State Returns:
  The divergence between federal and Michigan tax treatments emphasizes the importance of properly reconciling book/tax differences on state returns.

Key Takeaway

Michigan’s decoupling from major OBBBA provisions represents a material departure from favorable federal tax reforms. Businesses operating in Michigan should be aware that certain deductions yielding immediate federal benefits may not provide the same benefit for Michigan tax purposes.

Hungerford is Here to Help

If your business has significant capital expenditures, R&D activity, or interest expense, do not hesitate to reach out — we can help you model the impact of Michigan decoupling and align your tax planning accordingly.

Reach out to Hungerford today to learn exactly how these changes will affect your situation and to develop a personalized tax strategy that maximizes your benefits.

Disclaimer: This blog post is for informational purposes only and does not substitute for personalized advice. Please consult your tax professional for guidance tailored to your situation.