Michigan Breaks From Federal Tax Rules and Businesses Pay the Price

Michigan businesses expected federal tax relief to flow straight through to their state returns. That assumption just blew up. Governor Gretchen Whitmer signed a budget bill that cuts Michigan off from several major federal tax benefits starting in 2025. The result is a quiet but meaningful state tax increase that companies now need to plan around.

What Michigan Changed in the Tax Code

Michigan normally follows federal tax changes automatically through rolling conformity. This time, lawmakers hit pause.

House Bill 4961 selectively decouples Michigan from several provisions in the One Big Beautiful Bill for tax years beginning after December 31, 2024. Businesses must now compute Michigan taxable income as if those federal provisions never existed.

State fiscal estimates show the move raises hundreds of millions of dollars in additional tax revenue in 2025, with projections ranging roughly from 500 to 700 million dollars depending on the scoring method. Longer term estimates run into the billions by the end of the decade.

Which Federal Tax Benefits No Longer Apply in Michigan

The biggest hit comes from bonus depreciation. Federally, businesses can immediately deduct 100 percent of qualifying equipment placed in service after January 19, 2025. Michigan does not allow that for corporations, requiring a full addback on the state return.

Pass through entities get limited relief that phases out quickly. They may deduct 40 percent in 2025, 20 percent in 2026, and nothing after that.

Michigan also decouples from the new 100 percent special deduction for certain production property under IRC §168(n). Manufacturing buildings and similar assets cannot be immediately written off for Michigan purposes, even if they are federally.

On the research side, Michigan ignores the new federal §174A full expensing option. Instead, the state continues to require capitalization and amortization of research and experimental costs under §174 as it existed on December 31, 2024, even when taxpayers expense those costs federally.

Business interest deductions tighten as well because Michigan continues using older adjusted taxable income rules. Section 179 expensing is capped at pre-OBBB levels and does not adopt the higher federal thresholds.

Why the State Did This

From Lansing’s perspective, this is a budget protection move. Full conformity would have created a large revenue gap at a time when lawmakers were finalizing long term spending commitments.

From a business standpoint, it functions like a stealth tax increase. Investments that look attractive on a federal return may produce far less benefit once Michigan tax is layered in.

It also adds complexity. Companies now need parallel federal and Michigan calculations for depreciation, research costs, and interest expense.

What Businesses and CPAs Should Do Now

This change directly affects estimated payments, provisions, and year end planning. Businesses that assume federal deductions carry through to Michigan risk underpaying and triggering penalties.

Tax teams should start modeling Michigan impacts separately, especially for capital expenditures, R and D spending, and entity structure decisions. The federal state gap is no longer theoretical. It shows up in cash flow.

There are also meaningful differences between corporate filers and pass through entities that need careful tracking. Additional guidance is expected, particularly around production property and transition mechanics.

Bigger Picture for Multistate Businesses

Michigan is not alone in selectively decoupling from federal tax law. As federal policy continues to shift, more states may pick and choose what they follow.

For multistate operators, conformity can no longer be assumed. Each state now deserves its own review before major tax planning decisions are made.

Conclusion
Michigan’s decoupling turns federal tax relief into a state level tax increase for many businesses. The real risk now is inaction. Companies that do not adjust planning and compliance will feel the impact in higher taxes and avoidable penalties. The smart move is to treat Michigan as its own tax system and plan accordingly well before 2025 filings begin.