Michigan Governor Gretchen Whitmer signed House Bill 4961 into law on Oct. 7, 2025, decoupling the state from the five provisions of the federal One Big Beautiful Bill Act.
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They are listed below:
- Immediate deduction of research and experimental expenses – IRC §174A;
- Special depreciation of certain production property – IRC §168(n);
- Bonus depreciation allowing for deduction of 100% of the cost of equipment in the first year – IRC §168(k);
- Business interest deduction increase – IRC §163(j); and
- Increased limit on depreciable business assets deduction – IRC §179.
Michigan’s main incentive for decoupling was to increase state revenue, as Michigan heavily relies on state income taxes as its
State decoupling
For most states, the Internal Revenue Code is used as the basis for their state’s individual and corporate income tax codes, though it will depend on each state’s conformity status to determine whether it will adopt the newly enacted federal tax law.
Generally, states will have “rolling conformity” or “static conformity.” Rolling conformity states automatically adopt federal tax law changes as they occur, while static conformity states tend to adopt the IRC as it existed on a specific date. Additionally, states may choose to “decouple” from a particular federal tax provision. When a state decouples from a specific federal tax law provision, the state has essentially chosen to ignore that specific provision when determining its state taxable income.
A state decoupling from any federal tax provision will only affect that state’s own income tax liability on its taxpayers. It will not change the availability of any federal provisions on a taxpayer’s federal tax return. A taxpayer will still calculate their federal taxable income per current federal tax law.
Michigan’s decoupling provision effects
The primary effect of Michigan amending its state tax law relates to how individuals and corporations calculate their state income tax liability.
Michigan’s H.B. 4961 states that for tax years beginning after Dec. 31, 2024, corporate taxable income must be calculated as if both of the following conditions applied:
- Sections 1,168(k), 68(n) and 174A of the IRC were not in effect.
- Sections 163(j), 174, and 179 of the IRC applied as those provisions were in effect on Dec. 31, 2024.
For noncorporate taxpayers, the decoupling is slightly different in that Sec. 168(k) (bonus depreciation) will apply based on the federal provision in effect on Dec. 31, 2024. Accordingly, noncorporate taxpayers will continue to conform to the previous limits on bonus depreciation.
Bonus depreciation
- Federal effect: OBBB allows 100% bonus depreciation for qualified property acquired and placed in service after Jan. 19, 2025.
- Michigan effect: Michigan will continue to couple with the federal 100% bonus depreciation rules previously in effect. Accordingly, businesses will continue to track depreciation separately for Michigan purposes.
Special deduction for qualified production property
- Federal effect: OBBB allows a 100% special deduction for certain qualified production property placed in service before Jan. 1, 2031.
- Michigan effect: Michigan taxpayers will be required to adjust their taxable income to remove any effect of a taken Section 168(n) deduction. The regular MACRS rules must be applied for state income purposes.
Immediate deduction of research and experimental expenses
- Federal effect: OBBB allows an immediate deduction on any domestic R&E expenditures that are paid or incurred by a taxpayer during the taxable year beginning after Dec. 31, 2024.
- Michigan effect: Michigan law requires taxable income to be calculated as if Section 174A were not in effect. This will result in Michigan businesses being required to capitalize and amortize R&E expenses for state income purposes.
Business interest deduction increase
- Federal effect: OBBB made permanent the modified calculation of adjusted taxable income without regard to deductions allowable for depreciation, amortization, or depletion for taxable years beginning after December 31, 2024.
- Michigan effect: Because H.B. 4961 states that Section 163(j) must be applied as it was in effect on December 31, 2024, Michigan taxpayers must include depreciation and amortization deductions when calculating ATI. This will result in a lower ATI and potentially cause a lower business interest deduction.
Increased limit on depreciable business assets deduction
- Federal effect: OBBB increased the limit for expensing certain depreciable business assets (Sec. 179) from $1.22 million to $2.5 million for property placed in service in taxable years beginning after Dec. 31, 2024.
- Michigan effect: Michigan law ignores this increase and will only allow the 2024 limit of $1 million. Michigan taxpayers will need to recalculate depreciation if reported Sec. 179 depreciation exceeds the previous limits.
While lawmakers and business owners may disagree on the implications of decoupling, it is clear that proper planning is essential to determine Michigan tax liabilities.
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