Michigan has de-coupled from federal tax legislation affecting millions of Michigan taxpayers. Michigan typically follows federal tax laws which makes reporting taxes in Michigan rather easy. For example, you can take the same deduction for gambling losses in Michigan as you can on Schedule A of your federal return. Under H.B. 4961 (passed in October 2025) Michigan tax law separated from several provisions of federal tax law and this will affect corporations, pass-through entities, and individual tax payers.
What specific code sections or items are changed under the new Michigan Revenue Code? Michigan is now disallowing the 100% bonus depreciation expense that is allowed under the federal code. Michigan is using the Tax Cuts and Jobs Act (TCJA) tax law which allows a reduced bonus deduction. The amount you can claim for bonus depreciation in Michigan is now:
- 40% in 2025
- 20% in 2026
- 0% in 2027
The good news is that Michigan does allow Section 179 expensing of new assets, however H.B. 4961 did modify Michigan’s rules for Section 179. Michigan now has a capital expenditure limit for qualified property of $3,050,000 and the deductible expense is $1,220,000. This is a significant reduction compared to the federal deduction of $2,500,000.
Michigan has also altered the rules regarding Research and Development (R&D or sometimes referred to as R&E) costs. The federal code under the One Big Beautiful Bill Act (OBBBA) was allowing all R&D expenses to be deducted in their entirety. Michigan requires capitalization and amortization of those costs.
The final major category where Michigan de-coupled from the federal code is on business interest. The limitation for both federal and state is 30% of earnings, but the demarcation comes in the subject. Under federal rules the 30% limit is on EBITDA, while under Michigan code the 30% limit is on EBIT, removing the addback for both depreciation and amortization. This could certainly limit some businesses in their interest deduction, especially businesses that are capital intensive. The good news for business interest is the Michigan still follows the small business exception which means for businesses that average less than $31 million in gross receipts over a three-year period, this provision does not apply.
This is a rather big split from federal rules for Michigan individuals and businesses. Please consult with your tax professional to ensure proper reporting and planning around these new Michigan tax laws. Although the Treasury does not plan to introduce any new forms for tax year 2025 in regard to these changes, there could be new forms in place for 2026. If you own a pass-through entity, ensure clear and concise reporting on your Form K-1 to properly report any adjustment on your MI Form 1040.