Michigan Decoupled From the Federal Tax Code in 2025

For most of the last sixty years, a Michigan return started from the federal numbers and stayed close to them. Starting with tax year 2025, it doesn't. If you own a business, rental property, or a share of a partnership or S corporation, your Michigan return now needs figures the federal one does not have.

What happened

The federal One Big Beautiful Bill Act, signed July 4, 2025, rewrote several business deductions: it restored 100% bonus depreciation, loosened the business interest limit, allowed domestic research costs to be expensed at once, and raised the Section 179 limit. Michigan's income tax normally adopts the federal code as it stands, so those changes would have flowed straight into the state return and cost the state revenue.

Instead, Public Act 24 of 2025, signed October 7, 2025, moved Michigan's conformity date to January 1, 2025 and decoupled from the new provisions. For Michigan purposes, the old rules still apply. Treasury laid out the mechanics in a notice dated February 25, 2026 (opens in new tab), which is the source for everything on this page.

The four deductions Michigan no longer follows

Applies to the individual income tax and the flow-through entity tax. The Corporate Income Tax was already fully decoupled from bonus depreciation.

What it looks like on a return

Treasury's own example. A business buys a $10,000 asset in 2025 and deducts all of it on the federal return. Under the rule Michigan still uses, the first-year deduction would have been 40% bonus depreciation ($4,000) plus $600 of regular depreciation, $4,600 in total. The Michigan return therefore carries an addition of $5,400 in 2025. In each later year the owner subtracts the depreciation the old schedule would have allowed, until the two returns catch up.

Multiply that by every asset placed in service after 2024, add a separate Michigan carryover for business interest, and keep a second depreciation schedule running for years. For 2025 returns the additions and subtractions are reported on miscellaneous lines. That is the practical problem: tax software fills in the federal side automatically and the Michigan side only if someone tells it to.

Who is affected

• Anyone who bought equipment, vehicles, or other depreciable property in 2025 or later and used bonus depreciation or Section 179 federally. This includes landlords.
• Partners and S corporation shareholders. The adjustments flow through to your Michigan return, and to the flow-through entity tax if the entity elected in.
• Businesses with significant interest expense that hit the federal limit. The Michigan limit is now computed differently and carries forward on its own.
• Anyone with research and development costs. Expensed federally, still spread for Michigan.

Who is not: a wage earner with no business or rental income. The state rate is still a flat 4.25% for 2025 and 2026, and the personal exemption for 2025 is $5,800. Nothing here touches that return.

Two related changes from the same law

• Tips and overtime. The federal deductions for qualified tips and qualified overtime began in 2025. Michigan versions exist, but only for tax years 2026 through 2028; there is no Michigan deduction for 2025. Nonresidents may deduct only the part earned for work in Michigan. Source: Treasury notice, January 6, 2026 (opens in new tab).
• The flow-through entity election. The election lets a partnership or S corporation pay Michigan tax at the entity level so owners can deduct it federally. Its value depends on the federal cap on state tax deductions, which the 2025 federal law moved. The election is binding for three years, so Treasury allowed first-year electors to unwind (opens in new tab) 2025 payments made before the federal change. From 2025 returns onward, owners must attach Forms 6072 and 6074 to claim the credit or it is denied.

What to do about it

• Keep two fixed-asset schedules from 2025 on, one federal and one Michigan. The gap does not close for years.
• Check the 2025 return if it was filed with software and you bought anything depreciable. A missing addition is a Treasury letter waiting to happen.
• Re-run the flow-through entity decision before the September 30 election deadline instead of repeating last year's answer.
• Ask any CPA you are considering what a Michigan decoupling adjustment is. If the answer is vague, keep looking.

This is the single strongest reason to use a Michigan CPA rather than software for a business return. The state and federal returns now legitimately disagree, and the disagreement has to be tracked by hand.

Frequently asked questions

Informational only, not tax advice. Rules and figures are those published by Michigan Treasury as of September 2026 and change; verify against the notices linked above before acting.