2025 State of Michigan Income Tax Law Changes
By Christine LaTour, fmd@fmdcpas.com
On October 7, 2025, Governor Gretchen Whitmer signed the State of Michigan Budget for the 2025 – 2026 fiscal year. As part of the Budget agreement with the legislature, the State of Michigan issued 2025-PA24. The Act officially decouples Michigan Income Tax Law from the Internal Revenue Code, effective December 31, 2024. This is the first time since the 1967 Michigan Tax Code was established that the State of Michigan will not follow the current federal income tax law.
Under the new tax law, various deductions allowed under the One Big Beautiful Bill Act (OBBBA) that was signed on July 4, 2025, will not be allowed in calculating Michigan income taxes. Other deductions defined in the OBBBA will also be allowed for State of Michigan Income Tax purposes. The deductions affected include:
Bonus Depreciation
100 % Bonus depreciation, allowed under the OBBBA, will not be allowed for State of Michigan Income Tax purposes for assets purchased on or after January 20, 2025. Instead, Michigan will only allow 40% Bonus depreciation for all 2025 asset purchases. Michigan's allowable bonus depreciation will continue to phase out over the following two years, meaning only 20% bonus depreciation is available for 2026 asset purchases, and 0% bonus depreciation for 2027 asset purchases.
Section 179 Expense
For 2025, the OBBBA allows businesses to deduct up to $2.5 million in asset purchases for federal income tax purposes. For State of Michigan Income Tax purposes, the expense deduction limitation will remain at the 2024 limit of $1,220,000. The spending limitation for 2024 of $3,050,000 will also remain in effect. Both of these limits will continue to be indexed for inflation per the Federal tax code in effect as of December 31, 2024.
Research and Development Expenses
Under the OBBBA, businesses will be eligible to immediately expense Research and Development Expenses for federal income tax purposes. Businesses will NOT be allowed to immediately expense these costs for State of Michigan income tax purposes. Instead, all Research and Development Expenses must continue to be capitalized and amortized over a 5-year period per the Federal tax code in effect as of December 31, 2024.
Interest Expense Limitation
Interest expense limitations required under the 2024 federal rules will continue to be applied for State of Michigan income tax purposes in 2025. These rules were amended by OBBBA to again allow an addback to taxable income for depreciation, amortization, and depletion as previously allowed in 2021. Michigan will not allow these addbacks, and therefore, 163j limitations will have to be calculated independently for both Federal and Michigan income tax.
Qualified TIPS
For 2025 through 2029, the State of Michigan will allow a deduction for Qualified TIPS deducted for federal income tax purposes as created under the OBBBA.
Qualified Over-time Wages
For 2025 through 2029, the State of Michigan will allow a deduction for Qualified Overtime wages deducted for federal income tax purposes as created under the OBBBA.
MI Flow Through Entity Tax
Taxpayers who have elected into the MI Flow Through Entity Tax regime should review their tax estimates for 2025, and potentially increase their Q4 estimate if they were planning on deducting the additional expenses listed above under the OBBBA for federal income tax purposes. These deductions must be added back before calculating the tax due under the MI Flow Through Entity Tax Regime, and could substantially increase the tax due for 2025.
Time to reassess
Corporations, sole proprietors, and owners of pass-through businesses will be affected by the above rule changes. Given all of these and other federal tax law changes, now is a good time to review your tax situation and update your tax planning strategies. Turn to us to help you take full advantage of the new — or reduced— tax breaks.