The federal 2025 Act, also known as the One Big Beautiful Bill Act (OBBBA), made significant changes to federal depreciation rules. It permanently reinstated 100% bonus depreciation for qualified property acquired after January 19, 2025, and increased the Section 179 expensing limit to $2.5 million with a $4 million phase-out threshold, both indexed for inflation. These changes were intended to provide substantial tax benefits at the federal level by accelerating cost recovery for capital investments.

Michigan’s Legislative Response and Decoupling:

In response to the OBBBA, Michigan enacted legislation to decouple from these new federal provisions for pass-through entities. For tax years beginning after December 31, 2024, Michigan does not conform to the OBBBA’s permanent 100% bonus depreciation under IRC § 168(k) or the increased Section 179 expensing limits. Instead, Michigan requires taxpayers to calculate depreciation and expensing as if the Internal Revenue Code (IRC) stood on December 31, 2024, before the OBBBA changes took effect.

For Individuals, S-Corporations and Partnerships, you can still claim bonus depreciation but only at the following rates:

• 40% in 2025
• 20% in 2026
• 0% in 2027 and beyond

Section 179 depreciation will be limited to $1,225,000 and the phase out threshold is $3,130,000.

Taxpayers will still receive Michigan depreciation deduction for the assets that will be capitalized, however it will be extended over a longer period of time.

This will also affect taxes dues on your Michigan Flow Through Entity tax return, if applicable.

Key Provisions and Compliance Requirements:

• Bonus Depreciation:
  • Michigan requires an addback of any federal bonus depreciation deduction taken under IRC § 168(k) for state tax purposes. Taxpayers must instead compute depreciation using Michigan’s tax depreciation rules.
• Section 179 Expensing:
  • Michigan conforms to Section 179 as it existed on December 31, 2024, meaning the increased expensing limits and expanded property definitions under the OBBBA are not recognized for Michigan tax purposes.
• Recordkeeping:
  • Taxpayers must maintain separate depreciation schedules for federal and Michigan purposes, track basis differences, and make appropriate adjustments on Michigan returns.

Transition Rules and Special Considerations:

There are no special transition rules or exceptions for property placed in service around the effective date. For Corporate Income Tax, Michigan has long required a net bonus depreciation adjustment for assets placed in service after December 31, 2007, and this continues under the new law. For individual income tax, Michigan generally conforms to federal rules as of January 1, 2025, unless the taxpayer opts for a different conformity date, but the OBBBA changes are not automatically included.

Impact on Michigan Taxpayers:

• Michigan taxpayers will not have a tax benefit from the enhanced federal deductions for bonus depreciation and Section 179 expensing under the OBBBA.
• Separate calculations and adjustments are required for Michigan tax returns, and the state’s tax base is protected from the significant reductions that would result from the expanded federal provisions.

Conclusion:

Michigan’s decoupling from the OBBBA’s bonus depreciation and Section 179 expensing provisions is effective for tax years beginning after December 31, 2024. Taxpayers must continue to use pre-2025 Act rules for Michigan tax purposes and ensure proper tracking and reporting of depreciation and expensing differences between federal and state returns.

If you need further details or have specific scenarios to address, please contact your Polk and Associates advisor.

Polk & Associates

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Polk and Associates is a member of the Michigan Association of Certified Public Accountants, and the American Institute of Certified Public Accountants. The firm participates in the AICPA Peer Review Program, and has always received the highest level of award for its audit practice and quality control.