What Michigan’s OBBB Decoupling Means for Compliance & Finance Teams

Reshaping everything from the way businesses invest in research and experimentation (R&E) bonus depreciation and several provisions for individuals, few pieces of legislation have generated more waves in the world of financial policy than the One Big Beautiful Bill (OBBB). And given how sprawling the OBBB is, businesses and their financial and compliance teams have been hard at work trying to make sure that they are optimizing their businesses to both take advantage of these provisions and meet compliance expectations heading into 2026.

However, for businesses in Michigan, this recently became a bit more challenging. In early October, Gov. Gretchen Whitmer signed the fiscal year 2026 state budget, including House Bill 4961, into law. This legislation decouples Michigan from several provisions of the federal OBBB, including:

• 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)
• Increased limit on depreciable business assets deduction: IRC §179

The primary reason for decoupling was to protect state tax revenue and avoid a budget shortfall. It was estimated that conforming to OBBB would result in a loss of about $600 million in revenue in the first fiscal year, and over $2 billion through 2030. The decision was strongly protested by Michigan businesses and professional organizations, which said decoupling would amount to a permanent tax increase on Michigan businesses. Michigan’s house fiscal agency has estimated that decoupling will cost business owners $520 million in increased taxes in 2025.

What do these moves mean for Michigan businesses and their finance and compliance teams? And what things should businesses in other states considering decoupling do to prepare?

General effects on computing Michigan income tax

Most states use the Internal Revenue Code (IRC) as the basis for their individual and corporate income tax codes. When a state “decouples” from a specific federal tax law provision, this means the state has chosen to deviate from that specific provision when determining its state taxable income. Michigan is a “rolling conformity” state in that it automatically conforms to changes made to federal tax laws unless the state specifically passes legislation decoupling from the federal changes. The decoupling provisions passed affect corporate and pass-through entities in determining the income taxable in Michigan.

Michigan’s H.B. 4961 states that for tax years beginning after Dec. 31, 2024, taxpayers must calculate their taxable income for Michigan as if both of the following conditions applied:

• Sections 168(k), 168(n) and 174A of the IRC were not in effect.
• Sections 163(j), 174, and 179 of the IRC applied consistent with the provisions in effect Dec. 31, 2024.

As discussed below, there is a slight deviation between corporate and non-corporate taxpayers related to the bonus depreciation (Sec. 168(k)) rules.

How decoupling affects specific provisions

For business owners, one of the standout provisions from the OBBBA was the changes to bonus depreciation. OBBB allows 100% bonus depreciation at the federal level, which enables businesses to deduct the costs of certain assets immediately instead of over time for qualified property acquired and placed in service after Jan. 19, 2025. The Michigan’s decoupling creates different rules for bonus depreciation based on the type of taxpayer:

• For corporate taxpayers, the legislation does not allow any bonus depreciation. Accordingly, taxpayers will be required to add back any bonus depreciation claimed at the Federal level.
• Non-corporate taxpayers are eligible to claim bonus depreciation, but consistent with Federal rates prior to the passage of the OBBB: 40% in 2025, 20% in 2026 and 0% in 2027.

The OBBB also allows a 100% special deduction for certain qualified production property placed in service before Jan. 1, 2031, and is of particular interest for regions that are currently manufacturing centers or are looking to boost their manufacturing sectors in the future. Specific guidance is still needed for this deduction, but essentially, it will allow taxpayers to immediately depreciate buildings used to manufacture or process products in the United States. However, under Michigan’s bill, businesses will be required to add back any of the special depreciation deduction when calculating their Michigan taxable income.

Under the Tax Cuts and Jobs Act (TCJA) enacted during the first Trump Administration in 2017, businesses were required to capitalize domestic and foreign research and experimental expenses over five years for domestic expenses and 15 years for foreign. The OBBB allows for 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. The new decoupling legislation in Michigan requires taxpayers to continue to capitalize and amortize R&E expenses consistent with previous federal rules.

Under the TCJA, most businesses saw the amount of business interest expense limited to 30% of their adjusted taxable income (ATI) through changes to Section 163(j) of the IRC. The OBBB made permanent a modified calculation of ATI to include an addback of depreciation, amortization or depletion — thus likely raising the amount of deductible interest for most businesses — for taxable years beginning after Dec. 31, 2024. Because H.B. 4961 states that Section 163(j) must be applied as it was in effect Dec. 31, 2024, Michigan businesses must include depreciation and amortization deductions when calculating ATI. This will result in a lower ATI and may result in a lower business interest deduction.

The OBBB increased the limit for expensing certain depreciable business assets. Under the OBBB, the limit was increased to $2.5 million, up from $1.22 million in 2024, for property placed in service in taxable years beginning after Dec. 31, 2024. However, Michigan law will not follow this increase and will allow expensing only up to the 2024 limit.

Start planning now

Despite decoupling from a few federal provisions, these changes may significantly impact year-end tax planning and any estimated payments due in the next two months. Proper planning can help alleviate some of the burden and help avoid tax surprises and underpayment penalties in the spring.

Read the full article published by Corporate Compliance Insights.