At the tail end of the 2025 – 2026 legislative session, Michigan’s Legislature moved swiftly to enact House Bill (HB) 4961, which decouples from five federal tax benefits enacted earlier this year under the federal One Big Beautiful Bill Act (OBBBA).
Given that many of the OBBBA’s provisions – particularly those expanding tax deductions or credits – will reduce taxable income and state revenue, Michigan is one of many states assessing the impact of the OBBBA’s changes. Earlier this year, the Michigan Department of Treasury estimated that following the OBBBA’s changes to Internal Revenue Code (IRC) Sections 174A, 168(k), 168(n), 179, and 163(j), state revenues would be reduced by approximately $540 million in Fiscal Year (FY) 2025 – 2026 and by more than $2 billion through 2030. While the state’s decision to decouple comes as no surprise for businesses operating in Michigan, this move eliminates – or significantly reduces – the state-level benefit of the following five federal tax changes made in the OBBBA.
Key decoupling provisions
IRC § 174A: Domestic R&D amortization
OBBBA: Under the OBBBA, Section 174A allows full expensing of domestic research or experimental expenditures incurred in taxable years beginning after December 31, 2024. The OBBBA also permits taxpayers to alternatively elect to amortize such expenses over five years.
Michigan: For tax years beginning after December 31, 2024, HB 4961 requires taxpayers to compute their Michigan income as if Section 174A were not in effect. This means that Michigan taxpayers will not receive a state-level benefit from the new research and development (R&D) amortization option. Research intensive businesses will also have higher taxable income.
IRC § 168(k): Federal bonus depreciation
OBBBA: The OBBBA permanently restores 100% bonus depreciation at the federal level for qualified property acquired after January 19, 2025. Prior to the OBBBA, bonus depreciation phasedown rules enacted under the Tax Cuts and Jobs Act of 2017 would have reduced bonus depreciation to 60% for property placed in service in 2024 and eliminated it entirely by 2027.
Michigan: Michigan has historically instructed taxpayers to compute their Michigan income as if Section 168(k) was not in effect, meaning that under Michigan law, any bonus depreciation claimed on a taxpayer’s federal return was not allowed for corporate income tax purposes. Under HB 4961, Michigan continues to decouple from Section 168(k).
IRC § 168(n): Disaster-area bonus depreciation
OBBBA: The OBBBA also introduces a new deduction under Section 168(n) for investments in qualified domestic factory property.
Michigan: HB 4961 does not recognize the new deduction under Section 168(n). Property that qualifies for bonus depreciation federally must be depreciated under regular Modified Accelerated Cost Recovery System rules for Michigan, leading to slower cost recovery and higher near-term taxable income.
IRC § 179: Expensing for small business property
OBBBA: The OBBBA enhances Section 179, which permits immediate expensing of certain equipment and software purchases (subject to federal dollar limits), by significantly increasing the expensing limit and phase-out threshold beginning in tax years starting after December 31, 2024.
Michigan: HB 4961 freezes conformity to the 2024 limits, ignoring future federal increases. Small- and mid-sized businesses will lose the benefit of higher expensing thresholds that Congress may adopt later, narrowing the value of this investment incentive.
IRC § 163(j): Business interest expense limitation
OBBBA: For taxable years beginning after December 31, 2024, the OBBBA reinstates the earnings before interest, taxes, depreciation, and amortization-based calculation for business interest expense limitations by modifying the definition of adjusted taxable income (ATI) to be calculated permanently without regard to the allowance for depreciation, amortization, or depletion. This change increases the amount of ATI to which the limitation applies, leading to a larger deductible interest expense at the federal level.
Michigan: Under HB 4961, Michigan will follow Section 163(j) as it existed on December 31, 2024, and will not automatically adopt any later federal modifications. This means that Michigan taxpayers must compute ATI to include depreciation and amortization deductions. As a result, the amount of ATI to which the limitation applies is reduced, leading to a smaller deductible interest expense. Businesses also won’t benefit from future federal expansions of interest deductibility.
Notably, while Michigan’s decision to decouple from the OBBBA’s tax provisions reduces the benefits of the federal tax cuts for Michigan businesses, HB 4961 does not eliminate the refundable R&D tax credit that was enacted by the Michigan Legislature earlier this year. This credit remains available to qualifying corporations and qualifying flow-through entities for tax years beginning on and after January 1, 2025. The credit may be claimed against the state’s corporate income tax (for corporations) and the withholding tax (for flow-through entities).
Takeaways
While Michigan may be one of the first states to legislatively decouple from the OBBBA’s tax changes, it will not be the last. In Illinois, for example, the Department of Revenue has estimated that General Funds revenue collections will be more than $830 million below the amount estimated at the time the FY 2026 budget was passed because of the OBBBA. Accordingly, the Illinois Governor’s Office of Management and Budget has recommended the general assembly take immediate action to decouple from certain federal tax provisions to avoid some of the changes included in the OBBBA, including the new federal bonus depreciation rules. The Governor’s Office has also recommended updating the Illinois Income Tax Act to reflect the federal change from Global Intangible Low-Taxed Income to Net Controlled Foreign Corporation Tested Income. The Illinois General Assembly is expected to consider the governor’s recommendations during its six-day fall veto session, which runs from October 14 – 16 and October 28 – 30.
