Michigan’s 2025 Tax Overhaul: What It Means for You
Enacted October 7, 2025, Michigan House Bill 4961 brings one of the most comprehensive updates to the state’s tax laws in years. The legislation modernizes Michigan’s conformity with the federal Internal Revenue Code (IRC), while permanently decoupling from several elements of the federal One Big Beautiful Bill Act (OBBBA). These changes will significantly affect both corporate and individual taxpayers beginning in tax year 2025.
Updated Federal IRC Conformity
Michigan has advanced its IRC conformity date from January 1, 2018 to January 1, 2025. This alignment allows Michigan to follow more current federal rules, but with notable exceptions. Taxpayers can still elect to apply the version of the IRC in effect for their own tax year, but must account for areas where the state has explicitly opted out.
Permanent Decoupling from OBBBA Provisions
Beginning with tax years starting after December 31, 2024, Michigan will calculate state taxable income as if several major OBBBA provisions were never enacted. This means:
Research & Experimental (R&E) costs must continue to be capitalized and amortized, not immediately expensed under IRC § 174A.
Bonus depreciation under IRC § 168(k) and the special depreciation allowance for qualified production property under IRC § 168(n) will not apply in Michigan.
Interest expense deductions will follow pre-OBBBA limits under IRC § 163(j).
Increased expensing thresholds under IRC § 179 are not adopted by the state.
These decouplings are permanent, creating a lasting divergence between Michigan and federal tax treatment for these key provisions.
Business Implications
Companies with substantial research, capital investment, or debt financing will experience higher Michigan taxable income compared to federal returns. Businesses should:
Review fixed-asset schedules and depreciation methods to ensure conformity with state rules.
Re-evaluate capitalization of R&E costs and limitations on interest deductions.
Adjust 2025 estimated tax payments to reflect potential increases in state taxable income.
For flow-through entities, assess how these changes affect composite returns and owner liabilities.
Individual Tax Relief
While business taxpayers may see higher liabilities, individuals will receive targeted relief. For tax years 2026 through 2028, taxpayers can deduct qualified tips and overtime compensation earned for services performed in Michigan from their Michigan adjusted gross income.
The legislation also updates references within the state’s retirement income exclusion system to align with the January 1, 2025 IRC conformity date, potentially affecting eligibility and calculation for different birth-year categories.
Recommended Next Steps
Businesses should begin preparing now by updating their tax models and forecasts to incorporate Michigan’s permanent decoupling rules. It is important to coordinate with tax advisors to ensure research and experimental costs, as well as fixed-asset reporting, comply with the new requirements. Companies should also communicate potential tax impacts to shareholders and investors to manage expectations around future liabilities.
Individual taxpayers should take time to understand how these changes may affect their Michigan returns. Beginning in 2026, they should track tip and overtime income carefully to ensure eligibility for the new deductions and review their retirement income exclusions in light of the updated IRC references. Adjusting Michigan withholding or estimated tax payments in advance may help avoid surprises when filing future returns.
How CSH Can Help
Navigating Michigan’s new tax framework requires strategic planning and a deep understanding of how these changes interact with federal law. CSH’s tax advisors can help you analyze the impact of House Bill 4961 on your business or personal tax situation, identify new compliance requirements, and adjust your tax strategy for 2025 and beyond.
If you have questions about how these updates affect your organization, or want to develop a proactive plan, contact your CSH advisor or reach out to our State and Local Tax team today.
