Michigan’s new tax rules take effect in 2025. Several break, or “decouple,” from federal tax benefits the One Big Beautiful Bill recently put in place.
For manufacturers doing business in Michigan, the decoupling isn’t only a matter of calculating your state taxes differently than your federal taxes. It’s the areas where the state departs from federal tax code — and the benefits and deductions those areas afford — that will impact you most: namely, bonus depreciation, R&E expenses, and interest expense limitations.
Because Michigan’s tax code doesn’t align with federal rules in these areas, your business might see higher taxable income on your state returns and, ultimately, higher state taxes than if the two codes were aligned.
Understanding and proactively addressing these state-level tax changes is crucial for smart investing, compliance, and maintaining your competitive edge as you plan for the future. Here’s a look at what’s changing — and how you can prepare.
What’s Changing?
Bonus Depreciation
- C-Corporations: Michigan continues to disallow all federal bonus depreciation. If you’re a C-corp, you must add back any federal bonus depreciation to your Michigan taxable income, reducing immediate deduction benefits.
- Pass-Throughs/Individuals: Bonus depreciation is reduced — 40% of cost is allowed in tax year 2025, 20% in 2026, and eliminated entirely for 2027 and beyond.
Example: If your S-corporation buys new machinery in 2025 and claims 100% bonus depreciation federally, Michigan only allows 40% — the rest must be depreciated over subsequent years, increasing state taxable income for the year of purchase.
Section 179 Expensing
- Michigan’s expensing limits remain lower than the federal level, and any expense exceeding the cap must be depreciated over time; not deducted all at once.
Qualified Production Property Depreciation
- Michigan will not recognize special federal depreciation for “qualified production property” (Section 168(n)). If you deduct this federally, it must be added back on your Michigan return and depreciated over time.
R&D (R&E) Expenses
- Immediate deductions for R&D are allowed under the federal provisions, but at the state level, expenses remain amortized according to the following schedules:
- 5 years for U.S. R&D
- 15 years for international R&D
Example: An innovation project that cost $100,000 in U.S. R&D expenses may now only allow a $20,000 deduction per year over five years for Michigan, affecting yearly cash flow.
Interest Deduction Limitations
- Deductions for business interest are capped at 30% of EBIT (Earnings Before Interest and Taxes), which is tighter than the federal rule. Consider the potential impact if your operation relies on financing for growth or modernization.
Why This Matters for Manufacturers
- Reduced Immediate Tax Benefits: Less up-front relief for capital investments and R&D, impacting your cash position and ROI calculations.
- Increased Compliance Burden: Separate Michigan vs. federal calculations require meticulous record-keeping — a challenge for lean teams.
- Impact on Growth and Jobs: Smaller and mid-sized manufacturers may find it harder to reinvest in technology, people, or processes — affecting your future competitiveness.
Practical Impacts & Real-World Examples
- Purchasing New Equipment: A Grand Rapids auto supplier that is a pass-through entity purchases $500,000 in robotics. Under previous rules, the full amount could be deducted federally and (often) at the state level. Now, only $200,000 (40%) is deductible for Michigan in 2025, so the supplier’s taxable state income increases by $300,000 that year.
- Launching R&D Initiatives: An electronics manufacturer invests in product development. Instead of a single large write-off, deductions are spread across several years, slowing cash recovery and potentially delaying future innovation investments.
- Financing Facilities or Equipment: Companies relying on loans could find a smaller portion of interest expense deductible for Michigan purposes, increasing state tax liability even as they try to modernize.
What Should Michigan Manufacturers Do?
- Re-Evaluate Capital Investments: Time major purchases and consider both federal and Michigan treatment of depreciation and expensing to optimize cash flow and minimize taxes.
- Forecast Cash Flow and Tax Liability: Use new state rules to project impacts on annual tax payments and company liquidity; adjust operating or investment plans accordingly.
- Upgrade Record-Keeping: Maintain clear, separate schedules for Michigan and federal depreciation, R&D, and interest expenses to ensure compliance.
- Update Tax Estimates and Plan Ahead: Review quarterly Michigan estimated tax payments—delayed deductions could cause underpayment penalties.
- Seek Expert Advice: Consult with a manufacturing-focused tax professional who knows Michigan’s unique approach and can offer tailored scenario planning.
- Communicate Impacts: Consider informing lawmakers, industry groups, and lenders about the broader effects on your business and the manufacturing sector — from job creation to regional competitiveness.
Effective Date
These changes, enacted through H.B. 4961, apply to tax years starting Jan. 1, 2025.
Questions?
Speak with a Rehmann advisor today for guidance tailored to your operations. Our manufacturing-focused tax experts can help you navigate Michigan’s tax changes and plan strategically for the future.