Preliminary information for the Wholesale Marihuana Tax is now available.
Issued: February 25, 2026
Michigan Public Act 24 of 2025 (“PA 24”), signed into law on October 7, 2025, updated Michigan’s conformity to the Internal Revenue Code (IRC) and “decoupled” from several IRC provisions enacted by the federal One Big Beautiful Bill Act (P.L. 119-21, OB3). These amendments require certain taxpayers to adjust their income reported under the Individual Income Tax (IIT, Part 1 of the Michigan Income Tax Act (MITA)), Corporate Income Tax (CIT, Part 2 of the MITA), or elective flow-through entity tax (FTE tax, Part 4 of the MITA), generally starting with tax year 2025.
For Michigan income taxes, the computation of tax generally begins with amounts determined from the federal return (either adjusted gross income (AGI), federal taxable income (FTI), or, for FTE taxpayers, a modified version of FTI) based on the provisions of the IRC. Because Michigan law generally adopts the IRC currently in effect for the tax year, changes in the IRC to FTI or AGI automatically flow to the state return. To prevent that from occurring, Michigan may choose not to automatically adopt those changes. This is done through statutory amendments to the MITA, which is commonly referred to as “decoupling.”
PA 24 decoupled from several changes to the IRC made by the OB3. Decoupling generally requires taxpayers to recalculate FTI and AGI through special decoupling adjustments reported on the Michigan return. The provisions of the OB3 and the related decoupling adjustments due to PA 24 are discussed below. Note that this notice generally focuses on decoupling adjustments related to the 2025 tax year, as additional guidance for future tax years is forthcoming. Consequently, this notice is not intended to be a comprehensive summary of all decoupling adjustments.
IRC 163(j) imposes a limitation on the deduction of business interest expense (the business interest expenses limitation—BIEL) and allows any unused expense to be carried forward indefinitely. In general, the deduction is limited to the sum of the following amounts for the taxable year: (1) business interest income, (2) 30% of adjusted taxable income (ATI), and (3) floor plan financing interest.
Effective for tax years beginning after December 31, 2024, the OB3 makes changes to the calculation of the BIEL that will generally increase the amount of deductible business interest for taxpayers. Specifically, the OB3 allows taxpayers to add depreciation and amortization to the ATI calculation, effectively increasing the BIEL. Similarly, certain trailers and campers are included in the calculation of floor plan financing interest, increasing the BIEL for certain taxpayers.
For tax years beginning after December 31, 2024, PA 24 requires FTI and AGI to be calculated for Michigan purposes as if section 163(j) applied as that provision was in effect on December 31, 2024. Taxpayers must therefore recalculate their BIEL without adding depreciation and amortization to ATI and without including floor plan financing interest on trailers or campers. In general, this will reduce the IRC 163(j) business interest expense deduction for Michigan purposes and consequently increase the FTI/AGI used to compute Michigan tax.
Taxpayers will report the difference between their federally claimed business interest expense deduction and their recalculated Michigan deduction as either an addition or subtraction to their return, depending on the facts and circumstances. In addition, taxpayers will need to calculate and track their Michigan unused interest carryover and its use in future tax years, in accordance with the IRC and its regulations.
IRC 168(k) allows taxpayers to deduct an accelerated percentage of the cost of eligible property in the year it is placed in service. Prior to the OB3, this deduction was scheduled to phase out beginning in 2023, with no additional deduction permitted beginning in tax year 2027.
The OB3 permanently extends the bonus depreciation deduction, returning it to 100% of the cost of qualified property. Many of the restrictions on the date the property was acquired or placed in service were removed.
The CIT already fully decouples from IRC 168(k); therefore, CIT adjustments are not discussed in this section. For IIT and the FTE tax, PA 24 doesn’t fully decouple but requires taxpayers to use the version of IRC 168(k) in effect as of December 31, 2024 (pre-OB3 law). Taxpayers must therefore compute bonus depreciation based on the phase-out amounts implemented prior to the OB3, with a 40% accelerated deduction permitted for tax year 2025.
In practice, taxpayers will report an addition on the Michigan return equal to the difference between (1) the depreciation deduction allowed under OB3 and (2) the depreciation deduction allowed under pre-OB3 IRC 168(k), which includes any other depreciation deduction permitted under the IRC for the tax year.
Example 1: Under IRC 168(k), an individual taxpayer’s 2025 federal return deducts 100% of property that costs $10,000. Under pre-OB3 IRC 168(k), the taxpayer would have deducted 40% bonus depreciation ($4,000) plus $600 in MACRS depreciation, for a total of $4,600 that year. The taxpayer must report an addition on its Michigan return equal to the difference, $5,400 ($10,000 - $4,600).
In subsequent years, taxpayers will annually deduct the depreciation that would have been allowed on the property under pre-OB3 law.
Taxpayers must generally capitalize the cost of property used in a trade or business to produce income and recover such cost over time through annual depreciation deductions. In general, nonresidential real property has a 39-year recovery period.
The OB3 allows taxpayers to claim a first-year depreciation deduction for 100% of the adjusted basis of qualified production property. This deduction generally applies to certain new-construction nonresidential real property used by the taxpayer as an integral part of a qualified production activity (e.g., manufacturing, production, or refining) and placed in service in the United States before January 1, 2031.
For tax years beginning after December 31, 2024, PA 24 requires FTI and AGI to be calculated as if IRC 168(n) of the IRC was not in effect. Taxpayers that take an IRC 168(n) deduction on their federal return must recalculate FTI or AGI for Michigan purposes using the amount of the depreciation deduction that would otherwise be available if IRC 168(n) was not in effect. This change will result in adjustments to federally determined AGI or FTI.
Taxpayers are generally permitted to deduct or amortize certain foreign and domestic research and experimental expenditures. Though the requirement to deduct or amortize these expenditures has changed multiple times, domestic research and experimental expenditures incurred prior to the OB3 were generally required to be amortized over a five-year period.
For expenditures paid or incurred after December 31, 2024, the OB3 added IRC 174A and modified IRC 174 to eliminate the requirement that taxpayers amortize domestic research and experimental expenditures, effectively restoring an immediate deduction. Under special transition rules in section 70302 of the OB3, taxpayers amortizing expenditures incurred prior to January 1, 2025, may elect to accelerate the remaining deductions over a one- or two-year period. These transition rules allow certain small business taxpayers (i.e., those with average annual gross receipts of $31 million or less) to apply the deduction provisions retroactively to tax years beginning after December 31, 2021, by filing amended returns.
For tax years beginning after December 31, 2024, PA 24 decouples from all changes made to IRC 174 and 174A. Consequently, taxpayers are required to compute FTI and AGI as if domestic research and experimental activities are required to be amortized over a five-year period. For tax years beginning after December 31, 2021, PA 24 also decouples from section 70302’s transition rules. Consequently, small business taxpayers will not be able to apply the deduction provisions retroactively to tax years beginning after December 31, 2021, either on an original or an amended Michigan return. Further, taxpayers will not be permitted to deduct any domestic research and experimental expenses that were accelerated over a one- or two-year period under those transition rules.
In practice, taxpayers must report a Michigan addition for the difference between the amount deducted federally and the amount that would have been deducted had the five-year amortization period been in effect. The difference will be subtracted ratably over the immediately succeeding four full tax years.
IRC 179 allows taxpayers to immediately deduct, subject to certain limits, the cost of qualifying property (e.g., depreciable tangible personal property, off-the-shelf computer software, and qualified real property, that is purchased for use in the active conduct of a trade or business) placed in service in the taxable year. For property placed in service in taxable years beginning after December 31, 2024, the maximum deduction is $1.25 million, which is reduced by the amount by which the property cost exceeds $3.13 million. Both amounts are adjusted annually for inflation.
The OB3 modifies IRC 179 so that for property placed in service in taxable years beginning after December 31, 2024, the maximum deduction is increased to $2.5 million, and the phaseout threshold is increased to $4 million. Both amounts will be adjusted annually for inflation.
For tax years beginning after December 31, 2024, PA 24 requires FTI and AGI to be calculated as if IRC 179 applied as that provision was in effect on December 31, 2024. This change means taxpayers must compute the maximum deduction and applicable phase-out by applying the pre-OB3 limits ($1.25 million and $3.13 million, respectively, adjusted annually for inflation, as noted above). Taxpayers that take a section 179 deduction on their federal return may need to adjust their Michigan return for the year qualified property was placed in service, track a state-specific carryover of unused deduction, make annual depreciation adjustments, make a gain/loss adjustment in the year of sale or disposition, and make recapture adjustments.
Example 2: During its 2025 tax year, a taxpayer bought and placed in service property that qualifies for the section 179 deduction. The total cost of the taxpayer’s section 179 property placed in service during the tax year is $2 million, which does not exceed the maximum deduction for tax year 2025. Assume this taxpayer is not subject to the business income limit under IRC 179. The taxpayer takes a $2 million section 179 deduction on its federal return. For its Michigan return, the taxpayer is subject to the pre-OB3 limits. Consequently, its deduction is limited to $1.25 million. The phaseout does not apply because its total section 179 property placed in service during the tax year does not exceed $3.13 million. Under the pre-OB3 limits, the taxpayer would have deducted $1.25 million plus $75,000 in MACRS depreciation, for a total of $1,325,000 that year. The taxpayer must report an addition on its Michigan return equal to the difference between its federal deduction and its allowed Michigan deduction, $675,000 ($2,000,000 - $1,325,000).
For 2025 forms, taxpayers will report decoupling adjustments on miscellaneous lines. Worksheets are available in line-by-line instructions as follows:
Taxpayers should maintain a copy of their worksheet in any format and should maintain adequate records to support decoupling adjustments reported on any Michigan return. The worksheet and additional support are not required to be included with a 2025 return.
A member of a flow-through entity is required to report its share of the flow-through entity’s decoupling adjustments on the member’s Michigan income tax return. Consequently, a flow-through entity must report to each of its members specific information about that member’s share of any decoupling adjustments. This information can be reported to the member in any reasonable manner, such as through notes included with the federal Schedule K-1.
