Michigan does not allow federal bonus depreciation on state tax returns. If you claim 100% bonus depreciation under IRC Section 168(k) on your federal filing, you have to add that deduction back on your Michigan return and recompute depreciation using a standard method as if the bonus provision never existed. The gap between federal and state tax liability is real, and it grew wider once the One Big Beautiful Bill Act of 2025 made 100% federal bonus depreciation permanent while Michigan kept its decoupling in place.
How the Corporate Income Tax Handles the Add-Back
Michigan’s Corporate Income Tax calculates business income as though IRC Section 168(k) does not exist. The statute is blunt about it: any bonus depreciation claimed on a federal return must be added back when computing CIT business income.1Michigan Department of Treasury. Corporate Tax Base 2 – The CIT Is Decoupled From Federal Bonus Depreciation
Depreciation itself is not disallowed. You recompute it using a federally accepted method that calculates the deduction as if Section 168(k) was not in effect, which in practice means the standard Modified Accelerated Cost Recovery System schedule without the bonus component. Whatever method you pick has to stay consistent over the life of the asset until it is retired or disposed of.2Michigan Department of Treasury. Corporate Tax Base 6 – Under the CIT, Is There a Depreciation Deduction
The CIT applies to C corporations at 6% on the corporate income tax base after allocation or apportionment to Michigan.3Michigan Legislature. Michigan Code 206.623 – Corporate Income Tax Levy and Imposition A company that deducts $500,000 in bonus depreciation federally adds all $500,000 back for Michigan, then subtracts only the standard MACRS amount for that year. The difference is taxed at 6%.
Individual Filers and Pass-Through Entities Get Partial Conformity
Individuals and pass-through entities face a different version of the add-back. For tax years beginning after December 31, 2024, Michigan individual income tax filers and those subject to the elective flow-through entity tax must calculate adjusted gross income as if IRC Section 168(k) applied the way it did on December 31, 2024, before the OBBBA restored 100% bonus depreciation.4Michigan Legislature. Michigan Code 206.30 – Adjusted Gross Income Defined That means using the pre-OBBBA phase-down percentages. For tax year 2025, the phase-down rate was 40%.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions
The addition equals the difference between the depreciation allowed under the OBBBA (100%) and the depreciation that would have been allowed under the pre-OBBBA schedule, plus any other regular depreciation permitted for the year.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions So a sole proprietor or S corporation owner who took 100% federal bonus depreciation on a $200,000 asset adds back the difference between $200,000 and the amount allowed under the pre-OBBBA rate.
The distinction matters. CIT eliminates bonus depreciation entirely. Individual and FTE filers get a partial version tied to a frozen phase-down schedule. Which regime applies to you determines how much of a hit the Michigan return actually takes.
Michigan also decouples from IRC Sections 168(n), 174A, and the OBBBA versions of Sections 163(j), 174, and 179 for individual income tax and FTE purposes, requiring those provisions to be applied as they stood on December 31, 2024.4Michigan Legislature. Michigan Code 206.30 – Adjusted Gross Income Defined This is broader than bonus depreciation alone.
Where to Report the Adjustment
Individual filers report the decoupling adjustment on Form MI-1040, Schedule 1, line 8. Flow-through entity taxpayers report it on Form 5772, line 11. Treasury has indicated that worksheets will be included in line-by-line instructions for the applicable forms.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions
Section 179 Is a Workaround for CIT Filers
Michigan fully conforms to federal Section 179 expensing under the Corporate Income Tax. The Section 179 deduction taken on a federal return flows through to the CIT with no add-back.1Michigan Department of Treasury. Corporate Tax Base 2 – The CIT Is Decoupled From Federal Bonus Depreciation
One condition: if you did not elect Section 179 on your federal return, you cannot claim it retroactively for Michigan. The deduction has to appear federally first. For businesses buying equipment, maximizing Section 179 before layering on bonus depreciation narrows the federal-state gap. Section 179 has annual limits and phase-out thresholds at the federal level, so it will not fully replace bonus depreciation on large capital purchases, but it is the most direct way to get accelerated write-offs that Michigan actually honors for CIT filers.
Note that the individual and FTE decoupling reaches Section 179 as well, applying the version in effect on December 31, 2024, rather than the OBBBA version.4Michigan Legislature. Michigan Code 206.30 – Adjusted Gross Income Defined
The Add-Back Can Shrink or Eliminate Michigan Losses
Under the CIT, a business loss (a negative business income taxable amount after allocation or apportionment) carries forward to the year immediately following the loss year, then successively to the next nine taxable years, or until the loss is used up.3Michigan Legislature. Michigan Code 206.623 – Corporate Income Tax Levy and Imposition
Because the add-back raises taxable business income, it can shrink or wipe out a loss that would otherwise exist. A company showing a federal net operating loss after taking bonus depreciation might show positive Michigan income once the add-back is applied. No Michigan loss, no carryforward, even though the federal side generated an NOL. In exchange, later years produce slightly larger Michigan deductions as the standard depreciation spreads out. Planning around that timing mismatch is where most of the complexity sits.
For individual income tax filers, Michigan’s NOL rules work differently. Losses created in 2017 and earlier carry forward up to 20 years, and losses created in 2018 and later can be carried forward indefinitely.6Michigan Department of Treasury. 2023 Michigan Net Operating Loss Deduction The bonus depreciation adjustment affects those loss amounts too, though the partial conformity softens the impact compared with the CIT.
Keeping Two Depreciation Schedules
The practical cost of Michigan’s decoupling is that every asset receiving federal bonus depreciation needs a parallel Michigan computation. You need to track acquisition dates, placed-in-service dates, the depreciation method used for Michigan, and the remaining depreciable basis under both federal and Michigan calculations for each asset.
Getting the add-back wrong triggers the usual consequences of underreporting: interest on the underpayment and potential penalties. Treasury publishes taxpayer notices and FAQ guidance on the depreciation adjustment, and these are worth checking each filing season because the rules keep shifting. The 2025 decoupling from the OBBBA introduced new mechanics for individual and FTE filers that did not exist in earlier years.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions
If your business handles significant capital expenditures, budget for the added preparation work. The two-schedule requirement, combined with the different treatment between CIT and individual filers, means a single equipment purchase can generate multiple adjustment calculations across entities and returns.