Michigan does not allow federal bonus depreciation on state returns. If you claim the deduction under IRC Section 168(k) on your federal return, you have to add it back when you compute your Michigan tax, then recalculate depreciation as if the bonus provision never existed. The rule applies to C corporations under the Corporate Income Tax and, in a modified form, to individual filers and flow-through entities. The gap between federal and state liability became permanent in 2025, when the One Big Beautiful Bill Act restored 100% federal bonus depreciation with no sunset while Michigan kept its decoupling in place.
How the Add-Back Works for C Corporations
Michigan’s Corporate Income Tax calculates business income as if IRC Section 168(k) does not exist. The statute is blunt about it: federal taxable income for CIT purposes is computed as though the bonus depreciation provision was never enacted.1Michigan Department of Treasury. Corporate Tax Base 6 – Under the CIT, Is There a Depreciation Deduction Any bonus depreciation claimed federally must be added back to CIT business income.2Michigan Department of Treasury. Corporate Tax Base 2 – The CIT Is Decoupled From Federal Bonus Depreciation
Depreciation itself is still allowed. You just have to recompute it using a federally accepted method that treats Section 168(k) as if it were not in effect, which in practice usually means standard MACRS without the bonus component. Whatever method you choose, you have to apply it consistently over the asset’s life until it is retired or disposed of.1Michigan Department of Treasury. Corporate Tax Base 6 – Under the CIT, Is There a Depreciation Deduction
The CIT taxes the corporate income tax base at 6% 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%.
How the Add-Back Works for Individuals and Flow-Through Entities
If you file an individual return or your business income flows through to you from a partnership, S corporation, or an entity that elected Michigan’s flow-through entity tax, the add-back is partial rather than total.
For tax years beginning after December 31, 2024, Michigan requires individual income tax filers and FTE taxpayers to calculate adjusted gross income as if IRC Section 168(k) still worked 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 freezes you at the old TCJA phase-down schedule. For tax year 2025, that rate was 40%.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions
The adjustment is the difference between the depreciation allowed under the OBBBA (100%) and the depreciation that would have been allowed under the pre-OBBBA phase-down schedule, plus any other regular depreciation permitted for the year.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions A sole proprietor or S corporation owner who took 100% federal bonus depreciation on a $200,000 asset in 2025 adds back the difference between $200,000 and the amount the pre-OBBBA 40% rate would have allowed, then subtracts standard depreciation.
The distinction between the two regimes matters. The CIT eliminates bonus depreciation entirely. The individual income tax and FTE tax allow a partial version pinned to a frozen schedule. If you own interests in both a C corporation and a pass-through, your Michigan impact on identical assets will differ.
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
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 said worksheets for these calculations will appear in the 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 the Workaround for C Corporations
Michigan fully conforms to federal Section 179 expensing under the CIT. The Section 179 deduction taken on your federal return flows through to the state return without adjustment.2Michigan Department of Treasury. Corporate Tax Base 2 – The CIT Is Decoupled From Federal Bonus Depreciation
There is a catch. You cannot claim Section 179 for Michigan if you didn’t elect it on the federal return. The deduction has to appear federally first. For businesses buying qualifying equipment, maximizing the Section 179 election before relying on bonus depreciation reduces the gap between federal and Michigan outcomes. Section 179 has annual limits and phase-out thresholds, so it will not fully replace bonus depreciation on large capital purchases, but it is the cleanest way to get accelerated write-offs that Michigan actually honors for CIT filers.
Note that for individual income tax and FTE filers, Section 179 is also subject to decoupling from the OBBBA version, so Michigan honors it only as it stood on December 31, 2024.
What the Add-Back Does to Your Losses
The add-back can shrink or eliminate a loss that would otherwise exist. Because it increases taxable business income for Michigan purposes, a company that shows a loss on its federal return after taking bonus depreciation might show positive income on its Michigan return once the add-back is applied. No Michigan loss means nothing to carry forward, even if the federal return produced a net operating loss.
Under the CIT, a business loss (a negative business income taxable amount after allocation or apportionment) can be carried forward to the year immediately following the loss year and then successively to the next nine taxable years, or until it is used up.3Michigan Legislature. Michigan Code 206.623 – Corporate Income Tax Levy and Imposition The timing mismatch is real: smaller Michigan losses in early years when the add-back inflates income, slightly larger deductions in later years as standard depreciation spreads out.
For individual filers, Michigan’s NOL rules work differently. Losses from 2017 and earlier carry forward up to 20 years. Losses from 2018 and later carry forward indefinitely.6Michigan Department of Treasury. 2023 Michigan Net Operating Loss Deduction The partial conformity for individual filers softens the impact somewhat compared to the full CIT add-back, but the direction is the same.
Keeping Two Sets of Depreciation Records
The practical cost of decoupling is parallel bookkeeping. Every asset that received bonus depreciation on the federal return needs a separate Michigan computation showing depreciation as if Section 168(k) did not apply. You need to track acquisition dates, placed-in-service dates, the Michigan depreciation method, and the remaining depreciable basis under both calculations for each asset.
Getting the add-back wrong carries the same consequences as any other underreporting: interest on the underpayment and potential penalties. Treasury publishes taxpayer notices and FAQ guidance on handling the adjustment, and the rules have been evolving. The 2025 decoupling from the OBBBA added new wrinkles for individual and FTE filers that did not exist in prior years.5Michigan Department of Treasury. Decoupling Michigan Income Taxes From Certain Internal Revenue Code Provisions If you handle significant capital expenditures, budget for the added preparation time, especially where a single purchase crosses multiple entities and returns.