Michigan’s New Tax Landscape: A Guide for Manufacturers

This article appeared in the February 2026 issue of MiMfg Magazine. Read the full issue and find past issues online.

This year, completing your 2025 tax returns won’t be a matter of copy-pasting your federal numbers onto your state forms. Michigan has chosen to “decouple” from several federal tax benefits, essentially sticking to its own rules — and often stricter limits — in three critical areas: bonus depreciation, research and development (R&D) expensing and interest deduction limits. We’ll break down what’s different and share some proactive strategies you can use to prepare — and potentially lower your tax liability.

Bonus Depreciation Has Changed

The most immediate impact involves how manufacturers deduct the cost of capital investments like machinery and equipment. Michigan treatment varies by entity type:

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-Through Entities and Individuals: Bonus depreciation is reduced — 40 percent of cost is allowed in tax year 2025, 20 percent in 2026 and eliminated entirely for 2027 and beyond.

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.

While the federal rule allows businesses to deduct up to $2.5 million in asset purchases, Michigan’s deduction cap remains at the 2024 limit of $1,220,000.

Michigan’s spending limit phaseout of $3,050,000 remains.

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) Expensing

Immediate deductions for R&D are allowed under the federal provisions, but at the state level, expenses remain amortized: 5 years for U.S.-based R&D and 15 years for international R&D. However, Michigan recently enacted a refundable R&D tax credit; it rewards C-corps and flow-through entities that increased their spending on eligible R&D activities in Michigan. To qualify, companies must have spent more on Michigan R&D in 2025 than they did on average over the last three years.

Interest Deduction Limitations

Michigan limits business interest deductions to 30 percent of Earnings Before Interest and Taxes (EBIT). This cap is tighter than federal rules and affects manufacturers relying on financing for facility expansion or modernization.

Reducing Your State Tax Liability

To mitigate the impact of higher taxable income:

Re-evaluate capital expenditures: Analyze the state tax liability of major equipment purchases before finalizing. Timing your investments can significantly reduce your tax burden.
Forecast liquidity: Project your cash flow for the 2026 tax year to estimate tax payment requirements and prevent being caught off guard by reduced upfront deductions.
Maintain separate depreciation schedules: Your finance team must keep distinct depreciation and expense schedules for Michigan and federal filings — crucial for maintaining compliance and avoiding costly penalties.
Review estimated payments: Since your state taxable income may be higher, reassess your quarterly estimates to avoid underpayment penalties.
Get a Seasoned Expert: Have a tax advisor who has extensive experience with Michigan manufacturers help you with your 2025 returns and 2026 tax strategy.

About the Author

As director of Rehmann’s Tax Consulting practice, Anthony J. Licavoli Jr. leads a team of experts in providing strategic tax planning and consulting services. As a trusted advisor, Anthony is passionate about demystifying tax complexities for clients, empowering them to make informed decisions. He may be reached at 248-952-5000.

Rehmann is an MMA Premium Associate Member and has been an MMA member company since July 2006. Visit online: rehmann.com.