- The One Big Beautiful Bill Act (the “OBBBA”) was signed into law in July.
- The business community’s focus has been on the so-called “Big 3” changes – interest expense limitations, bonus depreciation, and research and experimentation (“R&E”) expenses, to the Internal Revenue Code of 1986 (the “Code”), as amended.
- States have reacted to stem the loss of revenue because of these federal tax law changes and the impact on state taxes.
Background
Governor Gretchen Whitmer recently signed legislation implementing significant changes to the state tax laws in the Michigan Code.
Updated Conformity Date
Michigan is a so-called “fixed conformity” state, meaning that it adopts the Code (to the extent that the Code informs state tax provisions) as of a certain date for all taxpayers. As a result of the legislation, Michigan’s conformity date is now January 1, 2025. Michigan has a unique provision that allows taxpayers to use the version of the Code as in effect for the tax year – the new legislation retains this provision.
Decoupling
Although Michigan updated its conformity date, it nonetheless took steps to decouple from the Big 3 changes to the Code in OBBBA. The provisions of the following sections of the Code apply as they were in effect on December 31, 2024, which means that Michigan does not adopt the changes to these provisions for all taxpayers:
- Section 163(j), which means that the limitation on interest expense is based on a percentage of EBIT rather than the change to EBITDA implemented by OBBBA.
- Section 168(k) relating to bonus depreciation.
- Section 174, relating to the amortization of R&E expenses.
The legislation further provides that, for Michigan tax purposes, the version of the Code incorporated via conformity is as if Section 168(n), allowing full expensing for certain manufacturing property, and Section 174A, permitting full expensing for domestic R&E expenses, were not enacted.
Forvis Mazars Insight: The OBBBA also allows certain small businesses to amend their 2022, 2023 and 2024 returns to claim a deduction for R&E expenses that had been capitalized on those returns. Interestingly, this provision is not codified within the Code but merely exists within the larger text of the federal legislation. The Michigan legislation also decouples from this provision, disallowing the potential refund for these taxpayers in Michigan.
Tips and Overtime
The Michigan legislation specifically tracks the federal legislation in allowing a deduction for tips and overtime that qualify for the temporary relief in the OBBBA for taxpayers with these types of earnings.
How Forvis Mazars Can Help
State tax conformity may not be the first issue that jumps to mind for taxpayers when considering the impacts of the OBBBA, but it adds a dimension of complexity and uncertainty for planning purposes. Michigan, among other states, has modified its laws because of the changes that OBBBA brings. However, many other states have yet to act and the laws in any particular state can change quickly. We can help keep you apprised of these changes and assist you in considering the impact of conformity and decoupling across the state landscape on your taxes.