Does Michigan Allow Bonus Depreciation?

Depreciation allows businesses to recover the cost of certain assets over their useful lives, reducing taxable income. This accounting method recognizes that assets lose value and utility over time. For tax purposes, depreciation expense serves to offset revenue, thereby lowering a business’s tax liability.

Federal tax law often provides for accelerated depreciation methods, such as bonus depreciation, which allows businesses to deduct a significant portion of an asset’s cost in the year it is placed in service, rather than spreading the deduction over many years. This federal provision, outlined in Internal Revenue Code (IRC) Section 168(k), aims to incentivize business investment. Understanding how state tax laws interact with these federal rules is important for businesses operating across different jurisdictions.

Michigan’s Stance on Bonus Depreciation

Michigan’s treatment of federal bonus depreciation varies. For Corporate Income Tax (CIT) purposes, Michigan does not conform to federal bonus depreciation under IRC Section 168(k). When calculating the Michigan Corporate Income Tax base, federal taxable income is used as a starting point, but it must be computed as if IRC Section 168(k) was not in effect. Therefore, any bonus depreciation taken on the federal income tax return for CIT payers must be added back to business income for Michigan CIT purposes.

Conversely, for individual income tax purposes, including income that flows through from pass-through entities, Michigan conforms to federal bonus depreciation rules. This means individuals and flow-through entities, such as partnerships, S corporations, and sole proprietorships, are not required to make adjustments for bonus depreciation on their Michigan individual income tax returns.

Calculating Depreciation for Michigan Tax Purposes

Given Michigan’s non-conformity for Corporate Income Tax (CIT), businesses that pay CIT must undertake a specific calculation to determine their Michigan-specific depreciation. This involves re-computing depreciation for assets as if federal bonus depreciation (IRC Section 168(k)) had not been claimed. The standard Modified Accelerated Cost Recovery System (MACRS) rules are used for this re-calculation, but without the accelerated bonus deduction.

To implement this, the federal bonus depreciation amount claimed is added back to federal taxable income when computing the Michigan CIT base. Subsequently, the depreciation calculated under Michigan’s specific rules, which mirrors regular MACRS depreciation without the bonus component, is deducted. This methodology effectively removes the federal bonus depreciation benefit for Michigan CIT purposes and replaces it with a more traditional depreciation schedule.

Businesses must maintain detailed records to track the separate basis of assets for Michigan tax purposes, distinct from their federal basis. This separate tracking is necessary because the initial depreciation deduction differs, impacting future gain or loss calculations upon asset disposition. Consistent application of this non-bonus depreciation method is required over the asset’s life for Michigan CIT reporting.

Impact on Different Michigan Business Taxes

The Michigan-specific depreciation calculation primarily impacts businesses filing the Michigan Corporate Income Tax (CIT) return. On the Michigan Corporate Income Tax Annual Return (Form MI-4891), taxpayers will find a specific line for “Adjustments due to decoupling of Michigan depreciation from IRC § 168(k).” This line reports the net difference between federal bonus depreciation taken and Michigan-calculated depreciation.

For pass-through entities, such as partnerships and S corporations, and for sole proprietors or single-member LLCs, the treatment is simpler. Since Michigan conforms to federal bonus depreciation for individual income tax purposes, the bonus depreciation claimed federally flows through to the owners’ Michigan individual income tax returns (Form MI-1040) without state-specific adjustments. The depreciation expense recognized on the federal Schedule C (for sole proprietors) or Schedule K-1 (for partners/shareholders) directly impacts their Michigan taxable income.

Therefore, complex depreciation adjustments are largely confined to corporations subject to the Michigan CIT. Other business structures operating in Michigan benefit from the state’s conformity to federal bonus depreciation at the individual income tax level.