1. What a cost segregation study does
A building normally depreciates over 27.5 years (residential) or 39 years (commercial). A cost segregation study breaks the purchase price apart and reclassifies components like flooring, cabinetry, dedicated electrical, and land improvements into 5, 7, and 15-year property, so a large slice of the basis depreciates on much shorter schedules.
On the federal return, that reclassified property also qualifies for bonus depreciation, which restores a 100% first-year write-off for qualifying property acquired and placed in service after January 19, 2025. States set their own rules, which is where Michigan comes in.
2. Michigan and federal bonus depreciation
For individual income tax (and the elective flow-through entity tax), Michigan Public Act 24 of 2025 (HB 4961) requires AGI for tax years beginning after December 31, 2024 to be computed using IRC 168(k) as it existed on December 31, 2024, i.e., the pre-OBBBA TCJA phase-down: 40% bonus for property placed in service in 2025, 20% for 2026, and 0% for 2027 and later. Michigan does NOT conform to the OBBBA's permanent 100% bonus for property acquired after January 19, 2025. For corporate income tax, the decoupling is harsher: the CIT base is computed as if 168(k) were not in effect at all, so C corporations get zero Michigan bonus depreciation. Michigan also treats new IRC 168(n) (qualified production property) and 174A as not in effect for both individual and corporate purposes.
Michigan recomputes the deduction under the 12/31/2024 IRC rather than using a fixed percentage addback-and-spread: the individual adds back the excess of federal bonus claimed (100%) over the Michigan-allowed amount (40% in 2025, 20% in 2026, 0% after), then recovers the difference through larger regular MACRS depreciation deductions in later years and a higher Michigan basis (smaller gain / larger loss adjustment) at disposition. Treasury's taxpayer notice directs these adjustments starting with tax year 2025 returns.
Worked example
A $1,000,000 building, with and without a study
Illustrative only. A residential rental purchased for $1,000,000 of building basis (land excluded), acquired and placed in service after January 19, 2025.
Building basis
$1,000,000
Reclassified to 5, 7, and 15-year property (25%)
$250,000
Federal first-year deduction at 100% bonus
$250,000
Year 1 on that $250,000 without a study (27.5-year straight line)
about $9,100
Michigan allows only part of the federal bonus deduction. Michigan recomputes the deduction under the 12/31/2024 IRC rather than using a fixed percentage addback-and-spread: the individual adds back the excess of federal bonus claimed (100%) over the Michigan-allowed amount (40% in 2025, 20% in 2026, 0% after), then recovers the difference through larger regular MACRS depreciation deductions in later years and a higher Michigan basis (smaller gain / larger loss adjustment) at disposition. Treasury's taxpayer notice directs these adjustments starting with tax year 2025 returns.
Model your own numbers with the tax strategy projector.
3. Section 179 in Michigan
Michigan Section 179 cap: Pre-OBBBA 12/31/2024-law limits: roughly $1.25 million expensing cap with a ~$3.13 million phase-out threshold for 2025 (the pre-OBBBA inflation-adjusted figures), versus the federal OBBBA cap of $2.5 million / $4 million phase-out.
PA 24 freezes IRC 179 at its December 31, 2024 version for both individual and corporate income tax for tax years beginning after December 31, 2024. Michigan does not follow the OBBBA's retroactive increase to a $2.5 million cap. Amounts expensed federally above the frozen Michigan limit must be capitalized and depreciated for Michigan purposes. Before 2025, Michigan conformed fully to federal 179 for individuals, so this cap divergence is new with the 2025 decoupling package.
4. Does it still help in Michigan?
Yes. Michigan starts from federal AGI and only adjusts the specifically decoupled provisions, so federal MACRS recovery periods and methods (5/7/15/27.5/39-year) flow through untouched; reclassifying components out of 27.5/39-year into 5-, 7-, and 15-year property still accelerates Michigan deductions on its own, and in 2025-2026 those reclassified assets also pick up the 40%/20% Michigan bonus individuals are still allowed.
- •Michigan enacted PA 24 of 2025 (HB 4961) on October 7, 2025 specifically to decouple from OBBBA provisions, retroactive to tax years beginning after December 31, 2024, an estimated $2 billion revenue preservation over five years
- •Entity type gives two different answers: individuals and flow-through owners get the pre-OBBBA phase-down bonus (40% in 2025, 20% in 2026, 0% from 2027), while C corporations compute Michigan CIT as if IRC 168(k) never existed, zero bonus
- •Michigan also switched off new IRC 168(n) (100% expensing of qualified production property) and 174A (R&E expensing) for state purposes, and froze 163(j) at the pre-OBBBA EBIT-based limit
- •Taxpayers nominally retain an election to use the IRC in effect for the tax year, but the decoupled sections are frozen at 12/31/2024 regardless of the election
- •Michigan's flat 4.25% individual income tax rate keeps the dollar cost of the state addback relatively small compared with high-rate decoupled states
- •The elective flow-through entity (FTE) tax follows the same individual-side decoupling, so PTET filers make the same 168(k)/179 adjustments
- •Before PA 24, Michigan's individual income tax effectively conformed to federal bonus depreciation in full (static date with current-year election), so 2025 is the first year Michigan individuals have a bonus depreciation addback
5. The exit: recapture and timing
The accelerated deductions come back into view when you sell. Gain attributable to the 5, 7, and 15-year property is Section 1245 recapture, taxed at ordinary rates, and the straight-line depreciation on the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. A study does not create that bill, it moves deductions forward, but the timing of the sale decides how much of the benefit you keep.
Two levers manage the exit. A 1031 exchange defers both flavors of recapture along with the rest of the gain, and simply holding the property lets the time value of the early deductions do its work; most owners want a 3 to 5 year horizon before a taxable sale for the math to stay comfortably positive. Model the exit before you commission the study, not after.