Depreciation Conventions

The convention used determines which depreciation table to use and how much depreciation you can deduct each year of the property's the recovery period.

  • Half-year convention:
    • If you place property in service between January and September (the first nine months), you must use the half-year convention.
    • This convention assumes you placed property in service in the middle of the year even if it was placed in service the beginning of the year.
    • It also assumes that when you dispose of the property, you disposed of it in the middle of the year even if you disposed of it on January 1.
    • Consequently, in the year the property is placed in service you may only deduct one-half of the annual depreciation and in the year the property is disposed of you may only deduct one-half of the annual depreciation.
  • Mid-quarter convention:
    • This convention considers the cost of business equipment (excluding realty) acquired in the last quarter of the year (October, November, and December).
    • If the total cost of business equipment acquired in the last quarter of the year exceeds 40% of the total cost of equipment acquired for the entire year, the mid-quarter convention must be used for all property placed in service in that tax year.
      • For example, if total annual acquisitions equal $50,000, which includes last quarter acquisitions of $30,000 the mid-quarter convention must be used ($30,000/$60,000=60%).
    • The depreciation table used for the mid-quarter convention is divided into four quarters.
      • Each quarter includes the depreciation rates for each year of the asset's recovery period.
      • The depreciation rate for each year is applied to each individual asset for each year of its recovery period.
      • The rate used for each asset depends on the quarter the asset was placed in service.
    • If the 40% test is not met, the half-year convention must be used.
  • Mid-month convention:
    • Applied to realty, such as residential rental property and nonresidential real property. Property is treated as placed in service or disposed of at the midpoint of the applicable month.
    • Only the straight-line method may be used for realty.

File your personal and small business taxes (Schedule C)