What is the Mid Quarter Convention for Depreciation
A mid quarter convention generally applies if the total cost basis of business equipment placed in service during the last three months of the tax year exceed 40% of the total basis of all the property placed in service during the year. In applying the 40% mid quarter convention rule, you do not count residential rental property, nonresidential realty, and assets that were placed in service and disposed of during the same year.
If the mid quarter convention applies, the first year depreciation for all property placed in service during the year is based on the number of quarters that the asset was in service. Property placed in service at any time during a quarter is treated as having been placed in service in the middle of the quarter.
For example, any item placed in service in October, November, or December is presumed to be placed in service in the middle of November, thus, you would get one and one-half months depreciation. This is to prevent people from going out in December and purchasing the majority of their depreciable personal property, then claiming a half year of depreciation.
The mid quarter convention also applies to sales and disposals of property. The disposal is treated as occurring in the midpoint of the quarter.
A quarter of a full 12 month tax year is a period of three months. The first quarter in a year begins on the first day of the tax year. The second quarter begins on the first day of the fourth month of the tax year. The third quarter begins on the first day of the seventh month of the tax year. The fourth quarter begins on the first day of the tenth month of the tax year.
Mid quarter convention example 1: Darrell Dummond purchases office furniture costing $1,200 in September 2014 and places it in service. He also purchases a computer costing $1,850 and puts it in service in October. The total basis of all property placed in service during 2014 is $3,050. Darrell must use the mid-quarter convention for the furniture and computer because over 40% of depreciable property placed into service during the year occurred in the last three months of the year. The office furniture is a seven-year property and the computer is a 5-year property. Both are depreciated using MACRS and a mid-quarter convention. Using the depreciation chart to determine the depreciation percentages, the total depreciation is $221.02 calculated below:
|% placed in service in last quarter||61% ($1,850 / $3,050)|
|Computer||$92.50 ($1,850 x 5%)|
|Furniture||$128.52 ($1,200 x 10.71%)|
|Total Depreciation using mid-quarter convention||$221.02|
To clarify the example above, the computers rate of 5% is used because it was placed into service in quarter 4 (October). The furniture’s rate of 10.71% is used because it was placed into service in quarter 3 (September).
If you dispose of property before the end of its recovery period, your deduction for the year is determined by multiplying a full year of depreciation by the percentage in the following chart:
Mid quarter convention example 2: Assume that Ed Walker purchases a computer for $4,000 in 2012. He then disposes of it in June 2014. Ed’s depreciation deduction will be determined as follows:
2014 Deduction – $912 ($4,000 x 22.80%)
Note that 22.80% is the rate for the 3rd year, 4th quarter in the MACRS table for the Mid-quarter convention. This is the full year deduction for the computer.
Depreciation Deduction – $342 ($912 x 37.5%)
June, the month of disposition for the computer, is in the 2nd quarter which is the 37.5% rate from above. Thus, take the full year 2014 depreciation deduction amount, $912, and multiply it by the 37.5% rate in the table.
Note that if you use the mid-quarter convention for a particular year, each item of depreciable personal property placed in service during that year must be depreciated using the mid-quarter convention for its entire recovery period.