Half-Year Convention for Depreciation

The half-year convention treats all business equipment
placed in service during a tax year as placed in service in
the midpoint of the tax year.  The same rule applies in the year in
which the property is disposed of.  You deduct a full year of depreciation
for any other year during the recovery period. 



In the simplest terms, when you elect to use the half-year
convention a half-year of depreciation is allowed in the first year
your property is placed in service, regardless of when the
property is placed in service during the tax year.  For each of the
remaining years of the recovery period, a full year of depreciation
is claimed. 

If you hold the property for the entire recovery period, a half-year of
depreciation is claimed for the year following the end of the recovery
period.  If you dispose of the property before the end of the recovery
period, a half-year of depreciation is allowable for the year of disposition.

View the depreciation tables section of Real Estate Owner to see the
breakdown of the Half Year Convention for MACRS depreciation

Example: Dan Eggertsen purchased a computer in 2007 for
$2,400.  The computer is his only acquisition in 2007.  The computer
is a five-year property and is subject to the half-year convention. 
The depreciation rate for the first year is 20% (see the link above
to view the depreciation chart for five-year property).  Dan's
depreciation would be determined as follows:

Summary of Deductions for $2,400 computer:
 
Year

1                                                            $
2
3
4
5
6

Total                                                    $		 Deduction

480       
768      
460.80
276.48
276.48
138.24

2400

2,400 x 20%
2,400 x 32%
2,400 x 19.20%
2,400 x 11.52%
2,400 x 11.52%
2,400 x 5.76%


Note that if you dispose of your property before the end of its
recovery period, your deduction will be 1/2 of the deduction
that would be allowed for the full year.

Ex:  Using Dan's example above, let's assume he decides to
dispose of the property in year 5.  Dan's deduction in year 5 would
be $138.24 ( $276.48 x 1/2 ).

The half-year convention applies unless the total cost bases of
depreciable assets placed in service during the year exceed 40%
of the total bases of all property placed in service during the entire
year.  If this 40% test applies, you must use the mid-quarter
convention to figure your annual depreciation deduction.

Lastly, you may even be able to deduct the entire amount of the property.
Visit our Section 179 section to learn more!







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