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. 

View the depreciation tables section of Real Estate Owner to see
the breakdown of the Mid Quarter Convention for MACRS depreciation.

Example: Darrell Dummond purchases office furniture costing
$1,200 in September 2007 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
2007 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:
 

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:
 

Quarter	Percentage
First Second Third Fourth	12.5% 37.5% 62.5% 87.5%

Ex:  Assume that Ed Walker purchases a computer for $4,000 in 2005. 
He then disposes of it in June 2007.  Ed's depreciation deduction will
be determined as follows:

 

2007 deduction Depreciation deduction

$912 ($4,000 x 22.80%) $342 ($912 x 37.5%)

Note that 22.80% is the rate for the 3rd year, 4th quarter in the MACRS table
for the Mid-quarter convention.  June, the month of disposition for the
computer, is in the 2nd quarter which is the 37.5% rate from above.


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. 

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