Depreciation Conventions: Half-Year, Mid-Quarter, and Mid-Month

The three depreciation conventions under MACRS — half-year, mid-quarter, and mid-month — are IRS rules that assign a legal placed-in-service date to your asset, and that assigned date controls how much depreciation you claim in the first year you own the asset and in the year you dispose of it. Which convention applies depends on the type of property and, for personal property, on when during the year you made your purchases.

Half-Year Convention

The half-year convention is the default for depreciable personal property such as office furniture, machinery, computers, and business vehicles.¹ Every asset placed in service during the year is treated as though it started working at the midpoint of the year, regardless of the actual date. For a calendar-year taxpayer, a laptop bought in January and a forklift bought in November are both treated as placed in service on July 1.

The result is simple: you claim exactly half a year of depreciation in the first year of the recovery period, and half a year in the year you dispose of the asset.² Sell the equipment in March or October and the answer is the same. You never have to track the specific day an asset entered or left service, only the year.

Mid-Quarter Convention and the 40 Percent Test

The half-year rule creates an obvious opening: load up on equipment in December and claim six months of depreciation on property used for a few weeks. The mid-quarter convention closes that gap. At the end of each tax year you run the 40 percent test to see which convention applies.¹

Add up the depreciable basis of all personal property placed in service in the last three months of your tax year. Compare that to the depreciable basis of all personal property placed in service during the entire year. If the fourth-quarter total exceeds 40 percent of the full-year total, the mid-quarter convention replaces the half-year convention for every personal property asset placed in service that year, not just the fourth-quarter purchases.

What Counts in the 40 Percent Test

Residential rental and nonresidential real property are excluded from both sides of the calculation because they follow the mid-month convention anyway. Property placed in service and disposed of within the same tax year is also excluded.³

Section 179 expense reduces the depreciable basis of property for the 40 percent test, but bonus depreciation does not.² The distinction matters. Buy $500,000 of equipment in Q4 and expense $400,000 under Section 179, and only $100,000 counts toward the 40 percent threshold. If the same equipment runs through bonus depreciation instead of Section 179, the full $500,000 counts.

How Mid-Quarter Depreciation Works

When mid-quarter applies, the year splits into four three-month quarters and each asset is treated as placed in service at the midpoint of its actual purchase quarter. The first-year deduction varies sharply by quarter:²

First quarter (Jan–Mar): 10.5 months of depreciation, or 87.5 percent of a full year
Second quarter (Apr–Jun): 7.5 months, or 62.5 percent
Third quarter (Jul–Sep): 4.5 months, or 37.5 percent
Fourth quarter (Oct–Dec): 1.5 months, or 12.5 percent

Under the half-year rule every asset gets six months. Mid-quarter rewards early purchasers and penalizes late ones, which is the point of the rule.

Mid-Month Convention for Real Property

Buildings follow their own convention. Residential rental property (27.5-year recovery) and nonresidential real property (39-year recovery) are always depreciated using the mid-month convention, regardless of when during the year you acquire them and regardless of what the 40 percent test would otherwise produce.¹ Every building is treated as placed in service on the 15th of the acquisition month, whether you closed on the 1st or the 31st.

First-year depreciation equals a full month for each full month remaining in the year after the purchase month, plus half a month for the purchase month itself. Buy a warehouse in August and you get 4.5 months of depreciation that first year: half of August plus September through December.² The same half-month treatment applies in the disposal year. Over a 27.5- or 39-year life, the difference between a January and December acquisition is almost a full year of deductions shifted forward.

Qualified Improvement Property

One boundary to flag: interior improvements to nonresidential buildings do not follow the mid-month convention. Qualified improvement property (QIP), which means improvements to the inside of a nonresidential building made after the building was first placed in service, has a 15-year recovery period.² Building enlargements, elevators, escalators, and changes to a building’s internal structural framework are not QIP.

Because QIP is 15-year property rather than real property, it follows the half-year convention, or mid-quarter if the 40 percent test is triggered. When you renovate a commercial building, the shell continues to depreciate over 39 years under the mid-month convention, but qualifying interior work depreciates over 15 years under the personal-property conventions.

Depreciation in the Disposal Year

The convention that applied when you placed an asset in service continues to govern when you sell or retire it.

Half-year convention: half a year of depreciation in the disposal year, whatever month you sell.²
Mid-quarter convention: 12.5 percent of a full year in Q1, 37.5 percent in Q2, 62.5 percent in Q3, or 87.5 percent in Q4.²
Mid-month convention: half a month for the disposal month plus every preceding full month in that year.

The mid-quarter disposal math is where mistakes cluster. Selling in the first quarter gives you 1.5 months of depreciation; selling in the fourth quarter gives you 10.5 months. If you can time a sale, waiting into the next quarter picks up an additional three months of deductions.

Short Tax Years

A business that operates for less than 12 months in a tax year faces a modified rule, and one piece of it is worth knowing even if the rest is technical: if your tax year is three months or less, the mid-quarter convention automatically applies to all personal property placed in service during that period, no matter how your purchases were spread.⁴

Where Section 179 and Bonus Depreciation Leave the Conventions

Conventions only control the portion of an asset’s cost that actually runs through the standard MACRS schedule. Section 179 and bonus depreciation both come off the top before the convention math runs.

Section 179 lets you expense the cost of qualifying property immediately. For 2026, the deduction limit is $2,560,000, phasing out dollar-for-dollar once total qualifying purchases exceed $4,090,000. Section 179 is subtracted from the asset’s basis first.²

Bonus depreciation applies next. Under the One, Big, Beautiful Bill Act signed on July 4, 2025, qualifying property acquired and placed in service after January 19, 2025, is eligible for 100 percent bonus depreciation.⁵ Taxpayers can elect 40 percent bonus instead of 100 percent.

If you claim 100 percent bonus depreciation on an asset, no basis is left to run through MACRS and the convention becomes irrelevant for that asset. Conventions matter for real property (which does not qualify for bonus depreciation), for property where you elect out of bonus, and for vehicles subject to the annual dollar caps.

Passenger Vehicle Caps

Passenger automobiles are subject to annual dollar limits that override the convention calculations. For vehicles placed in service in 2026, the maximum first-year depreciation deduction is $20,300 with bonus depreciation or $12,300 without.⁶

The caps make the convention consequential for cars. Without the cap, 100 percent bonus would eliminate the entire cost in year one. Because the cap limits the first-year deduction, the remaining cost carries into future years under whichever convention applied when the vehicle was placed in service. A vehicle placed in service in Q4 under the mid-quarter convention gets only 1.5 months of regular depreciation in its first year, compounding the effect of the cap.

Reporting on Form 4562

You report MACRS depreciation on Form 4562, Depreciation and Amortization. For any property placed in service during the current tax year, Part III asks for the asset classification, the month and year placed in service, the basis after Section 179 and bonus depreciation, the recovery period, the applicable convention, and the depreciation method.⁷ The convention column takes HY (half-year), MQ (mid-quarter), or MM (mid-month). An error here cascades through every remaining year of the recovery period, so run the 40 percent test carefully before filing.

1
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Publication 946 – How To Depreciate Property
3
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions Half-Year and Mid-Quarter Conventions
4
GovInfo. 26 CFR 1.168(d)-1 – Applicable Conventions Half-Year and Mid-Quarter Conventions
5
Internal Revenue Service. Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
6
Internal Revenue Service. Rev Proc 2026-15
7
Internal Revenue Service. Instructions for Form 4562 (2025)