Half-Year Convention Rules: First-Year Depreciation and Exceptions

The half-year convention is the default rule under the Modified Accelerated Cost Recovery System (MACRS) that treats depreciable personal property as if it was placed in service at the midpoint of the tax year, regardless of the actual purchase date. You get six months of depreciation in the first year, six months in the final year, and the total recovery stretches one tax year beyond the asset’s stated class life. It’s a simplifying rule: no daily proration, no matter when in the year you bought the equipment.

How the Rule Works

Under IRC Section 168(d)(1), the half-year convention is the general rule for depreciable personal property such as machinery, equipment, vehicles, and office furniture.¹ Buy an asset on January 3 or November 28, and the IRS treats it the same way: placed in service at the midpoint of the tax year. A calendar-year taxpayer always gets exactly half a year’s depreciation in year one.

The same logic runs at the back end. Sell or retire the asset before its recovery period ends and the convention treats it as disposed of at the midpoint of the disposition year, so you claim half a year of depreciation in that final year no matter when the sale actually happened.¹ The IRS percentage tables already build in this symmetry, so if you use the tables the adjustment is done for you.

Because year one only captures six months, the recovery schedule always adds one tax year beyond the stated class life. Five-year property takes six tax years to fully depreciate. Seven-year property takes eight. That trailing stub year absorbs the six months the convention deferred at the beginning.

What the Convention Does Not Cover

The half-year convention does not apply to real property. Nonresidential real property, residential rental property, and railroad gradings or tunnel bores use the mid-month convention instead, which treats property as placed in service at the midpoint of the specific month you start using it.¹

Intangible assets like patents, trademarks, and goodwill are governed by Section 197 and amortize straight-line over 15 years from the month of acquisition. MACRS conventions don’t touch them.

When the Mid-Quarter Convention Overrides It

Load up on purchases late in the year and the half-year convention gets taken away. If the total depreciable basis of property placed in service in the last three months of the tax year exceeds 40% of all property placed in service during the year, the mid-quarter convention becomes mandatory for every asset placed in service that year.²

Two categories are excluded from the 40% test: real property that uses the mid-month convention, and property placed in service and disposed of within the same tax year.¹ Neither counts in the numerator or denominator.

Under the mid-quarter convention, each asset is treated as placed in service at the midpoint of the quarter you actually acquired it. Property bought in October through December gets roughly a month and a half of depreciation instead of six. That’s the point of the rule: it prevents a taxpayer from buying a large piece of equipment on December 30 and claiming half a year of deductions on it.

Run the 40% test every year. When you fail it, mid-quarter treatment applies to all personal property placed in service that year, not just the fourth-quarter purchases.

Calculating First-Year Depreciation

The standard MACRS method for most personal property is the 200% declining balance method, which front-loads deductions into the early years. The IRS publishes percentage tables that already incorporate both the declining balance math and the half-year adjustment, so most taxpayers just multiply the asset’s basis by the table percentage.³

MACRS percentages for common recovery periods under the half-year convention:

Five-year property (computers, copiers, vehicles): 20.00% in year one, 32.00% in year two, 19.20% in year three, 11.52% in years four and five, and 5.76% in year six.
Seven-year property (office furniture, fixtures): 14.29% in year one, 24.49% in year two, 17.49% in year three, 12.49% in year four, 8.93% in years five and seven, 8.92% in year six, and 4.46% in year eight.

Both schedules run one year past the stated class life. That trailing year is the deferred six months from year one.

Worked Example: Five-Year Equipment

Buy a $10,000 piece of equipment classified as five-year property. Without the convention, the full-year 200% declining balance rate would be 40% (2 divided by 5), producing a $4,000 first-year deduction. The half-year convention cuts that in half. Your first-year deduction is $2,000, which matches the 20.00% table rate applied to the $10,000 basis.³

In year two, you get a full 12 months. The 40% rate applies to the remaining $8,000 basis and produces $3,200, matching the 32.00% table rate against the original $10,000. Deductions decline through year six, when the final $576 closes out the asset.

You report these deductions on Part III of IRS Form 4562, Depreciation and Amortization.⁴

Depreciation in the Year You Dispose of an Asset

Sell, trade, or retire an asset before the recovery period ends and you still get a partial deduction for that final year. The convention treats the disposition as occurring at the midpoint of the year, so you claim half of the full-year amount.¹

Getting that final number right matters because it changes your adjusted basis, which drives the gain or loss on the sale. Underclaim and you overstate basis. Overclaim and you create phantom losses. For personal property, gain attributable to prior depreciation is generally taxed as ordinary income under the recapture rules of IRC Section 1245, not at capital gains rates.⁵

How Bonus Depreciation and Section 179 Change the Picture

The half-year convention matters most when you’re actually spreading an asset’s cost over its recovery period. Two provisions can reduce or eliminate what’s left to spread.

Bonus Depreciation

The One Big Beautiful Bill Act, signed on July 4, 2025, permanently restored 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025.⁶ For qualifying property, you can deduct the entire cost in year one with no annual dollar cap.⁷

When you take 100% bonus, the half-year convention is effectively moot because no basis remains to spread. Elect out of bonus (some businesses do for tax-planning reasons) and the convention applies to the full asset cost under normal MACRS rules. For property that received partial bonus under the prior phasedown (placed in service before January 20, 2025), the convention applies to the remaining basis after subtracting the bonus amount.⁴

Section 179

Section 179 lets you immediately expense the cost of qualifying property up to an annual limit. The statutory base is $2,500,000, with a phase-out that starts when total qualifying property placed in service exceeds $4,000,000. Both amounts are indexed for inflation starting with tax years beginning in 2026.⁸

The order matters. Section 179 comes first, then bonus depreciation, then regular MACRS on whatever basis is left.⁴ The half-year convention only touches that last layer. If Section 179 zeroes out a $50,000 truck, the convention never enters the picture. Partially expense it and elect out of bonus, and the convention applies to what remains.

Passenger Vehicle Depreciation Caps

Even with 100% bonus depreciation back, passenger automobiles run into annual caps that override the normal MACRS or bonus result. For vehicles placed in service in 2026, the first-year cap is $20,300 with bonus depreciation and $12,300 without it.⁹

The half-year convention is already baked into these caps. Buy a $60,000 business sedan and you don’t get the $12,000 that a straight 20% first-year table entry against $60,000 would suggest. You’re limited to $12,300 without bonus or $20,300 with it. Any unrecovered basis after the regular recovery period ends comes out in equal installments in later years.

Short Tax Years

If your business has a short tax year (less than 12 months, common at startup, closure, or an accounting-period change), the convention still applies but the midpoint shifts. For a short year that begins on the first of a month or ends on the last day of a month, divide the number of months by two to find the midpoint. For other short years, divide total days by two and round to the nearest midpoint or first day of a month.¹⁰

One situation forces a switch: a short tax year of three months or less requires the mid-quarter convention for all personal property placed in service during that period.¹⁰

1
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
2
eCFR. 26 CFR 1.168(d)-1 – Half-Year and Mid-Quarter Conventions
3
Internal Revenue Service. Depreciation Frequently Asked Questions
4
Internal Revenue Service. Instructions for Form 4562
5
Office of the Law Revision Counsel. 26 U.S. Code 1245 – Gain From Dispositions of Certain Depreciable Property
6
Internal Revenue Service. One, Big, Beautiful Bill Provisions
7
Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction
8
Office of the Law Revision Counsel. 26 USC 179 – Election to Expense Certain Depreciable Business Assets
9
Internal Revenue Service. Rev. Proc. 2026-15
10
Internal Revenue Service. Publication 946 – How To Depreciate Property