Mid-Quarter Convention: 40% Test, Depreciation, and Section 179

The mid-quarter convention is a mandatory MACRS depreciation rule that applies when more than 40% of the depreciable basis of the personal property you placed in service during the tax year went into service in the last three months of that year. When it applies, every piece of MACRS personal property placed in service that year is treated as if it entered service at the midpoint of its quarter, which sharply cuts first-year depreciation on fourth-quarter purchases and slightly increases it for assets placed in service earlier.¹ It isn’t an election. If you fail the 40% test, you use it.

Running the 40% Test

Add up the depreciable basis of every piece of MACRS personal property you placed in service in the last three months of the tax year. Add up the depreciable basis of every piece of MACRS personal property you placed in service during the entire year. If the first figure is more than 40% of the second, the mid-quarter convention applies to everything you placed in service that year, not just the late purchases.¹

Depreciable basis for the test is not the full purchase price. Reduce each asset’s cost by any Section 179 expense you elected on it and by the portion attributable to personal use. An asset fully expensed under Section 179 drops out of the calculation because its remaining basis is zero. The basis is not reduced for bonus depreciation.²

A short example. Your calendar-year business places $120,000 of MACRS equipment in service during the year, including a $55,000 truck bought in November. Forty percent of $120,000 is $48,000. The November truck alone exceeds that, so the mid-quarter convention applies to every MACRS asset placed in service that year, including the ones from January and June.

“Placed in service” is not the same as “purchased.” An asset is placed in service when it’s ready and available for use in your business. A machine ordered in September but not installed and operational until January belongs to the following tax year and plays no part in this year’s test.

How the Convention Changes First-Year Depreciation

Under the mid-quarter convention, each asset is treated as placed in service at the midpoint of the quarter in which it actually went into service. For a 12-month tax year, the first-year depreciation works out to a fixed percentage of the full annual amount based on quarter:²

First quarter: 87.5% (10.5 months of service)
Second quarter: 62.5% (7.5 months)
Third quarter: 37.5% (4.5 months)
Fourth quarter: 12.5% (1.5 months)

The Q4 figure is where the rule bites.

Worked Example

Say you place $100,000 of five-year MACRS property in service. Under 200% declining balance, the full annual rate in year one is 40% of cost, or $40,000 before any convention adjustment. A Q1 placement gives you $35,000 ($40,000 × 87.5%). A Q4 placement gives you $5,000 ($40,000 × 12.5%). Same asset, same cost, same recovery period, a $30,000 swing in the first year’s deduction based only on the quarter of placement.²

Compared to the Half-Year Convention

When the 40% test is not triggered, MACRS personal property defaults to the half-year convention. That rule treats every asset as placed in service at the midpoint of the tax year regardless of actual date, so you get six months of depreciation in year one whether you bought the equipment on January 2 or December 30.²

For businesses that buy heavily late in the year, the half-year convention is more favorable, because six months beats the 1.5 months the mid-quarter rule gives Q4 assets. For a Q1 asset the mid-quarter convention is actually slightly better: 87.5% exceeds the half-year convention’s flat 50%.

A separate rule, the mid-month convention, applies to residential rental property, nonresidential real property, and railroad grading or tunnel bores. That property follows its own rules and is ignored for the 40% test entirely.¹

What Doesn’t Count Toward the 40% Test

Two categories of property are carved out of the calculation:¹

Real property that uses the mid-month convention (nonresidential real, residential rental, railroad grading or tunnel bores) is excluded from both the test and the convention itself.
Property placed in service and disposed of in the same tax year is excluded from the test. No depreciation is allowed on these assets.²

One common misunderstanding worth flagging: property depreciated under the Alternative Depreciation System is not excluded. The statute requires ADS property to use the same convention determined under the regular rules. If the 40% test is triggered, ADS property placed in service that year also uses the mid-quarter convention.³

Using Section 179 To Stay Under 40%

Because Section 179 expense reduces the depreciable basis used in the 40% test, you can use it deliberately to stay below the threshold. If a late-year purchase would push you over, electing Section 179 on that asset shrinks or eliminates its basis in the calculation and can keep the half-year convention in place for all your assets.²

For 2025 tax years, the Section 179 expensing limit is $2,500,000 (the figure adjusts annually for inflation). Any portion of an asset’s cost you elect to expense under Section 179 is subtracted from its basis before you run the 40% test. Expense the entire cost and the asset effectively disappears from the calculation.

This planning works best when you’re near the line. Before year-end, total the depreciable bases of everything placed in service, figure what the fourth-quarter assets represent, and see whether a Section 179 election brings the ratio under 40%.

Why Bonus Depreciation Doesn’t Help the Test

The One Big Beautiful Bill permanently reinstated 100% bonus depreciation for qualified property acquired after January 19, 2025. For most businesses buying new or qualifying used equipment, bonus depreciation can wipe out the entire cost in year one.⁴

Bonus depreciation does not, however, reduce the depreciable basis for the 40% test. Even if you claim 100% bonus on a fourth-quarter asset, its full cost still counts in the ratio. The IRS is explicit: the test basis reflects Section 179 reductions but not any reduction for the special depreciation allowance.²

In practice, when you claim 100% bonus on everything, the convention has little effect because there is no remaining basis to depreciate over the recovery period. The convention matters more when you elect out of bonus (or elect the reduced rate available for certain property), because then the MACRS tables and their convention adjustments decide a meaningful share of your deduction.

Selling an Asset Subject to the Convention

The mid-quarter convention also controls how much depreciation you claim in the year you dispose of the asset. The disposition-year percentages are essentially the reverse of the first-year ones:²

Disposed in Q1: 12.5% of the full annual depreciation
Disposed in Q2: 37.5%
Disposed in Q3: 62.5%
Disposed in Q4: 87.5%

Selling early in the year produces a small final deduction; selling late produces a larger one. The convention assumes the disposition happened at the midpoint of the quarter, so a Q1 sale yields only 1.5 months of depreciation.

Short Tax Years and Fiscal Years

If your tax year is shorter than 12 months, the 40% test works the same way: compare the basis of property placed in service in the last three months of the short year to the basis of all property placed in service during the short year. If the short tax year is three months or less, the mid-quarter convention applies automatically to all applicable property, and no 40% test is needed.⁵

For short-year depreciation under the convention, figure depreciation as if you had a full 12-month year, then multiply by a fraction: the months (including partial months) the asset is treated as in service during the short year, divided by 12.²

For a fiscal-year business, the “last three months” and the quarterly breakdowns run on your fiscal year, not the calendar. A business with a fiscal year ending June 30 measures its fourth-quarter placements from April 1 through June 30 and runs the 40% test on April, May, and June placements. The percentages are identical. Only the dates shift.

Where It Shows Up on Your Return

MACRS depreciation, including anything calculated under the mid-quarter convention, is reported on IRS Form 4562 (Depreciation and Amortization). The form’s instructions walk through the convention determination and require you to indicate which convention applies.⁶ Publication 946 contains MACRS percentage tables that already incorporate the mid-quarter convention, so you can look up each asset’s annual percentage by quarter and recovery period rather than running the math by hand.

1
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
3
Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
4
Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
5
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
6
IRS. 2025 Instructions for Form 4562 – Depreciation and Amortization