The mid-quarter convention is another method for calculating depreciation, specifically for personal property, that is stipulated by the IRS in the United States. It’s used when more than 40% of the total cost of all personal property placed in service occurs during the last quarter of the tax year.
Under the mid-quarter convention, all property is considered to have been placed into service or disposed of at the midpoint of the quarter in which it was actually placed in service or disposed of.
The purpose of the mid-quarter convention is to prevent businesses from buying property late in the year and then claiming a full year’s worth of tax depreciation benefits.
Here’s how the depreciation rates break down under the mid-quarter convention:
- Property placed in service or disposed of in the first quarter (January – March): depreciation is based on 10.5/12 of a full year’s depreciation.
- Second quarter (April – June): depreciation is based on 7.5/12 of a full year’s depreciation.
- Third quarter (July – September): depreciation is based on 4.5/12 of a full year’s depreciation.
- Fourth quarter (October – December): depreciation is based on 1.5/12 of a full year’s depreciation.
It’s important to note that the mid-quarter convention only applies in the first year the property is placed in service. In subsequent years, a full year of depreciation can be claimed until the property is fully depreciated.
Example of the Mid-Quarter Convention
Suppose a company purchases equipment (considered personal property for tax purposes) worth $50,000 in October 2023. Let’s assume that this is the only personal property the company places in service in 2023, and the company uses the Modified Accelerated Cost Recovery System (MACRS) with a seven-year life for the equipment.
Normally, without considering the mid-quarter convention, the annual depreciation for the equipment using the 200% declining balance method (a common choice for equipment under MACRS) and the half-year convention (which is usually used when the mid-quarter convention doesn’t apply) would be approximately $7,143 for 2023.
However, since the equipment was placed into service in the fourth quarter (October – December), and this accounts for more than 40% of the total cost of all personal property placed in service for the year (in fact, it’s 100% in this case), the mid-quarter convention applies.
Under the mid-quarter convention, the equipment is considered to have been placed into service in the middle of the fourth quarter, so the company can only claim 1.5/12 of the yearly depreciation expense for 2023:
$7,143 (normal yearly depreciation) x 1.5/12 = $892.88
So, the depreciation expense for the equipment for the year 2023 is $892.88.
For subsequent years, the depreciation will be calculated as per the MACRS seven-year schedule, and a full year of depreciation can be claimed until the property is fully depreciated, provided the asset is still in service.