Half-Year Convention for Depreciation

What it is

The half-year convention treats all property acquired during a tax year as if it were placed in service at the midpoint of that year. As a result, only half of the normal full-year depreciation is allowed in the first year and the remaining half is deferred to the final year of the asset’s depreciation schedule.

Why it’s used

• Implements the matching principle by aligning depreciation expense with the period in which the asset provides value.
• Simplifies timing assumptions for assets placed in service at various points during the year.
• Applies across depreciation methods (straight-line, declining-balance, sum-of-the-years’ digits), unless a different convention is required.

How it works (simple mechanics)

• Compute the normal annual depreciation according to the chosen method.
• In year 1, record 50% of that annual amount.
• Continue with full annual amounts in intervening years.
• In the final year, record the remaining 50%, effectively extending the depreciation schedule by one year.

Example

Purchase: delivery truck cost $105,000; salvage value $5,000; useful life 10 years.
Straight-line annual depreciation = (105,000 − 5,000) / 10 = $10,000.

With half-year convention:
– Year 1: $5,000 (half of $10,000)
– Years 2–10: $10,000 each
– Year 11: $5,000 (final half-year)

This extends the recovery period by one year but better matches expense to the truck’s service.

When the mid-quarter convention replaces it

The mid-quarter convention must be used instead of the half-year convention if more than 40% of the aggregate basis of property placed in service during the tax year was placed in service in the last three months of that year.

Example of the 40% test:
– Machine: $2,000 (January)
– Desk: $500 (April)
– Computer: $2,000 (November)
Total basis = $4,500; November purchases = $2,000 → 44.4% → mid-quarter convention applies for all assets.

Assets excluded from the half-year convention

The half-year convention does not apply to:
– Residential rental property
– Nonresidential real property
– Railroad grading
– Tunnel bores

(These asset classes follow other conventions.)

Interaction with MACRS

Under the IRS Modified Accelerated Cost Recovery System (MACRS):
– General Depreciation System (GDS) allows 200% declining-balance, 150% declining-balance, and straight-line methods.
– Alternative Depreciation System (ADS) uses straight-line only.
The half-year convention can be used with available MACRS methods unless another convention (such as mid-quarter) is required.

Key takeaways

• The half-year convention assumes assets are placed in service mid-year, producing half-year depreciation in the first and last years.
• It aids accurate expense recognition under the matching principle.
• Use the mid-quarter convention instead when the 40% late-year acquisition threshold is exceeded.
• Certain real property and specialized assets are excluded and follow other conventions.