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Updated for 2011
Small Business Deductions: Depreciation
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Depreciation Conventions
The convention used determines which depreciation table to use and how much depreciation you can deduct each year of the property's the recovery period.
- Half-year convention:
- If you place property in service between January and September (the first nine months), you must use the half-year convention.
- This convention assumes you placed property in service in the middle of the year even if it was placed in service the beginning of the year.
- It also assumes that when you dispose of the property, you disposed of it in the middle of the year even if you disposed of it on January 1.
- Consequently, in the year the property is placed in service you may only deduct one-half of the annual depreciation and in the year the property is disposed of you may only deduct one-half of the annual depreciation.
- Mid-quarter convention:
- This convention considers the cost of business equipment (excluding realty) acquired in the last quarter of the year (October, November, and December).
- If the total cost of business equipment acquired in the last quarter of the year exceeds 40% of the total cost of equipment acquired for the entire year, the mid-quarter convention must be used for all property placed in service in that tax year.
- For example, if total annual acquisitions equal $50,000, which includes last quarter acquisitions of $30,000 the mid-quarter convention must be used ($30,000/$60,000=60%).
- The depreciation table used for the mid-quarter convention is divided into four quarters.
- Each quarter includes the depreciation rates for each year of the asset's recovery period.
- The depreciation rate for each year is applied to each individual asset for each year of its recovery period.
- The rate used for each asset depends on the quarter the asset was placed in service.
- If the 40% test is not met, the half-year convention must be used.
- Mid-month convention:
- Applied to realty, such as residential rental property and nonresidential real property. Property is treated as placed in service or disposed of at the midpoint of the applicable month.
- Only the straight-line method may be used for realty.
Next:
Depreciation: Recovery Periods, Class Life, Examples of Property
Related Links
- Investment Use Property
- Depreciation Methods (MACRS)
- Form 4562, Depreciation and Amortization
- How the General Depreciation System and
- Converting Personal Use Property to Business Use
- Converting Personal Use Property to Business Use
- How to Compute Depreciation
- Two Examples: Computing Depreciation-Example 1: Accelerated MACRS
- How to Claim Depreciation
- What is the First-Year Expensing Deduction (also called the Section 179 deduction)?
- Eligibility Requirements for Claiming First-Year Expensing
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