Half-Year Convention Rules: First-Year, Disposal, and Vehicle Caps

The half-year convention is the default MACRS rule that treats depreciable personal property as though it was placed in service on the midpoint of the tax year, no matter when during that year you actually bought or installed it. You get six months of depreciation in year one and six months in a stub year after the class life ends, which is why a five-year asset takes six tax years to fully depreciate and a seven-year asset takes eight. The convention exists to spare taxpayers from prorating every asset by days, and its symmetry is already baked into the IRS percentage tables.

How the Rule Actually Works

Under IRC Section 168(d)(1), the half-year convention is the general rule for depreciable personal property: machinery, equipment, vehicles, office furniture, and similar assets.¹ Whether you place an asset in service on January 3 or November 28, the IRS treats the clock as starting at the midpoint of that tax year. A calendar-year taxpayer always gets exactly half a year’s worth of depreciation in the first year.

The same logic runs at the back end. If you sell or retire the asset before the recovery period ends, the convention treats the disposition as happening at the midpoint of that year, so you claim half a year of depreciation in the final year regardless of the actual sale date.¹

Because year one only carries half a year of depreciation, the schedule extends one tax year past the stated class life. That trailing stub year catches the six months the convention deferred at the start.

What the Convention Does Not Cover

Real property is out. Nonresidential real property (office buildings, warehouses), residential rental property, and railroad gradings or tunnel bores all use the mid-month convention, which treats the asset as placed in service at the midpoint of the specific month you started using it.¹

Intangible assets like patents, trademarks, and goodwill fall under Section 197 and are amortized straight-line over 15 years starting from the month of acquisition. The MACRS conventions don’t apply to them at all.

When the Mid-Quarter Convention Takes Over

The half-year rule gets overridden when a business concentrates its buying at the end of the year. If the total depreciable basis of property placed in service during the last three months of the tax year exceeds 40% of all property placed in service that year, the mid-quarter convention becomes mandatory for every asset placed in service during that year.²

Two categories don’t count in the 40% test: real property (which uses mid-month anyway), and property placed in service and disposed of within the same tax year.¹ Neither enters the numerator or the denominator.

Under mid-quarter treatment, each asset is treated as placed in service at the midpoint of the quarter it was acquired. Property purchased in October through December ends up with roughly a month and a half of first-year depreciation instead of six months. This is the whole point: a taxpayer can’t buy a large piece of equipment on December 30 and claim half a year of deductions on it.

Run the 40% test every year. If you fail it, every personal-property asset placed in service that year shifts to mid-quarter, not just the fourth-quarter purchases.

First-Year Depreciation Under the Half-Year Convention

The standard MACRS method for most personal property is 200% declining balance, which front-loads deductions. The IRS tables already fold the declining-balance calculation and the half-year adjustment together, so most taxpayers just multiply the asset’s basis by the table percentage.³

Common recovery periods under the half-year convention:

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

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

A Worked Example

Buy a $10,000 piece of equipment classified as five-year property. Without the half-year convention, the full-year 200% declining balance rate would be 40% (2 divided by 5), producing a $4,000 first-year deduction. The convention cuts that in half, giving you a first-year deduction of $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% declining-balance rate applies to the remaining $8,000 basis, producing $3,200, which matches the 32.00% table rate on the original $10,000. The pattern continues with declining amounts through year six, when the final $576 closes out the recovery.

You report all of this on Part III of Form 4562, and the deduction flows to the return that matches your business structure (Schedule C for sole proprietors, Form 1065 for partnerships, and so on).⁴

The Year You Dispose of the Asset

Sell, trade, or retire an asset before the recovery period ends and you still claim a partial deduction. The convention treats the disposition as happening at the midpoint of that year, so the final-year deduction is exactly half of what a full year would produce.¹

Getting that final number right matters because it feeds into your adjusted basis, which determines gain or loss on the sale. Underclaim the depreciation and you overstate basis, potentially underreporting gain. Overclaim it and you create phantom losses.

For personal property, any gain attributable to prior depreciation deductions is generally taxed as ordinary income under the Section 1245 recapture rules, not at capital gains rates.⁵ The depreciation you claimed over the years comes back as ordinary income when you sell at a gain. That’s where people get surprised.

How Bonus Depreciation and Section 179 Change the Picture

The convention matters most when you’re actually spreading an asset’s cost over its full recovery period. Two provisions can shrink or eliminate that 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 You can deduct the entire cost in year one with no annual dollar cap on the bonus itself.⁷

When you take 100% bonus, the half-year convention is essentially moot because no basis is left to spread. If you elect out of bonus depreciation, the convention applies to the full asset cost under standard MACRS. For assets that received partial bonus under the earlier phasedown (property 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 qualifying property up to an annual limit rather than depreciate it. The statutory base limit is $2,500,000, with a phase-out beginning when total qualifying property placed in service exceeds $4,000,000. Both figures are indexed for inflation starting with tax years beginning in 2026.⁸

Order matters. Apply Section 179 first, then bonus depreciation, then regular MACRS on whatever basis remains.⁴ The half-year convention only touches that last layer. Section 179 a $50,000 truck down to zero remaining basis, and the convention never enters the math. Partially expense it and elect out of bonus depreciation, and the convention applies to the leftover.

Passenger Vehicle Caps

Even with 100% bonus depreciation available, passenger automobiles are subject to annual depreciation limits that can override whatever the tables or bonus rules would otherwise produce. For vehicles placed in service in 2026, the first-year cap is $20,300 if bonus depreciation applies, or $12,300 if it does not.⁹

The half-year convention is already built into these caps. Buy a $60,000 sedan for business use and you don’t get the $12,000 that straight five-year MACRS would produce (20% of $60,000). You get $12,300 without bonus or $20,300 with it. Any unrecovered basis after the regular recovery period is deducted in equal installments in later years, which makes vehicle depreciation one of the slowest cost-recovery processes in the code.

Short Tax Years

A short tax year (less than 12 months, common in startups, closures, and accounting-period changes) doesn’t eliminate the convention, but it does shift the midpoint. For a short year that starts on the first of a month or ends on the last day of a month, find the midpoint by dividing the number of months by two. For other short years, divide the total days by two and round to the nearest midpoint or first day of a month.¹⁰

One case forces a switch. If your short tax year is three months or less, the mid-quarter convention applies to all personal property placed in service during that period, regardless of the 40% test.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