Half-Year vs Mid-Quarter Convention: The 40% Test and Year-One Impact

The choice between the half-year convention and the mid-quarter convention is not really a choice. The half-year convention is the MACRS default for personal property, giving you six months of depreciation in year one no matter when during the year the asset went into service. The mid-quarter convention takes over automatically when more than 40 percent of your year’s MACRS personal-property purchases (measured by depreciable basis) were placed in service during the last three months of your tax year. If you cross that threshold, the mid-quarter convention applies to every piece of personal property you placed in service that year, not just the late ones.¹

The 40 Percent Test

Run the test once you know everything you placed in service during the tax year. Add up the depreciable basis of all MACRS personal property placed in service during the year. Then add up the depreciable basis of the subset placed in service during the last three months. If the second figure exceeds 40 percent of the first, you use the mid-quarter convention. Otherwise, you use the half-year convention.¹

The statute says “last three months of the tax year,” not “fourth calendar quarter.” For calendar-year filers those are the same window (October through December). For fiscal-year filers, it is whatever three-month period closes out the fiscal year.

A worked example. A calendar-year business places three assets in service:

March: $150,000 of manufacturing equipment
June: $140,000 of office furniture
November: $210,000 of computer systems

Total basis: $500,000. Last-three-months basis: $210,000. The threshold is $200,000 (40 percent of $500,000). Because $210,000 clears $200,000, every one of those assets — the March equipment and the June furniture included — uses the mid-quarter convention. Cut the November purchase to $190,000 and the entire year runs on the half-year convention instead. The all-or-nothing swing on a single late invoice is what catches most people off guard.

What Each Convention Gives You in Year One

Under the half-year convention, every asset is treated as placed in service at the midpoint of the year. Six months of depreciation in year one, six months in the final recovery year, regardless of actual service date.² A $100,000 asset classified as 5-year property under the 200-percent declining balance method has a full-year rate of 40 percent. Multiply by one-half: a $20,000 first-year deduction whether the asset arrived in February or November.

Under the mid-quarter convention, each asset is treated as placed in service at the midpoint of the quarter it actually entered use. The IRS assigns each quarter a fraction of the full-year amount:³

Q1 (Jan–Mar): 87.5 percent, or 10.5 months
Q2 (Apr–Jun): 62.5 percent, or 7.5 months
Q3 (Jul–Sep): 37.5 percent, or 4.5 months
Q4 (Oct–Dec): 12.5 percent, or 1.5 months

Same $100,000 asset, same 40 percent full-year rate. The first-year deduction is $35,000 if placed in service in Q1, $25,000 in Q2, $15,000 in Q3, and just $5,000 in Q4. Compare that Q4 figure to the $20,000 the half-year convention would have delivered. The mid-quarter rule exists to stop businesses from loading purchases into December and still claiming half a year of depreciation. Total depreciation over the full recovery period stays the same either way; only the timing shifts.

Publication 946 provides precomputed percentage tables so you do not have to redo this math by hand. Table A-1 covers the half-year convention. Tables A-2 through A-5 cover the mid-quarter convention, one per placement quarter.²

What Counts in the Test, and What Doesn’t

Several categories of property drop out of the 40 percent calculation:¹

Real property using the mid-month convention. Nonresidential buildings, residential rental property, and railroad grading or tunnel bores use their own convention and do not factor in.
Property placed in service and disposed of in the same tax year. It drops out of both the numerator and the denominator, and no depreciation is allowed on it at all.⁴
Property depreciated under a method outside MACRS, such as unit-of-production.

Section 179 and Bonus Depreciation Behave Differently

This is where filers most often go wrong. Both Section 179 and bonus depreciation cut the amount you eventually recover through regular MACRS, but they hit the 40 percent test in opposite directions.²

Section 179 reduces the basis used in the test. Expense a $300,000 November machine in full under Section 179 and its depreciable basis for the test is zero. The purchase effectively disappears from the calculation.

Bonus depreciation does not reduce the basis used in the test. Claim 100 percent bonus on that same $300,000 November machine and it still counts as $300,000 in the last-three-months numerator. You can trigger the mid-quarter convention on assets that ultimately receive no regular MACRS depreciation at all.

Under the One Big Beautiful Bill Act, 100 percent bonus depreciation is permanent for qualified property acquired after January 19, 2025, and both new and previously owned property can qualify.⁵⁶ If you claim 100 percent bonus on every asset, the convention makes no practical difference to your federal deduction because the whole cost is written off in year one anyway. You still have to run the test and report the correct convention on Form 4562, though, because it affects any asset where bonus does not apply — property you elected out of, property that does not qualify, and, importantly, your state return if your state has decoupled from bonus depreciation.

The Convention Also Governs the Year You Dispose of the Asset

Whichever convention applied when you placed an asset in service also controls how much depreciation you can claim in the year you sell, retire, or otherwise dispose of it.²

Under the half-year convention, you get exactly half the full-year amount in the disposal year, no matter when during the year you sold. Under the mid-quarter convention, the disposal-year fractions are the mirror image of the placement fractions: 12.5 percent for a Q1 disposal, 37.5 percent for Q2, 62.5 percent for Q3, and 87.5 percent for Q4. If an asset is placed in service and disposed of in the same tax year, no depreciation is allowed on it.⁴

If You Picked the Wrong Convention

Using the wrong convention is treated as a change in accounting method, not a math error, so you do not fix it with an amended return. You file Form 3115, Application for Change in Accounting Method.⁷

Correcting an impermissible convention qualifies as an automatic change under Designated Change Number 7, which carries no user fee. You attach the original Form 3115 to your timely filed return for the year of change, send a signed copy to the IRS National Office, and complete Schedule E for depreciation-related changes. The form computes a Section 481(a) adjustment that accounts for cumulative over- or under-depreciation from prior years. Under-depreciation is picked up in a single year and increases your current deduction; over-depreciation is spread over four years. The longer the error runs, the larger the adjustment, so it is worth running the 40 percent test carefully the first time.

1
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
3
Internal Revenue Service. Instructions for Form 4562 (2025)
4
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
5
Internal Revenue Service. Interim Guidance on Additional First Year Depreciation Deduction under Section 168(k)
6
Internal Revenue Service. Additional First Year Depreciation Deduction (Bonus) – FAQ
7
Internal Revenue Service. Instructions for Form 3115