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. Explore More Resources
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. Explore More Resources
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. Explore More Resources
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.) Explore More Resources
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.