Mid-Quarter Depreciation Convention

Written by Steven D. Beaucaire, MST
Vice President, Tax - Bedford Capital Consulting

Most of us look at mid-winter as a great time to put our lives in order, whether it be
reorganizing our closets or reassessing our financial plan. In that line of thinking, mid- winter might be a good time for an accountant to revisit mid-quarter convention. Too often tangible personal property is automatically given the half-year convention without any consideration to the 40% test, the guide for determining whether mid-quarter convention applies to this year's additions. And here’s the key point! This is not elective; it applies whether you want it to or not.

Let's analyze the criteria. Mid-quarter convention applies to all personal property acquired during a tax year if more than 40% of total additions are placed in service during the last three monts of the year. If the taxpayer meets this condition, the depreciation for the first year is limited to one-half of the quarter within which the property is placed in service, i.e. fourth-quarter additions get one-half of that quarter's depreciation which amounts to 1 and 1/2 months depreciation. But here's the piece often overlooked - the additions from the earlier quarters get one-half of that quarter's depreciation plus the remainder of the year, i.e. the second quarter additions would amount to 7 and 1/2 months depreciation.

There are some half-dozen exclusions that apply when calculating the 40% test for the mid-quarter convention. One of the most important categories is the exclusion of non- residential real property, residential rental property, and any railroad grading or tunnel bores (Code Sec. 168(d)(3)(B)(i)). The mid-quarter convention pertains only to personal property depreciable under MACRS (§168). One further exception to keep in mind is computer software. Because it is depreciated under §167, it would be excluded from the 40% test.

Remember that you don't want the IRS making the determination on audit that mid- quarter should have been applied. Being aware that there might be an issue is the best way to protect your clients.