The three MACRS conventions, and how to tell which one a schedule used

The convention is the narrowest column on a depreciation schedule. Two letters, sometimes buried
inside a method string, often not printed at all.

It also moves the first-year number more than anything else on the row. The same asset, the same
cost, the same recovery period and the same method can produce a first-year deduction seven times
larger under one convention than under another. Nothing else on the line has that range.

There are three, and which one governs is not a preference. Each follows from facts — what kind of
property it is, and when during the year the client's assets were placed in service — and one of
those facts is about the whole year rather than about the asset in front of you. That last point is
what makes a missing convention column a genuine problem rather than an inconvenience.

The half-year convention, and what default means here

Under the half year convention, property is treated as placed in service at the midpoint of the
tax year, whatever the actual date. Half a year of depreciation in the first year, and the recovery
spills one year past the nominal class life to pick up the other half at the end — which is why
five-year property sits on a schedule for six years.

It applies to personal property, which is to say everything that is not residential rental or
nonresidential real property, and it is what governs unless the mid-quarter test below is tripped.

Calling it the default is accurate but slightly misleading. Nobody elects it. It applies because the
alternative did not.

The mid-quarter convention, and the 40% test that triggers it

The mid quarter convention treats property as placed in service at the midpoint of the quarter
in which it was actually placed in service. Four possible first-year fractions instead of one.

It is triggered by a test on the whole year: if the aggregate basis of MACRS property placed in
service during the last three months of the tax year exceeds 40% of the aggregate basis of
all MACRS property placed in service during the entire year, mid-quarter applies. Residential rental
and nonresidential real property are excluded from both sides of that computation, since they run on
mid-month regardless.

Two consequences are worth being explicit about, because they are where the reasoning usually goes
wrong.

It is all-or-nothing for the year. If the test is tripped, every item of personal property placed
in service that year moves to mid-quarter — not only the ones bought in the fourth quarter. An asset
acquired in February is affected by a purchase made in December.

It is a fact about the client's year, not about the asset. Nothing on an individual row can tell
you whether the test was met. The row does not know what else was bought.

The mid-month convention, and why real property is separate

The mid month convention treats property as placed in service at the midpoint of the month, and
it applies to residential rental property and to nonresidential real property. Twelve possible
first-year fractions.

The arithmetic is simple enough to state in one line: the first year takes
(12 − month + 0.5) ÷ 12 of a full year's straight-line depreciation. Property placed in service in
January gets 11.5 months of the twelve; property placed in service in December gets half a month.

For 27.5-year residential rental property that works out to 3.485% of basis in a January year and
0.152% in a December one. The full grid for every month and both real property classes is in
Publication 946, Appendix A, and is worth reading there rather than from a copy.

Real property is on straight line throughout, so unlike the other two conventions there is no
interaction with a declining-balance rate to reason about.

Reading the convention off the numbers

This is the useful part when a schedule arrives from a prior preparer with no convention column,
which happens often.

The convention is visible in the first-year deduction as a fraction of basis, because each
convention produces a distinct first-year percentage for a given class and method. For the
declining-balance classes those percentages are exact and easy to recognise:

First-year rate	3-year 200DB	5-year 200DB
Half-year	33.33%	20.00%
Mid-quarter, Q1	58.33%	35.00%
Mid-quarter, Q2	41.67%	25.00%
Mid-quarter, Q3	25.00%	15.00%
Mid-quarter, Q4	8.33%	5.00%

They are not arbitrary. The annual declining-balance rate is 2 ÷ life, and the convention decides
what fraction of the year it runs for — six months out of twelve under half-year, and 10.5, 7.5, 4.5
or 1.5 months under mid-quarter by quarter. For five-year property the annual rate is 40%, so
half-year gives 20.00% and a fourth-quarter acquisition gives 5.00%. The same construction works for
any class and any declining-balance rate.

So: take a row whose first year is on the schedule, divide the first year's depreciation by the
basis, and compare. A five-year row showing 5% of cost in its first year was placed in service in a
fourth quarter under mid-quarter. One showing 20% was under half-year.

Two cautions. The method has to be the one you assume — a 150% declining-balance row has different
percentages, derived the same way from 1.5 ÷ life. And this identifies what the prior preparer's
software did, which is the fact you need in order to transcribe the schedule faithfully. It is not
a view about what should have been done, and it cannot be, because the 40% test depends on the
year's full acquisition list and that list is not on the page.

Where the schedule shows only later years, this does not work at all: from year two onward the
half-year and mid-quarter percentage series diverge in ways that are not distinctive enough to read
by eye.

The other route is the return. Column (e) of Part III, Section B of
Form 4562 states the convention for that year's additions, one row
per property class.

The disposal year, where the convention returns

A convention applies at both ends. It governs the year an asset leaves as well as the year it
arrives.

Under half-year, a disposal takes half a year's depreciation in the year of sale regardless of the
date. Under mid-quarter, it takes depreciation to the midpoint of the quarter of disposal. Under
mid-month, to the midpoint of the month.

This is the part most often missed when an asset base is rebuilt in new software, because the
convention field is treated as first-year metadata and quietly dropped once the asset is a few years
old. It stops being relevant right up until the client sells something.

What we do with it

The convention is transcribed from what the schedule prints. Where it is printed in its own column,
or inside a compressed method string such as 5 HY 200DB, it is read from there.

Where it is not printed at all, the field comes back empty and flagged rather than filled with the
convention that is most likely. Half-year is the most likely, and writing it in would be right most
of the time — which is exactly why it is not done. A convention silently supplied by us, wrong in
the minority of cases where the client had a heavy fourth quarter, would be indistinguishable on the
page from one the document actually stated.

Before any of that, the extracted rows are checked against the schedule's own printed subtotals and
grand total. A convention has no effect on that check, since it is not a dollar amount — which is
another reason it is left to the preparer rather than inferred.

If the convention is missing and matters, the cleanest route is to ask for the detailed print or the
fixed-asset export, the same as with any other absent column. What a schedule carries and what it
drops is covered in reading a MACRS depreciation schedule, and
the wider question of what survives a software change is on the
switching tax software page.

FAQ

What are the three MACRS conventions?

Half-year, mid-quarter and mid-month, printed as HY, MQ and MM. Half-year and mid-quarter apply to
personal property; mid-month applies to residential rental and nonresidential real property.

What triggers the mid-quarter convention?

The aggregate basis of MACRS property placed in service during the last three months of the tax year
exceeding 40% of the aggregate basis of all MACRS property placed in service during the whole year,
with residential rental and nonresidential real property excluded from the computation. When the
test is met, every item of personal property placed in service that year uses mid-quarter, not only
the fourth-quarter acquisitions.

What is the half-year convention?

Treating property as placed in service at the midpoint of the tax year regardless of the actual
date, so the first year takes half of a full year's depreciation and the recovery extends one year
beyond the nominal class life.

Which property uses the mid-month convention?

Residential rental property and nonresidential real property. The first year takes
(12 − month + 0.5) ÷ 12 of a full year's straight-line depreciation, so a January in-service date
gets 11.5 months of the twelve and a December one gets half a month.

Can I work out the convention from a schedule that does not print it?

From a first-year row, yes. Divide the first year's depreciation by the basis and compare against
the first-year percentages for that class and method — five-year 200DB gives 20.00% under half-year
and 35.00%, 25.00%, 15.00% or 5.00% under mid-quarter by quarter. From a later year it is not
reliably readable. That year's Form 4562, column (e) of Part III Section B, states it directly.

Does the convention matter after the first year?

Yes, at disposal. The convention governs how much depreciation the year of sale takes — half a year
under half-year, to the midpoint of the quarter under mid-quarter, to the midpoint of the month
under mid-month. It is easy to treat as first-year metadata and drop, and the omission surfaces only
when something is sold.