Applicable convention
Encyclopedia
An applicable convention, as presented in of the United States
Internal Revenue Code
, is an assumption about when property is placed into service. It is used to determine when property depreciation begins. The purpose of applicable conventions is to simplify depreciation because they do not require a taxpayer to prove to the IRS when every piece of depreciable property was placed into service.
There are three types of conventions. The first, the “half-year convention
,” assumes that all property placed into service, or disposed of, during a taxable year was placed into service, or disposed of, at the mid-point of that year. (§ 168(d)(4)(A)) Section 168(d)(1) states that all taxpayers should use the half-year convention unless a different convention is specifically required by § 168(d)(2) or § 168(d)(3).
The second, the “mid-month convention,” assumes that all property placed into service, or disposed of, during any month was placed into service, or disposed of, at the mid-point of that month. (§ 168(d)(4)(B)) Section 168(d)(2) tells a taxpayer when it is appropriate to use the mid-month convention.
The third, the “mid-quarter convention,” assumes that all property placed into service, or disposed of, during any quarter of a taxable year was placed into service, or disposed of, at the mid-point of that quarter. (§ 168(d)(4)(C)) Section 168(d)(3) tells a taxpayer when it is appropriate to use the mid-quarter convention. Specifically, if a taxpayer buys a lot of depreciable assets in the last three months of the taxable year, the taxpayer will in some cases be forced to use the mid-quarter convention, resulting in an even smaller depreciation deduction in the first year as compared to the half-year convention.
Half-Year Convention
This convention applies to all depreciable tangible personal property.
Exemptions:
Residential rental and non residential real property
Property subject to mid quarter convention
Mid-quarter convention
If more than 40% of the total basis of property is placed in service during the last three months of the tax year, the mid quarter convention applies.
Exemptions:
Property that is being depreciated under a method other than MACRS.
Any residential rental property, nonresidential real property, or railroad gradings and tunnel bores.
Property that is placed in service and disposed of within the same tax year.
Mid-month convention
The mid-month convention applies only to real property. Under the mid-month convention, one-half month of depreciation is allowed for the month the asset is placed in service or disposed of and a full month of depreciation is allowed for each additional month of the year that the asset is in service.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
, is an assumption about when property is placed into service. It is used to determine when property depreciation begins. The purpose of applicable conventions is to simplify depreciation because they do not require a taxpayer to prove to the IRS when every piece of depreciable property was placed into service.
There are three types of conventions. The first, the “half-year convention
Half-year convention
Half-year convention is a principle of United States taxation law.Certain property is subject to depreciation. Depreciaton allows one to deduct a certain amount of the value or basis of depreciable property per taxable year. A person with depreciable property must know when to start depreciating...
,” assumes that all property placed into service, or disposed of, during a taxable year was placed into service, or disposed of, at the mid-point of that year. (§ 168(d)(4)(A)) Section 168(d)(1) states that all taxpayers should use the half-year convention unless a different convention is specifically required by § 168(d)(2) or § 168(d)(3).
The second, the “mid-month convention,” assumes that all property placed into service, or disposed of, during any month was placed into service, or disposed of, at the mid-point of that month. (§ 168(d)(4)(B)) Section 168(d)(2) tells a taxpayer when it is appropriate to use the mid-month convention.
The third, the “mid-quarter convention,” assumes that all property placed into service, or disposed of, during any quarter of a taxable year was placed into service, or disposed of, at the mid-point of that quarter. (§ 168(d)(4)(C)) Section 168(d)(3) tells a taxpayer when it is appropriate to use the mid-quarter convention. Specifically, if a taxpayer buys a lot of depreciable assets in the last three months of the taxable year, the taxpayer will in some cases be forced to use the mid-quarter convention, resulting in an even smaller depreciation deduction in the first year as compared to the half-year convention.
Half-Year Convention
This convention applies to all depreciable tangible personal property.
Exemptions:
Residential rental and non residential real property
Property subject to mid quarter convention
Mid-quarter convention
If more than 40% of the total basis of property is placed in service during the last three months of the tax year, the mid quarter convention applies.
Exemptions:
Property that is being depreciated under a method other than MACRS.
Any residential rental property, nonresidential real property, or railroad gradings and tunnel bores.
Property that is placed in service and disposed of within the same tax year.
Mid-month convention
The mid-month convention applies only to real property. Under the mid-month convention, one-half month of depreciation is allowed for the month the asset is placed in service or disposed of and a full month of depreciation is allowed for each additional month of the year that the asset is in service.