Half-year convention
Encyclopedia
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 his/her property. The tax code explains how to do this through, what is called, the applicable convention
.
In tax accounting the half-year convention is the default applicable convention used for federal income tax purposes. Like other conventions, the half-year convention affects the depreciation deduction computation in the year in which the property is placed into service. Using the half-year convention, a taxpayer claims a half of a year's depreciation for the first taxable year, regardless of when the property was actually put into service. It is assumed that the property being depreciated was placed into service at the mid-point of the year. To compensate for this computation, the taxpayer is entitled to another half-year of depreciation at the end of the normal recovery period. § 168(d)(4) of the Federal Income Tax Code defines half-year convention as a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.
Year 1- limited to half of the deduction normally entitled in a full year. One
deduction of $5,000 allowed at the end of the year, since the property is put into
service on July 1, year 1.
Year 2- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 3- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 4- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 5- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 6- $5,000 deduction taken on June 30.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
taxation law.
Certain property is subject to depreciation
Depreciation
Depreciation refers to two very different but related concepts:# the decrease in value of assets , and# the allocation of the cost of assets to periods in which the assets are used ....
. 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 his/her property. The tax code explains how to do this through, what is called, the applicable convention
Applicable convention
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...
.
In tax accounting the half-year convention is the default applicable convention used for federal income tax purposes. Like other conventions, the half-year convention affects the depreciation deduction computation in the year in which the property is placed into service. Using the half-year convention, a taxpayer claims a half of a year's depreciation for the first taxable year, regardless of when the property was actually put into service. It is assumed that the property being depreciated was placed into service at the mid-point of the year. To compensate for this computation, the taxpayer is entitled to another half-year of depreciation at the end of the normal recovery period. § 168(d)(4) of the Federal Income Tax Code defines half-year convention as a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.
Example
Consider you are a taxpayer with five-year property worth $50,000. Also, assume that the property depreciates $10,000 per year.Year 1- limited to half of the deduction normally entitled in a full year. One
deduction of $5,000 allowed at the end of the year, since the property is put into
service on July 1, year 1.
Year 2- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 3- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 4- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 5- $10,000 deduction taken. $5,000 deducted on June 30. $5,000 deducted
on December 31.
Year 6- $5,000 deduction taken on June 30.