Calculating Partial Year Depreciation

When a business acquires or disposes of an asset, tax rules prevent claiming a full year’s depreciation for an item used for only part of the year. The deduction is instead prorated based on how long the asset was in service. To standardize this, the Modified Accelerated Cost Recovery System (MACRS) requires using specific averaging conventions. These conventions establish a standard assumption for when an asset’s recovery period begins or ends, with the correct one depending on the asset type and acquisition timing.

Determining the Applicable Depreciation Convention

For most business equipment and personal property, like vehicles and machinery, the half-year convention is the default method. It treats all property placed in service during a tax year as if it were placed in service on the midpoint of that year.

An exception is the mid-quarter convention, triggered by the 40% test. If the cost basis of personal property placed in service during the final three months of the tax year exceeds 40% of the total basis of all personal property placed in service for the entire year, this convention must be used.

For example, if a business buys a $30,000 machine in February and a $70,000 truck in November, the total basis is $100,000. Since the truck’s $70,000 basis was placed in service in the fourth quarter and exceeds $40,000 (40% of the total), both assets are subject to the mid-quarter convention.

The mid-month convention is required for all residential rental and nonresidential real property. This method treats the property as being placed in service in the middle of the month it was acquired, allowing a half-month of depreciation for the acquisition month.

Calculating Depreciation for Assets Placed in Service

For assets under the half-year convention, calculate the depreciation for a full year using the appropriate MACRS method and then take 50% of that amount for the first year’s deduction.

Under the mid-quarter convention, the first-year deduction is a percentage of the full year’s depreciation based on the quarter the asset was placed in service.

• First quarter (Jan-Mar): 87.5%
• Second quarter (Apr-Jun): 62.5%
• Third quarter (Jul-Sep): 37.5%
• Fourth quarter (Oct-Dec): 12.5%

For real property under the mid-month convention, first determine the full-year straight-line depreciation by dividing the asset’s basis by its recovery period (27.5 years for residential rental or 39 years for nonresidential real). Divide this annual amount by 12 to find the monthly depreciation. For the year of acquisition, you can deduct the full monthly amount for each full month of service, plus half of the monthly amount for the month the property was placed in service.

Calculating Depreciation for Assets Disposed of Mid-Year

The same conventions that apply when an asset is placed in service also govern depreciation in the year it is sold. The calculation is based on a percentage of what that year’s full depreciation deduction would have been.

When disposing of an asset under the half-year convention, you are entitled to one-half (50%) of the depreciation amount that would have been allowed for the full year. This treats the asset as being sold at the midpoint of the year.

For an asset under the mid-quarter convention, the deduction in the year of disposal is based on the quarter it was sold. The allowed percentage of a full year’s depreciation is as follows:

• First quarter disposal: 12.5%
• Second quarter disposal: 37.5%
• Third quarter disposal: 62.5%
• Fourth quarter disposal: 87.5%

For real property under the mid-month convention, the asset is treated as disposed of in the middle of the month of sale. To calculate the deduction, take the full monthly depreciation for each full month of service, and add a half-month’s depreciation for the month of the sale. For example, a property sold in August would receive 7.5 months of depreciation for that year.

Interaction with Bonus Depreciation and Section 179

Special expensing rules, namely the Section 179 deduction and bonus depreciation, interact with partial year depreciation in a specific order. These deductions are applied before the regular MACRS depreciation and its associated partial year conventions.

The first deduction to consider is the Section 179 expense, which allows a business to immediately expense the cost of qualifying property and reduce its depreciable basis. For 2025, the maximum deduction is $1,250,000. This deduction begins to phase out when the total cost of qualifying property placed in service during the year exceeds $3,130,000.

After the Section 179 deduction is applied, the next step is bonus depreciation. For property placed in service in 2025, bonus depreciation allows an immediate deduction of 40% of the remaining cost of qualifying property. This rate is scheduled to decrease to 20% in 2026 and be eliminated in 2027. This deduction is calculated on the asset’s basis after it has been reduced by any Section 179 expense taken.

Only after both Section 179 and bonus depreciation are subtracted from the asset’s cost is regular MACRS depreciation calculated. The partial year conventions are then applied to this final remaining basis. The conventions determine the prorated portion of depreciation on the cost not already written off through these accelerated methods.