MACRS Mid-Quarter Convention Table: How to Use It

The Modified Accelerated Cost Recovery System, or MACRS, is the required tax depreciation system for most property in the United States, allowing businesses to recover the cost of property over a specified number of years. A component of MACRS is the use of “conventions,” which are timing rules that establish when an asset’s depreciation begins.

There are three primary conventions under MACRS: the half-year, the mid-month, and the mid-quarter convention. The half-year convention is the most common, treating all property as if it were placed in service in the middle of the tax year. The mid-month convention is used specifically for real estate. The mid-quarter convention is an exception that applies to certain personal property based on the timing of asset purchases within a year.

Determining if the Mid-Quarter Convention Applies

The mid-quarter convention is a specific rule that must be used if a significant portion of a business’s assets are acquired late in the tax year. This rule is triggered if the total cost basis of MACRS property placed in service during the final three months of the tax year is more than 40% of the total cost basis of all MACRS property acquired during the entire year. This is often referred to as the “40% test.” The purpose of this rule is to prevent businesses from claiming a large depreciation deduction by purchasing a majority of their assets at the very end of the year.

The 40% test applies to tangible personal property, such as machinery, equipment, vehicles, and furniture. However, certain assets are excluded from this calculation, including:

• Nonresidential real property
• Residential rental property
• Property depreciated under a method other than MACRS
• Any property that is both placed in service and disposed of within the same tax year
• Property expensed under Section 179

To determine if the mid-quarter convention applies, first sum the depreciable basis of all eligible MACRS property placed in service during the entire tax year. Second, sum the basis of the eligible property placed in service during the last three months of the tax year. Finally, divide the fourth-quarter total by the full-year total. If the result is greater than 40%, the mid-quarter convention must be used for all eligible property placed in service that year.

For example, a business with a calendar tax year purchases two assets. It buys a machine for $65,000 and places it in service on March 1st (Quarter 1). It then buys another piece of equipment for $35,000 and places it in service on November 15th (Quarter 4). The total basis of property for the year is $100,000. The basis of property placed in service in the fourth quarter is $35,000. Since $35,000 is 35% of $100,000, the 40% threshold is not met, and the half-year convention would apply.

How to Use the Mid-Quarter Convention Tables

Once you determine that the mid-quarter convention applies, you must use the depreciation tables in IRS Publication 946, How To Depreciate Property. Unlike the half-year convention, the mid-quarter convention groups assets based on the specific quarter in which they were placed in service.

The IRS provides separate tables for assets placed in service in each of the four quarters, organized by the asset’s recovery period (e.g., 3-year, 5-year, or 7-year property). To find the correct depreciation rate, you must identify the table that matches the quarter the asset was placed in service.

For instance, if you placed 5-year property into service during the second quarter, you would use the mid-quarter table for property placed in service in Quarter 2. You would then find the row for the current recovery year to locate the applicable depreciation percentage.

Below are excerpts from the IRS tables for 5-year and 7-year property, which are common for business equipment and machinery.

5-Year Property
| Recovery Year | Placed in Service in Quarter 1 | Placed in Service in Quarter 2 | Placed in Service in Quarter 3 | Placed in Service in Quarter 4 |
| :— | :— | :— | :— | :— |
| 1 | 35.00% | 25.00% | 15.00% | 5.00% |
| 2 | 26.00% | 30.00% | 34.00% | 38.00% |
| 3 | 15.60% | 18.00% | 20.40% | 22.80% |
| 4 | 11.01% | 11.37% | 12.24% | 13.68% |
| 5 | 5.76% | 11.37% | 11.30% | 11.31% |
| 6 | 5.76% | 4.26% | 6.06% | 9.21% |

7-Year Property
| Recovery Year | Placed in Service in Quarter 1 | Placed in Service in Quarter 2 | Placed in Service in Quarter 3 | Placed in Service in Quarter 4 |
| :— | :— | :— | :— | :— |
| 1 | 25.00% | 17.85% | 10.71% | 3.57% |
| 2 | 21.43% | 23.47% | 25.51% | 27.55% |
| 3 | 15.31% | 16.76% | 18.22% | 19.68% |
| 4 | 10.93% | 11.97% | 13.02% | 14.06% |
| 5 | 8.75% | 8.87% | 9.30% | 10.04% |
| 6 | 8.74% | 8.87% | 8.85% | 8.73% |
| 7 | 8.75% | 8.87% | 8.85% | 8.73% |
| 8 | 1.09% | 3.32% | 5.53% | 7.69% |

Calculating Depreciation with the Mid-Quarter Convention

The depreciation deduction is calculated by multiplying the asset’s basis by the specific percentage rate from the IRS tables for its class, placed-in-service quarter, and recovery year.

First, determine the asset’s depreciable basis, which is its cost plus any expenses for shipping or installation. Next, identify the asset’s property class, which determines its recovery period (e.g., 5-year or 7-year property).

After locating the correct rate in the table, multiply the asset’s basis by this rate to find the depreciation deduction for that tax year. This calculation is performed each year of the asset’s recovery period, moving down the table to the next recovery year’s rate.

For example, a business purchases a new machine for $50,000. This machine is 7-year property placed in service on February 20th (Quarter 1). Assuming the mid-quarter convention applies, the Year 1 depreciation is calculated using the 25.00% rate from the 7-year property table for a Quarter 1 placement. The deduction is $50,000 0.2500 = $12,500.

For Year 2, the rate is 21.43%, for a deduction of $10,715. In Year 3, the rate is 15.31%, resulting in a deduction of $7,655. This process continues for each year of the asset’s recovery schedule until its cost is fully depreciated.

Depreciation in the Year of Disposal

The mid-quarter convention rules also apply in the year an asset is sold or disposed of. If an asset was subject to the mid-quarter convention when placed in service, the same convention must be used for its disposal. The rule treats the property as being disposed of at the midpoint of the quarter in which the disposal occurs.

To calculate the final year’s depreciation, first determine the full year’s depreciation by multiplying the asset’s basis by the rate for that recovery year. Then, you must adjust this amount based on the quarter of disposal.

The adjustment percentages are as follows:

• Disposal in Quarter 1: 12.5% of the full-year depreciation
• Disposal in Quarter 2: 37.5% of the full-year depreciation
• Disposal in Quarter 3: 62.5% of the full-year depreciation
• Disposal in Quarter 4: 87.5% of the full-year depreciation

For example, using the $50,000 machine from the previous section, assume it is sold in Year 4. The full-year depreciation rate for Year 4 is 10.93%, which would be a deduction of $5,465. If the business sells this machine on May 10th (a second-quarter disposal), the deduction is adjusted. The calculation is the full-year amount of $5,465 multiplied by the second-quarter disposal percentage of 37.5%, resulting in a final deduction of $2,049.38.