First Year Averaging Conventions to Calculate a Depreciation Deduction

When a piece of property is placed in service, you are required to use a particular convention to determine the depreciation deduction you will get for the year of acquisition.  Below are the most commonly used convention types:

Half-Year (HALFYR): During the year an asset is acquired, only six months of depreciation is allowed regardless of when the asset is actually acquired during the year.

Mid-Month (MIDM):  For IRS Tax depreciation, one half of the normal monthly depreciation is allowed during the month of acquisition.  GAAP depreciation methods allow for full normal monthly depreciation when acquired between the 1st-15th of the month.  Assets acquired after the 15th are allowed no normal monthly depreciation during the month of acquisition with a full months depreciation allowance in the following months.

Mid-Quarter (MIDQ):  According to IRS Tax depreciation, when more than 40% of personal property assets acquired during the year are acquired during the last quarter of the year, a 40% Rule violation exists.  When the 40% Rule is violated, the tax payer can only deduct 1/2 of the normal depreciation calculated for the quarter during which the asset was acquired.  Remaining quarters following the quarter of acquisition are allowed full normal depreciation.

Full Month (FULLMO):  Allows for normal monthly deprecation regardless of the day of the month the asset is acquired.

When calculating depreciation expense, it is important to use the appropriate calculation for the first year conventions.  Otherwise, the amount will either be an overstatement or understatement.

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