Half-year convention

The half-year convention is used to calculate depreciation for tax purposes, and states that a fixed asset is assumed to have been in service for one-half of its first year, irrespective of the actual purchase date. The remaining half-year of depreciation is deducted from earnings in the final year of depreciation.

For example, a company buys a machine for $50,000 on October 1. The machine has a five-year useful life. Under the half-year convention, the depreciation for the machine is as follows:

Year 1 =   $5,000
Year 2 = $10,000
Year 3 = $10,000
Year 4 = $10,000
Year 5 = $10,000
Year 6 =   $5,000