The mid-quarter convention

The mid-quarter convention states that a business that acquires fixed assets in a reporting quarter should account for those assets as though they were acquired at the mid-point of the quarter. Thus, assets acquired at the beginning and end of a quarter would both be recognized as though they were acquired as of the middle of the quarter.

The mid-quarter convention also applies at the end of the useful life of a fixed asset, so that the last quarter of depreciation only covers one-half of that quarter.

As a simplified example, a business purchases an asset for $5,000, and plans to depreciate it over six quarters. Using the mid-quarter convention, the depreciation would be:

Quarter 1 = Depreciation is $500

Quarter 2 = Depreciation is $1,000

Quarter 3 = Depreciation is $1,000

Quarter 4 = Depreciation is $1,000

Quarter 5 = Depreciation is $1,000

Quarter 6 = Depreciation is $500 

The mid-quarter convention is required by the Internal Revenue Service for tax reporting purposes if at least 40% of the cost basis of all tangible personal property acquired in a year occurs in the fourth quarter of the year. Property that is both acquired and disposed of in the same year is exempt from this requirement, as is residential rental property, nonresidential real property, and any property not being depreciated with MACRS depreciation rates.

The mid-quarter convention can be used to level out the initial amount of depreciation that is recorded on a monthly basis. Also, if depreciation is calculated manually, it may be slightly easier to calculate based on just four asset acquisition dates per year. However, over the long term, it has little impact on the reported amount of depreciation. Also, the use of a fixed asset database that automatically calculates depreciation makes the second argument less tenable. Consequently, the mid-quarter convention is not frequently used, outside of situations where it is required for tax reporting purposes. It is more common for a business to simply record a full period of depreciation in the initial period in which an asset is acquired, irrespective of the exact acquisition date. Another alternative that is more frequently used is the mid-month convention, under which a half-month of depreciation is charged in the first and last months during which an asset is depreciated.