What is the Mid-Quarter Convention?

The mid-quarter convention is a depreciation rule under the Modified Accelerated Cost Recovery System that applies when more than 40 percent of personal property is placed in service during the final quarter of a tax year. Instead of using the half-year convention, assets are treated as though placed in service at the midpoint of the quarter in which they were acquired. This approach changes the timing of first-year depreciation deductions. It generally reduces depreciation for assets acquired in the fourth quarter. The rule is intended to prevent taxpayers from accelerating deductions through significant year-end asset purchases.

Advantages of the Mid-Quarter Convention

The mid-quarter convention provides a more precise allocation of depreciation when a large portion of fixed asset additions occurs late in the year. By treating assets placed in service during a quarter as if acquired at the midpoint of that quarter, it better matches depreciation expense with actual usage. This reduces front-loading of deductions that would otherwise occur under the half-year convention. It also limits tax deferral strategies that rely on year-end purchases, promoting consistency and fairness in tax reporting while improving comparability of capital investment timing.

Disadvantages of the Mid-Quarter Convention

The mid-quarter convention increases computational complexity because depreciation must be tracked separately by quarter of acquisition, rather than applying a uniform half-year assumption. This requires more detailed fixed asset records and increases the risk of calculation errors. It may also reduce first-year depreciation deductions when substantial assets are acquired in the fourth quarter, accelerating taxable income and increasing current tax liability. The convention can create planning constraints, since exceeding the 40 percent threshold triggers its application to all qualifying assets for the year. As a result, tax projections become less predictable, and year-end capital spending strategies may require careful monitoring.

Example of the Mid-Quarter Convention

As a simplified example of the mid-quarter convention, 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 as follows:

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