half-year convention

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Half-Year Convention

In accounting, the assumption that an asset is purchased at its value exactly half-way through the calendar year in which it is purchased. For example, if one buys an asset for $1,000 on January 1st and it is worth $1,200 at the end of the second quarter, the half-year convention would assume that it was bought for $1,200. This can affect taxes owed on the asset and the depreciation allowed each year. Obviously the half-year convention can have both positive and negative impacts, depending on the price movement of the asset.

half-year convention

The assumption for tax purposes that a newly acquired asset is placed in service halfway through the year regardless of when the asset is actually acquired and placed in service. The half-year convention affects annual depreciation, taxation, and earnings calculations.

Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

References in periodicals archive ?

For example, if a taxpayer purchased $1,000,000 of equipment (5 year MACRS recovery life, subject to the half year convention) on September 1, 2010, that is eligible for a [section]179 deduction and is also eligible for the bonus depreciation.

New legislation brings concrete results to businesses

The equipment is MACRS property with 5-year class life and half year convention applies.

Questions to the tax desk

Our example used the modified accelerated cost recovery system with the required half year convention. We also used beginning-of-the-year payments since most lease contracts require payments in advance.