Mid-Quarter Convention

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Mid-Quarter Convention

A method in which the owner of some asset is allowed one half-quarter of depreciation in the quarter that the asset is purchased or sold (or otherwise disposed of). That is, the mid-quarter convention treats assets purchased or sold any time during a quarter as having been purchased or sold on the day half-way through that quarter. In general, one uses the mid quarter convention if the cost basis of assets purchased or placed in service during the fourth quarter of the year is greater than 40% of the total basis of all property purchased or placed in service that year.
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Additionally, for purposes of determining whether the midquarter convention applies to other MACRS property placed in service during the year, the change-in-use property is not taken into account.
Equipment acquisition through a tax lease won't count toward your 40 percent MidQuarter Convention limit and still allows you to choose the equipment vendor and retain the option to own the equipment at the end of the lease.
Leasing companies use the same MidQuarter Convention concept as other businesses to boost their own corporate tax deductions.
In addition, if over 40% of the horses acquired during any year are purchased in the last quarter, the midquarter convention is required and rates different from those in exhibit 5 must be used.
168(i)(7) transactions, the parties to the transaction need to give special consideration to the midquarter convention, related depreciation calculations, and bonus depreciation.
In certain circumstances, however, the midquarter convention is required.
168(i)(7) transaction in the last quarter of its tax year, the likelihood of its being required to use the midquarter convention greatly increases (Regs.
Assets subject to the midquarter convention may be grouped only into an account with other assets placed in service in the same quarter, and passenger vehicles subject to the depreciation caps must be grouped into a separate general asset account.
Depreciation after the end of the recovery period: Although computers have a five-year MACRS life, because either the half-year or midquarter convention is used in the year of purchase and in the year of disposition, the computer is actually depreciated over six years.
However, if the aggregate basis of property placed in service during the last three months of the tax year exceeds 40% of the basis placed in service during the entire year, the less-favorable midquarter convention applies.
Observation: Smaller businesses with infrequent asset additions may be able to eliminate a detrimental midquarter convention by electing the section 179 deduction against fourth-quarter additions, so as to decrease depreciable basis below 40%.
Software highlights: Handles "shoe box" data; maintains complete audit trail; includes tax planner, fixed-asset management; depreciation schedule supports MACRS with midquarter convention, ACRS, ADS, SLS and DDB; automatic client letter/billing; fully integrated modules for 26 states; pop-up hlep screens; file compression program that shrinks size of typical corporate data file to less than 10Kb.