Mid-Quarter Convention
The mid-quarter convention applies to a year’s personal property when more than 40 percent of the tested basis is placed in service in the final three months of the tax year. Real property is left out of the test. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Key takeaways
- The test compares last-quarter basis to the year’s total basis for property other than the real-property categories.
- If the 40% threshold is exceeded, all of that year’s tested property uses mid-quarter.
- Each asset is then treated as placed in service at the midpoint of its actual quarter.
- Real property and property placed in service and disposed of in the same year are excluded from the test.
- How §179 and bonus amounts enter the test basis was not verified for this page.
Section 168(d)(3) requires the mid-quarter convention when the aggregate bases of property placed in service during the last three months of the taxable year exceed 40 percent of the aggregate bases of all property placed in service during the year. Under mid-quarter, each asset is treated as placed in service, or disposed of, at the midpoint of the quarter in which it was actually placed in service or disposed of.
Residential rental property, nonresidential real property, and railroad grading or tunnel bore are not taken into account for the test. Property placed in service and disposed of during the same taxable year is also left out. The building in a fourth-quarter closing does not, by itself, trip the test. The personal property and land improvements placed in service in that closing can.
Mid-quarter reduces first-year depreciation on fourth-quarter assets and increases it on first-quarter assets compared with half-year. Because the test applies to the whole year’s tested property, one large fourth-quarter acquisition can change the convention for machines placed in service in February.
A cost segregation study can move substantial basis into personal-property classes. If the building is placed in service in the fourth quarter, that reclassified basis counts in the test. Planning the closing month and the mix of other equipment placed in service that year is a CPA computation, not a study marketing claim.
This page is educational information, not tax advice. How amounts expensed under §179 or taken as bonus depreciation affect the tested basis was not confirmed from the statute or Publication 946 in this research. That detail is omitted rather than guessed.
The statutory test
The statute compares two aggregates. The numerator is the bases of property placed in service in the last three months. The denominator is the bases of all property placed in service during the year. Both sides omit the real-property categories in §168(d)(3)(B) and same-year in-and-out property.
“Exceed 40 percent” is the trigger. Property at exactly 40 percent stays on half-year. Property at 40.1 percent moves the year’s tested assets to mid-quarter. Rounding and basis adjustments are computation questions for the CPA.
The convention, once triggered, applies to all property to which §168 applies that was placed in service that year, other than the real-property categories that always use mid-month. It is not elected asset by asset.
Effect on first-year fractions
A first-quarter asset is treated as placed in service at the midpoint of the first quarter — one and one-half months into a calendar year. A fourth-quarter asset is treated as placed in service at the midpoint of the fourth quarter — ten and one-half months into the year, leaving one and one-half months of depreciation.
Publication 946’s mid-quarter tables already incorporate those fractions. Applying a half-year table to a mid-quarter year is an error. Form 4562 column (e) should show the convention actually used.
On disposition, the same midpoint-of-the-quarter rule applies. The sale month’s quarter, not the exact day, sets the allowed depreciation in the sale year.
Cost segregation context
A fourth-quarter acquisition of a furnished apartment building can place appliances, furniture, and site work into service in the last quarter. Those bases enter the test. The 27.5-year dwellings do not.
A study completed years later does not change the original year’s convention. Look-back reclassification uses the original placed-in-service dates. If mid-quarter applied in the original year, the catch-up computation should respect that convention. If it did not, do not impose mid-quarter retroactively without a basis in that year’s test.
Short tax years and fiscal years still use “last three months” of that tax year, not of the calendar year. Confirm the taxpayer’s year-end before calling a September closing a fourth-quarter event.
What we have not verified
Whether basis reduced by a §179 expense or by bonus depreciation is excluded from the 40 percent test was not confirmed from an official page opened for this article. Publication 946 may address it; the excerpt used here did not settle it. The question is logged rather than answered.
Do not treat a 100 percent bonus deduction, as of October 16, 2026 for post-January 19, 2025 qualified property, as automatically removing the asset from the test. Ask the CPA to apply the current Publication 946 worksheet.
Proposed regulations and later IRS publications could clarify the point. Until they do, this page stops at the statutory comparison of aggregate bases.
Sources
- 1
- 2IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.