When Does Depreciation Begin?

Your depreciation deductions for a piece of property begin in the tax year in which you "place it in service."

That means that just buying a depreciable property is not enough. In order to claim a depreciation deduction for the property in a given year, you must put it to productive use in the business before the end of the tax year.

If you are using the expensing election, the timing doesn't matter much; as long as you begin using the property before the end of the year, you get the entire deduction.

But if you have property that's not eligible for the expensing election (for example, your home office or other business real estate), the date on which you place the property in service, and the total amount of property placed in service during the year, are the two factors that determine how much of a full year's deduction you will get for the first year. If you sell or dispose of the property within the year you got it, you can't claim a depreciation deduction at all.

The mid-month convention. Nonresidential real estate (a classification that includes home offices) must be depreciated using a mid-month convention. That is, your property is treated as being placed in service in the middle of the month in which you actually placed it in service. You will get a deduction for half of that month, plus the rest of the months for the remainder of the year. This principle, known as the mid-month convention, is factored into the depreciation tables use for this type of property.

The half-year convention. For most depreciable property other than real estate, a half-year convention must be used. This means that no matter what month of the year you begin using the property, you must treat it as if you began its use in the middle of the year. So, you will generally get one-half of the first year's depreciation, regardless of when you placed the property in service. Again, this principle is factored into the depreciation tables used for most depreciable property.

The mid-quarter convention. However, there's an important exception to the half-year convention described above. If Uncle Sam were going to give you a half year's tax break for a purchase made any time in the year, what would keep you from routinely purchasing all your business assets and placing them in use in the final days of December?

Presumable, that would allow you to get a deduction for a half year's worth of depreciation, while avoiding any actual cash outlay until late in the year. Good deal? You bet! Unfortunately, the IRS is well aware of this strategy, and has imposed the mid-quarter convention rules to prevent you from doing that.

These rules, called the mid-quarter convention rules, apply if you place more than 40 percent of your total new property for the year into service in the last quarter. If you do, you will have to use these rules for all assets placed in service during the year. Under the mid-quarter rules, assets are considered to be placed in service at the midpoint of the quarter in which they were actually placed in service. So, for the first year, depending on the quarter in which you placed the asset in service, you would get the following portions of a full year's depreciation:

Don't worry about having to use these percentages; they are factored into the depreciation charts the IRS provides for mid-quarter property.

If you want to avoid the mid-quarter rules, you can't be too aggressive about placing a lot of property in service late in the year. However, there may be times when using the mid-quarter convention can work to your advantage. If you place a large, expensive asset in service in the first quarter, you may be able to claim more depreciation by placing slightly more than 40 percent of new assets in service in the last quarter.

Example If you placed five-year assets with a total value of $10,000 in service at various points during the year, but no more than $4,000 in assets were placed in service in the fourth quarter, you'd ordinarily be able to claim a total of $10,000 x .20 = $2,000 in the first year. If, however, $5,999 in assets were placed in service in the first quarter and $4,001 in the fourth quarter, your depreciation deduction would be ($5,999 x .35) + ($4,001 x .05), which equals $2,099.65 + $200.05 for a total deduction of 2,300 in the first year.