The half-year convention treats all business equipment placed in service during a tax year as placed in service in the midpoint of that tax year. The same rule applies in the year in which the property is disposed of. The effect of this rule is as follows: A half-year of depreciation is allowed in the first year property is placed in service, regardless of when the property is placed in service during the tax year. For each of the remaining years of the recovery period, a full year of depreciation is claimed. If you hold the property for the entire recovery period, a half-year of depreciation is claimed for the year following the end of the recovery period. If you dispose of the property before the end of the recovery period, a half-year of depreciation is allowable for the year of disposition.
See the Table of MACRS Depreciation Rates (42.5) for year-by-year rates under the half-year convention. Apply the rate from the table to the original basis, minus any first-year expensing (42.3) deduction and bonus depreciation claimed. The Example in 42.5 shows the year-by-year deduction computation for five-year property under the half-year convention.
If you dispose of property before the end of its recovery period (42.5), your deduction for the year of disposition is one-half of the deduction that would be allowed for the full year using the rate shown in the table. For example, if you sell the machine in the Example in 42.5 in year three, the deduction is $1,920 (½ of $3,840).
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