In: Accounting
What is the mid-quarter convention?
The mid-quarter convention states that a business that acquires
fixed assets in a reporting quarter should account for those assets
as though they were acquired at the mid-point of the quarter. Thus,
assets acquired at the beginning and end of a quarter would both be
recognized as though they were acquired as of the middle of the
quarter. The mid-quarter convention also applies at the end of the
useful life of a fixed asset, so that the last quarter of
depreciation only covers one-half of that quarter.
The mid-quarter convention is required by the Internal Revenue
Service for tax reporting purposes if at least 40% of the cost
basis of all tangible personal property acquired in a year occurs
in the fourth quarter of the year. Property that is both acquired
and disposed of in the same year is exempt from this requirement,
as is residential rental property, nonresidential real property,
and any property not being depreciated with MACRS depreciation
rates.
The mid-quarter convention can be used to level out the initial
amount of depreciation that is recorded on a monthly basis. Also,
if depreciation is calculated manually, it may be slightly easier
to calculate based on just four asset acquisition dates per year.
However, over the long term, it has little impact on the reported
amount of depreciation. Also, the use of a fixed asset database
that automatically calculates depreciation makes the second
argument less tenable.
A mid quarter convention generally applies if the total cost basis
of business equipment placed in service during the last three
months of the tax year exceed 40% of the total basis of all the
property placed in service during the year.
Above is the information about mid quarter convention