Author: Robert K Valentine Jr.
Selling, scrapping, or trading in a business asset partway through its recovery period doesn’t just stop depreciation cold. For MACRS personal property with a recovery period of 20 years or less — the 3-, 5-, 7-, 10-, 15-, and 20-year classes — the tax code still allows a partial depreciation deduction in the year of disposition, and exactly how much depends on which convention applied when the asset was placed in service: half-year or mid-quarter. Whether first-year bonus depreciation was claimed changes the picture too, sometimes dramatically. This article walks through both conventions, with and without bonus depreciation, using worked examples.
This article covers personal property only — equipment, machinery, furniture, vehicles, and similar assets depreciated under GDS with a life of 20 years or less. Real property (39-year nonresidential and 27.5-year residential rental buildings) uses the mid-month convention instead, which we cover in a separate article.
A Quick Refresher: Half-Year vs. Mid-Quarter
- Half-year convention is the default for MACRS personal property. It treats every asset as placed in service (and, eventually, disposed of) at the midpoint of the tax year, regardless of the actual date.
- Mid-quarter convention applies instead of half-year whenever more than 40% of the total unadjusted basis of all MACRS personal property a business places in service during the year falls in the last three months of that tax year. When the test is met, every item of personal property placed in service that year uses mid-quarter — not just the fourth-quarter purchases. The 40% test is applied using the property’s unadjusted basis, before any reduction for bonus depreciation or Section 179 — electing bonus depreciation doesn’t change whether the test is triggered.
The Rule for the Year of Disposition
Both conventions treat the year you dispose of an asset the same way they treated the year you placed it in service — symmetrically, and without regard to the actual date of sale within the year:
- Half-year convention: You’re allowed exactly 50% of the depreciation the applicable percentage table would otherwise give you for that recovery year — no matter which month you actually sold the asset.
- Mid-quarter convention: The percentage depends on which quarter the disposal falls in:
- 1st quarter: 12.5% of the full-year amount
- 2nd quarter: 37.5% of the full-year amount
- 3rd quarter: 62.5% of the full-year amount
- 4th quarter: 87.5% of the full-year amount
In both cases, “the full-year amount” means the recovery year’s percentage from the applicable MACRS table applied to the asset’s depreciable basis — the same calculation you’d do for any other year, just scaled down for the partial year of use.
How Bonus Depreciation Changes the Picture
Bonus depreciation isn’t prorated by convention at all — it’s a flat percentage of the full cost, allowed entirely in the placed-in-service year regardless of half-year or mid-quarter treatment. That has a direct consequence for the disposition-year math:
- If 100% bonus depreciation was claimed in the placed-in-service year, the entire depreciable basis was already expensed then and there. Remaining basis is $0, so every year after that — including the year of disposition — has $0 of MACRS depreciation, and the half-year and mid-quarter disposal percentages have nothing left to apply to. Keep in mind that 100% bonus wasn’t available for every day of 2025: the One Big Beautiful Bill Act (OBBBA) restored the 100% rate only for property placed in service after January 19, 2025. Property placed in service from January 1 through January 19, 2025 still falls under the prior law’s phase-down schedule, which had already reduced bonus depreciation to just 40% for 2025 before OBBBA was enacted — so an asset bought in that short window has 60% of its basis left to depreciate under the regular MACRS tables, not $0.
- If bonus depreciation was not claimed — whether because the taxpayer elected out under Section 168(k)(7), or bonus simply wasn’t available for that asset class in that year — the full depreciable basis runs through the regular MACRS percentage tables, and the half-year/mid-quarter disposal rules above apply directly.
Electing out of bonus depreciation is made once per recovery-period class per tax year (for example, “all 7-year property placed in service in 2025”), not asset by asset. Businesses sometimes do this deliberately — to preserve depreciation deductions for future years, to match a state that doesn’t conform to federal bonus depreciation, or simply because spreading the deduction fits their income projections better than front-loading it.
Example 1: Half-Year Convention
- Asset: Manufacturing equipment
- Cost: $140,000.00
- Recovery period: 7 years, 200% declining balance, half-year convention
- Placed in service: April 2025
- Bonus depreciation: Elected out under Section 168(k)(7)
- Sold: October 2028 (Year 4 of the recovery period)
Because bonus depreciation was not claimed, the full $140,000 depreciates under the standard 7-year half-year table. Years 1 through 3 are ordinary full-year deductions; Year 4, the year of sale, gets cut in half regardless of the fact that the sale happened in October, near the end of the year:
| Tax Year | Recovery Year | Table % | Full-Year Amount | Depreciation Deduction | Adjusted Basis (End of Year) |
|---|---|---|---|---|---|
| 2025 | 1 | 14.29% | $20,006.00 | $20,006.00 | $119,994.00 |
| 2026 | 2 | 24.49% | $34,286.00 | $34,286.00 | $85,708.00 |
| 2027 | 3 | 17.49% | $24,486.00 | $24,486.00 | $61,222.00 |
| 2028 (sold) | 4 | 12.49% | $17,486.00 | $8,743.00 (50% of full-year amount) | $52,479.00 |
The $52,479.00 of adjusted basis remaining after the sale — the cost minus all depreciation actually allowed through the year of disposition — is what gets compared to the sale proceeds to figure gain or loss (and potential Section 1245 depreciation recapture), which is a separate calculation from the depreciation deduction itself.
Now suppose 100% bonus depreciation had been claimed instead. Because this equipment was placed in service after January 19, 2025, it qualified for the OBBBA’s 100% bonus rate, so the entire $140,000 would have been expensed in 2025, the placed-in-service year, leaving $0 of remaining basis. There would be no depreciation to calculate in 2026, 2027, or 2028 — the sale in October 2028 would simply involve $0 of MACRS depreciation, and the half-year convention would never come into play because there’d be nothing left to prorate.
Example 2: Mid-Quarter Convention
- Asset: Office furniture and fixtures
- Cost: $60,000.00
- Recovery period: 7 years, 200% declining balance, mid-quarter convention
- Placed in service: November 2025 (4th quarter)
- Bonus depreciation: Elected out under Section 168(k)(7)
- Sold: August 2028 (3rd quarter of Year 4)
This furniture was placed in service in November 2025, and enough other equipment was purchased that same quarter that more than 40% of the year’s total personal property additions fell in the fourth quarter — triggering the mid-quarter convention for everything the business placed in service in 2025, including this furniture. Because it’s 4th-quarter property, it depreciates under the Q4 mid-quarter table for 7-year property:
| Tax Year | Recovery Year | Table % | Full-Year Amount | Depreciation Deduction | Adjusted Basis (End of Year) |
|---|---|---|---|---|---|
| 2025 | 1 | 3.57% | $2,142.00 | $2,142.00 | $57,858.00 |
| 2026 | 2 | 27.55% | $16,530.00 | $16,530.00 | $41,328.00 |
| 2027 | 3 | 19.68% | $11,808.00 | $11,808.00 | $29,520.00 |
| 2028 (sold, Q3) | 4 | 14.06% | $8,436.00 | $5,272.50 (62.5% of full-year amount) | $24,247.50 |
Notice how much smaller the Year 1 deduction is compared to the half-year example (3.57% instead of 14.29%) — that’s the mid-quarter convention giving this 4th-quarter purchase only about 1.5 months of depreciation in its first year, rather than a half-year’s worth. The disposal in August 2028 falls in the 3rd quarter, so the year-of-disposition deduction is 62.5% of what a full Year 4 would otherwise allow.
Now suppose 100% bonus depreciation had been claimed instead. The mid-quarter test would still be based on this furniture’s full, unadjusted $60,000 cost — bonus depreciation doesn’t shrink an asset’s basis for purposes of deciding whether the 40% threshold was crossed. Since this furniture was also placed in service after January 19, 2025, it qualified for the OBBBA’s 100% rate, so the entire $60,000 would have been expensed in 2025, leaving $0 of remaining basis. The August 2028 sale would again involve $0 of MACRS depreciation, regardless of which quarter it fell in.
Key Takeaways
- The disposal-year rule is the same across every recovery period from 3 to 20 years — it’s driven by the convention, not the asset’s life. Only the underlying percentage tables differ by recovery period.
- Half-year convention: 50% of the recovery year’s full-year depreciation, regardless of the actual sale date.
- Mid-quarter convention: 12.5%, 37.5%, 62.5%, or 87.5% of the recovery year’s full-year depreciation, depending on which quarter the sale falls in.
- 100% bonus depreciation zeroes out future years entirely, including the year of disposition — there’s no remaining basis left for the half-year or mid-quarter rules to apply to.
- The mid-quarter 40% test always uses unadjusted basis — before bonus depreciation or Section 179 — so claiming bonus depreciation doesn’t help a business avoid mid-quarter treatment on its 4th-quarter purchases.
This article is for general informational purposes only and does not constitute tax or legal advice. It covers the depreciation deduction in the year of disposition only; figuring gain, loss, and depreciation recapture on the sale itself involves additional rules under Sections 1245 and 1250. Always consult a qualified tax professional before applying these rules to your own asset dispositions.
Simplify Your Fixed Asset Depreciation: Figuring out whether an asset used half-year or mid-quarter convention, tracking whether bonus depreciation wiped out its basis, and then applying the right disposal-year percentage is easy to get wrong on a spreadsheet — especially across a full fixed asset ledger. Depreciation Calculator Pro II automatically applies the correct convention and disposal-year percentage when you record an asset as sold, so you don’t have to work it out by hand every time an asset leaves your books.