How to Calculate Depreciation With a Half Year Convention

Certain property you use for business or income-producing activities may be eligible for depreciation on your federal tax return. Depreciation is used as a method to recover the cost of property you use to earn income. You may not depreciate personal property unless it is also used to produce taxable income. Once you claim depreciation on an asset, you must continue to depreciate it each year until the cost is fully recovered or you stop using the asset to produce income, whichever occurs first. The half-year convention is used to depreciate property placed in service, or disposed of, in the middle of the year.

Step 1

Determine the recovery period for your property. Classification periods for half-year convention property include three-year, five-year, seven-year, 10-year, 15-year and 20-year recovery items. For example, a vehicle is five-year property, office equipment is seven-year property and leasehold improvements constitute 15-year property. Do not use the half-year convention to depreciate residential rental property or other nonresidential real property.

Step 2

Determine your basis for depreciation. This is the amount you paid for the property, plus any additional costs required to register the property or put it into service. If the property is split between personal and business use, you may only depreciate the cost allocated to business use percentage. For example, if the property is used 50 percent for business and the cost is $20,000, your basis for depreciation is $10,000.

Step 3

Subtract any prior depreciation amounts. The result is the current basis for depreciation.

Step 4

Apply your current year depreciation basis to the half-year convention table on page 17 of the IRS Form 4562 instructions. The table lists a percentage based on the recovery period of the property and the year of service you're depreciating. Multiply the percentage by your depreciation basis. The result is your half-year depreciation expense.