What is an Applicable Convention?

Mary McMahon

An applicable convention is a tool a taxpayer uses in a depreciation claim to determine when property was put in service. Under this system, rather than giving a specific date and documentation, the taxpayer claims the appropriate applicable convention, mid-year, mid-quarter, or mid-month, depending on the situation. This creates a standardized system for depreciating property. For example, if someone claims a mid-year applicable convention, tax authorities assume the property was put in service or taken out of service in the middle of the tax year, and thus the person receives six months of depreciation on that year's taxes.

Man climbing a rope
Man climbing a rope

The applicable convention system streamlines the process of using the Modified Accelerated Cost Recovery System (MACRS) to depreciate property on taxes. People can depreciate property associated with a business, including real estate, store fixtures, computers, and so forth. Generally, they claim the mid-year applicable convention, unless another one applies. If people are not sure about what to claim, they can talk to an accountant to discuss the situation.

The mid-quarter date is available for people to use when items are put in service or taken out of service toward the end of the year, and 40% or more of the depreciation occurs within the last quarter. The mid-month applicable convention is used primarily for real estate, where people acquire or dispose of real property in the middle of a month.

The tax code changes periodically, and it is important to depreciate property appropriately. Many tax agencies issue guides to help people understand their options and select the depreciation system they want to use. Once they choose one, they cannot change methods on future tax returns, because this could skew the values on the taxes. An accountant can discuss the different systems and help people decide on the best option for their needs.

Tax forms for people to claim depreciation of assets come with instructions and a guide to selecting the most appropriate applicable convention. These forms can sometimes be confusing and it is advisable to read them thoroughly and take notes. As questions come up, people can jot them down and see if the form answers them. In situations where depreciation is complex because of the varied nature and timing of purchases, an accountant may be necessary to provide guidance. Accountants are familiar with the tax code and can make sure their clients avoid common pitfalls while taking advantage of available benefits in the tax code.

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