 Hello and welcome to this session in which we will discuss the mid-quarter convention when it comes to cost recovery or simply put depreciation for DAX purposes. In the prior session we explained what cost recovery is and we explained that the default convention is the half-year convention. Now I hope as I was explaining the half-year convention you guys notice something unusual about the half-year convention. What does the half-year convention assumes? The half-year convention assumes that you place your property midway throughout the year regardless of when you purchase the asset. Regardless of when you purchase the asset we always assume it's placed in service mid-year. Well that's great. Here's what I'm going to do if I'm a business person. If that's the case I'm going to go ahead and purchase my asset during the last part of the year, sometime in December, buy as many assets as possible. Why? Well if that's the case I'm going to buy the asset for one month and have the depreciation for six months. Well this is what the half-year convention allows you to do. Well guess what? To curb abuses such as these the government introduces the mid-quarter convention. So when do we use the mid-quarter convention? For one thing it applies only to personal property so we're not dealing with real property which is land and building so we're still working with personal property just like the half-year convention. So the mid-quarter convention applies when what? When you placed 40 percent of your asset in the fourth quarter. I hope you know we have four quarters throughout the year. If you happen to purchase 40 percent of your asset which is a vast majority of your asset in the fourth quarter well then you have to then you have to use the mid-quarter convention. So you cannot assume you purchase your assets on average mid-year that's not acceptable anymore. So what do you have to do? You're going to assume that you purchase the asset in the quarter in which you purchased it in and it's midway throughout the quarter. So if you made a purchase in the first quarter you assume the purchase is made in the middle of quarter one in the middle of the first quarter. So it's someplace here we have January, February and March mid-February. If you purchased something in the second quarter April, May and June mid-May. If you purchased something in the third quarter July August September August 15th. If you purchased something in the fourth quarter October November December November 15th. So notice rather than assuming you purchase your asset halfway throughout the year if you happen to place 40 percent of your personal property in the fourth quarter then you go back and you would use the mid-quarter convention and it's assumed bought or sold in the mid-quarter. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions as well as exercises. Go ahead start your free trial today. So the mid-quarter convention is applicable when what? When you purchase a vast majority of your asset in the fourth quarter then they are categorized by quarter and they are purchased in the middle of the quarter. For example the first quarter the cost recovery period is 10.5 month. Why? Let's look at this timeline again. One, two, three, third quarter, fourth quarter. Well if you place the asset in the first quarter if it's placed here it means you're going to depreciate this asset. Well what's left? What's left is three quarters which is nine month and 1.5 month. In total you have 10.5 month equivalent to three and a half quarters. If you placed your asset, if you placed some of the asset in the second quarter, the asset are placed in the second quarter, how many months are they going to be applicable to? How many month of depreciation? It's six month plus 1.5, 7.5 month. Well if you place the asset in the third quarter it's four and a half month which is a full quarter and month and a half from the third quarter if you place your asset in the fourth quarter it means you have to only depreciate the asset for a month and a half which is half of a quarter. Now also you can do the spike percentages so for example here let's go back here and use percentages rather than month this way in case the information is presented to you in your CPA exam course or in your accounting course so this is 25% of the year or basically if you purchase your asset here you know January 1st you have your asset you depreciate the asset for 100% of the year of course if you purchase your asset at the end of the first quarter what's left is 75% of the year if you purchase your asset halfway during the quarter you still have 50% if you purchased it at the end of the third quarter you have 25% left 25% left and obviously if you purchased your asset December 31st you don't have any time for that year to depreciate your asset so what's going to happen is this percentage wise if you want to look at it percentage wise what you do if you purchase something in the first quarter basically 100 plus 75 divided by 2 equal to 87.5% you're going to depreciate it 87.5% of the year the same thing in the second quarter 75 plus 50 equal to 125 divide 125 by 2 62.5 so this this point here this point going forward represents 60 62.5 this point here going forward represent 87.5 and obviously you can do the same thing here in the same thing here 25 plus 0 equal to 25 divided by 2 is 12.5 12.5 and 12.5 let's take a look at an example to illustrate this concept let's assume a business with a year in December 31st placed in service the following used seven year class assets asset one on February 18th and paid 40 000 asset two December 15 120 the first thing you would you want to find out is can i use the half year convention or do i have to use the mid quarter convention well i'm going to add up all the assets 40 plus 120 that's equal to 160 and in the fourth quarter i placed 120 000 and i can assure you if you take 120 divided by 160 it's going to be more than 40% and specifically you placed 75% of your asset in the fourth quarter what does that mean stop you gotta use the mid quarter convention when 40% of your assets are placed in the last quarter you cannot use the half year you want you want to use the mid quarter you want to use the half a year why it's going to give you more depreciation so how do we compute the depreciation well you're going to be given a table okay so let me show you how the table is how to read the table now these tables are from the irs website your textbook your cpa course they might have slightly different tables but you have to know how to read the tables for the 40 000 asset it's a first of all it's a seven year asset so we're gonna go to the table of um 357 357 10 15 and 20 year property mid quarter convention and this is this asset the 40 000 is placed in the first quarter so what do we do we go okay year one seven year asset placed in the first quarter that's 25 so we're gonna take 40 000 don't worry how they come up with this they already did all the factor for you times 25 we have 10 000 of depreciation for the second asset for the second asset it's it's the year one but it was it's year one 357 it's a seven year property mid quarter convention placed in service in the fourth quarter now we're using a different table now again you're you your textbook they might combine the tables to make it easy for you but this is the official irs tables so we're looking at year one first year 3.57 so we'll take 120 000 times 0357 4289 the total depreciation is 14 284 using the mid quarter convention so so far what we did is we looked at the half a year convention mid quarter convention and both of these as both of these conventions apply to what type of asset personal asset not real asset well guess what in the next session we're going to be looking at is mid month so we have a mid month and guess what the mid month applies to real property to real property and what's real property building warehouses right something that's not movable what should you do now go to farhat lectures and look at additional resources lectures multiple choice through false that's going to help you understand the cost recovery whether you are a CPA exam candidate an accounting student or an enrolled agent i can help you do better invest in yourself good luck study hard and of course stay safe