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Definition: Half Year Convention for Depreciation
Used by the United States tax payers, this is a depreciation model that considers all property acquired during a particular year as property acquired at the middle of the year. If the property was acquired in January, depreciation would be considered for only half of the year i.e. from July 1st and the rest is depreciated in the last year of useful life.
Consider a property worth $. 5, 00,000 which has a useful life of 5 years. It has no residual value and depreciates at 10% of the original amount per annum i.e. $. 1, 00,000 per year. The property was purchased in June 2015.
2015: $. 5, 000 depreciation on the property due to the half year convention
2016: $. 10, 000 depreciation on June 30, 2016
2017: $. 10, 000 depreciation on June 30, 2017
2018: $. 10, 000 depreciation on June 30, 2018
2019: $. 10, 000 depreciation on June 30, 2019
2020: $. 5, 000 depreciation on June 30, 2020
For the Revenue Department (in case of taxation), this would be an advantage because even if the property is purchased in the second half of the year, it would still be taxed with respect to the half year convention itself.
For the property owners (or tax payers), it would be an advantage because the exact date of purchase is not required as the depreciation (or tax cut) is done at the exact half of the year.
There is a different convention in case the property owners purchase much property in the last quarter of the year i.e. the last 3 months of a year. This is called the “Mid Quarter” convention.
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