What is the Half-Year Convention?

The half-year convention is used to calculate depreciation for tax purposes, and states that a fixed asset is assumed to have been in service for one-half of its first year, irrespective of the actual purchase date. The remaining half-year of depreciation is deducted from earnings in the final year of depreciation.

Example of the Half-Year Convention

As an example of the half-year convention, a company buys a machine for $50,000 on October 1. The machine has a five-year useful life. Under the half-year convention, the depreciation for the machine is as follows:

Year 1 = $5,000
Year 2 = $10,000
Year 3 = $10,000
Year 4 = $10,000
Year 5 = $10,000
Year 6 = $5,000

In effect, and as shown in the example, the half-year convention tends to extend the depreciation period somewhat beyond the predetermined useful life of an asset. If the convention had not been used in this example, the machine would have been fully depreciated by the end of Year Five.