A construction company places $4 million of equipment in service in late November. Their tax director assumes a half-year of depreciation on every asset. The actual deduction is $1.2 million lower than that. The mid-quarter convention quietly triggered when fourth-quarter purchases crossed the 40 percent line, and every asset placed that year now depreciates from a different starting point.
The Modified Accelerated Cost Recovery System is required for tangible property placed in service after 1986. MACRS has two subsystems. GDS (General Depreciation System) is the default and uses accelerated rates. ADS (Alternative Depreciation System) uses straight-line over longer recovery periods and is mandatory for listed property below the 50 percent business-use threshold, tax-exempt use property, and property used predominantly outside the U.S.
GDS uses 200 percent declining balance switching to straight-line for 3-, 5-, 7-, and 10-year classes. The 15- and 20-year classes use 150 percent declining balance switching to straight-line. Real property (27.5 and 39 years) uses straight-line only.
Common mistakes
- Confusing the mid-quarter trigger. Real property is excluded from both numerator and denominator. A $200,000 building plus $50,000 of Q1 equipment does not trigger mid-quarter, because Q4 personal property is $0 of $50,000.
- Applying §280F caps to heavy SUVs. Vehicles above 6,000 lbs GVWR escape §280F entirely. They face only the §179 SUV cap ($32,000 for 2026) plus 100% bonus on the remainder. Applying the $20,300 cap to a 6,500-lb SUV understates the deduction by tens of thousands.
- Treating §179 and bonus depreciation as interchangeable. §179 cannot create a loss. Bonus can. A business with $80,000 income and $200,000 of equipment can elect §179 of $80,000 (income-capped), but 100% bonus on the remaining $120,000 of basis is unaffected by the income limit and drives income negative into an NOL.
Bottom line
- MACRS GDS recovery periods: 5 years (autos, computers), 7 years (machinery, furniture), 15 years (land improvements, QIP), 20 years (farm structures), 27.5 years (residential rental), 39 years (nonresidential real)
- Half-year is the default convention; mid-quarter triggers when more than 40% of personal property is placed in service in Q4 (real property excluded); mid-month applies to all real property
- Section 179: $2,560,000 cap with phaseout starting at $4,090,000 (2026); cannot create a loss; indefinite carryforward
- Bonus depreciation: 100% and permanent for property acquired after January 19, 2025 (OBBBA); no income limit, can create a loss, no carryforward
Exam shortcut
Run the 40% mid-quarter test first when the question lists quarterly asset purchases (real property excluded). If it triggers, every asset gets a different rate. Apply §179 first (income-capped), bonus second (no cap), MACRS third, never reverse the order. §280F passenger auto caps override §179 and bonus on vehicles ≤ 6,000 lbs GVWR.
The full lesson (about 3,113 words, 21 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.B1
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