MACRS Half-Year Convention Explained | Cost Recovery Depreciation — CPA/EA Exam

What is the half-year convention in MACRS depreciation? This lesson explains cost recovery for tax purposes — how tax cost recovery differs from financial accounting depreciation, the recovery classes and IRS tables, and how the half-year convention limits first-year and final-year deductions — built for REG CPA Exam candidates, EA students, and accounting students studying depreciation and cost recovery. Try it free at farhatlectures.com — interactive exercises, lectures, simulations, cases, multiple choice, and AI tools for CPA, CMA, EA and students. Video Timeline & Key Concepts: 0:00 — Introduction 0:00 — Depreciation vs. tax cost recovery 5:15 — Basis and converting personal-use property to business use 8:04 — Real property vs. personal property 11:20 — IRS recovery classes and depreciation tables 14:55 — The half-year convention: first year and final year Frequently Asked Questions: What is the half-year convention? The half-year convention assumes that any personal property placed in service or disposed of during the year is treated as if it happened in the middle of the year. As a result, only a half year of depreciation is allowed in the first year. How does cost recovery differ from financial accounting depreciation? Financial accounting depreciation allocates cost over an asset's estimated useful life under the matching principle. Tax cost recovery instead uses IRS-prescribed recovery periods and tables as a deduction to reduce taxable income. What are the MACRS recovery classes? Instead of estimating useful life, the IRS assigns assets to specific recovery classes such as 3, 5, 7, 10, 15, and 20 years, then provides depreciation tables that build in the applicable convention and method. How is basis determined when converting personal property to business use? When a personal-use asset is converted to business use, its depreciable basis is the lesser of the adjusted basis or the fair market value at the date of conversion, which prevents deducting a decline in value that occurred during personal use. How does the half-year convention affect the year of sale? In the year an asset is sold, the half-year convention allows only half of that year's normal depreciation. For example, a five-year asset sold in year three uses 16%, which is half of the full-year 32% rate. #CPAexam #CMAexam #enrolledagentexam #accountingcourses #collegecourses #courses #REG #MACRS #halfyearconvention #costrecovery #ProfessorFarhat #accountingstudents