an accounting convention used for the calculation of depreciation of an asset. The midpoint convention works under the assumption that an asset purchased or disposed of during any given period is put into service or taken out of service at the midpoint of that period.
How the Midpoint Convention Works
From time to time, you may acquire an asset that you will use over a relatively long period of time. These assets could be something like a building, vehicle, or computer, for example. The costs that you incur from using these assets are accounted for using the idea of depreciation. You can then apply the costs of depreciation to various tax and other accounting calculations. In some cases, you might acquire the item but not start using it until much later.
To resolve this potential accounting difficulty, the midpoint convention simply assumes that you start using the asset midway through the relevant period of time. You will then begin accounting for the depreciation from that point. Similarly, once you sell an asset or take it out of use, you need to account for that too. The midpoint convention assumes that you take the asset out of use in the middle of the relevant time period.
There are a few catches to the convention, however. One, you can only use the midpoint convention as a shorthand for certain accounting functions, however. Those using it need to follow the appropriate guidelines for the accounting or tax calculation they are performing. Second, not all property has an applicable depreciation calculation or an appropriate midpoint convention use.
Midpoint Convention Example
According to IRS Publication 946 on How to Depreciate Property, if the asset you are calculating depreciation for is a nonresidential property, you should use the mid-month convention. This convention assumes that you begin using the property in the middle of the month. If you gained possession of a property on March 2 of any given year, you would begin to calculate the depreciation on the property from March 15. Similarly, if you sold the property on October 28 of a given year, you would only calculate depreciation on that property to October 15 of that year.
Another midpoint convention that you might use is the half-year convention. According to IRS Publication 946, this applies to any property that the mid-month or mid-quarter convention does not apply to. Using the example of a vehicle acquired on September 19 of a given year, when calculating how much that vehicle had depreciated, you would assume that it entered into service on July 1 of that year. You would then apply six months of depreciation to that vehicle for the year.
This practice also applies if you sold any property. Take, for example, a computer that was taken out of service and disposed of on November 22 of a given year. Under the half-year convention, you would assume that the computer was taken out of service on June 30 of that year and would only be able to claim depreciation for that half-year.