The applicable convention determines the portion of the tax year for which depreciation is allowable during a year property is either placed in service or disposed of.  There are three types of conventions.  To select the correct convention, you must know the type of property and when you placed the property in service.

Half-year convention

This convention applies to all property reported unless the mid-quarter convention applies. It does not apply to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any tax year as placed in service (or disposed of) on the midpoint of that tax year. Half-year convention is referred to as "HY".

Mid-month convention 

This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.  Mid-month convention is referred to as "MM".

Mid-quarter convention 

If the total depreciable bases (before any special depreciation allowance) of MACRS property placed in service during the last 3 months of your tax year exceed 40% of the total depreciable bases of MACRS property placed in service during the entire tax year, the mid-quarter, instead of the half-year, convention generally applies.

In determining whether the mid-quarter convention applies, do not take into account the following:

• Property that is being depreciated under a method other than MACRS.

• Any residential rental property, nonresidential real property, or railroad gradings and tunnel bores.

• Property that is placed in service and disposed of within the same tax year.

The mid-quarter convention treats all property placed in service (or disposed of) during any quarter as placed in service (or disposed of) on the midpoint of that quarter. However, no depreciation is allowed under this convention for property that is placed in service and disposed of within the same tax year.  Mid-quarter convention is referred to as "MQ".

For more information see www.IRS.gov and search for form 4562