Cost Seg on a Q4 Purchase: the Mid-Quarter Convention Explained

How a single-property October-December acquisition triggers the §168(d)(3) mid-quarter convention, what the Pub 946 Table A-5 values do to year 1, and a worked example.

Cost Seg on a Q4 Purchase: the Mid-Quarter Convention Explained

This tutorial covers a single mechanic: the §168(d)(3) mid-quarter convention, which the calculator applies automatically whenever a purchase_month falls in October, November, or December. Property owners who close late in the year are sometimes surprised that the year-1 deduction on the reclassified slice is smaller than they expected. The mid-quarter rules are the reason — and they are codified, not optional.

When mid-quarter applies (and when half-year does)

IRC §168(d) gives every accelerated-recovery class a default convention of half-year: regardless of when in the year the property is placed in service, the property is treated as in service on the midpoint of the year. This is the convention the engine uses for Q1, Q2, and Q3 acquisitions on 5-year, 7-year, and 15-year property — Pub 946 Table A-1 percentages apply.

IRC §168(d)(3) overrides the half-year default in a specific situation: if more than 40% of the aggregate bases of personal property placed in service during the year is placed in service in the last quarter (Oct-Dec), the mid-quarter convention applies to every item of personal property placed in service during the year. For a single-property cost-seg study, every dollar of personal property is placed in service in the same quarter — so the >40% test is automatically failed (Q1-Q3 stay on half-year) or automatically met (Q4 placement triggers mid-quarter on the entire year's personal-property basis).

The calculator encodes this as is_mid_quarter_q4(month) in cost_seg/constants.py: months 10, 11, and 12 trigger the Pub 946 Table A-5 (200% DB Q4) and Table A-6 (150% DB Q4) values. Everything else uses the half-year tables.

Why the year-1 deduction shrinks for the MACRS portion only

The mid-quarter convention does not affect bonus depreciation under IRC §168(k). Bonus is a fixed percentage of the asset's basis — currently 100% under OBBBA — applied immediately in the year of placement, regardless of convention. The mid-quarter rules govern the MACRS percentage applied to the post-bonus remainder in year 1 and subsequent years.

Compare the Q4 mid-quarter row 1 to the half-year row 1 from Pub 946:

• 5-year, half-year (Table A-1): Year 1 = 20.00%
• 5-year, Q4 mid-quarter (Table A-5): Year 1 = 5.00%
• 15-year, half-year (Table A-1): Year 1 = 5.00%
• 15-year, Q4 mid-quarter (Table A-6): Year 1 = 1.25%

When 100% bonus depreciation is in effect (2017-2022, 2026+), the post-bonus remainder is zero — the convention is moot for the accelerable bucket. When the bonus rate is less than 100%, the convention bites: a Q4 acquisition in 2024 (60% bonus) on $50,000 of 5-year property leaves $20,000 of remainder, and year 1 of MACRS is 5% of that = $1,000 instead of 20% × $20,000 = $4,000 under half-year.

Worked example — Q4 2024 STR purchase

A property owner purchased a short-term rental in October 2024 for $480,000 with $80,000 allocated to land, leaving $400,000 of depreciable basis. The 2024 bonus rate under the TCJA phase-down is 60%. Base STR allocation is 13% / 1% / 8%; the property is otherwise builder-grade.

• 5-year: $400,000 × 13% = $52,000
• 7-year: $400,000 × 1% = $4,000
• 15-year: $400,000 × 8% = $32,000
• 27.5-year building: $400,000 × 78% = $312,000

Bonus on accelerable: $88,000 × 60% = $52,800 (immediate year-1 deduction).

Post-bonus remainder: $35,200 — split $20,800 (5-yr), $1,600 (7-yr), $12,800 (15-yr).

Year-1 MACRS at Q4 mid-quarter (Table A-5/A-6 first-year values):

• 5-yr: $20,800 × 5.00% = $1,040
• 7-yr: $1,600 × 3.57% = $57
• 15-yr: $12,800 × 1.25% = $160
• MACRS year-1 total: ~$1,257

Compared to the half-year convention, where the same remainder would have generated:

• 5-yr: $20,800 × 20.00% = $4,160
• 7-yr: $1,600 × 14.29% = $229
• 15-yr: $12,800 × 5.00% = $640
• HY year-1 total: ~$5,029

The mid-quarter convention reduces the year-1 MACRS portion by roughly $3,800 on this property. The bonus and building S/L portions are unchanged. The rest of the depreciation is not lost — it is shifted into later years.

Try a Q4 2024 STR estimate →

What changes for a Q4 2026+ purchase

Under OBBBA, 100% bonus depreciation is permanent for property acquired after January 19, 2025. The post-bonus remainder is zero — there is no MACRS first-year amount to reduce, so the mid-quarter convention is mathematically inert on the accelerable bucket. The building S/L is still subject to the mid-month convention on the 27.5-year (or 39-year) class, which is a separate rule under IRC §168(d)(2). A Q4 2026 acquisition gets a half-month or so of building S/L in year 1 — Jan placement gets 11.5 months, Dec placement gets 0.5 months.

For the calculator, the practical effect: a Q4 2026 cost-seg estimate on the same $400,000 STR basis returns a year-1 deduction of roughly $88,000 (full 100% bonus on the accelerable bucket) plus a token building S/L (mid-month December ≈ $568 = $312,000 / 27.5 × 0.5/12). The mid-quarter convention is in the engine but does not bite when the post-bonus remainder is zero.

See the same property in Q4 2026 →

When Q4 timing actually changes the decision

Mid-quarter is most consequential when bonus is partial — the 2023 (80%), 2024 (60%), and pre-Jan-19-2025 (40%) acquisition years. Property owners who closed in those windows and are running look-back math should expect the year-1 MACRS slice to be smaller on a Q4 acquisition than the half-year tables would suggest. The §481(a) catch-up calculation in the engine honors the historic Q4 tables when the original placement was in Q4.

Citations

• IRC §168(d)(2) — mid-month convention for residential rental and nonresidential real property.
• IRC §168(d)(3) — mid-quarter convention when >40% of personal-property basis is in Q4.
• IRS Publication 946, Tables A-1, A-5, A-6 — half-year and Q4 mid-quarter MACRS percentages.
• IRC §168(k)(6) — 100% bonus, OBBBA permanent restoration.

Disclaimer. This tutorial describes general federal tax concepts. TaxProtestTx (Nought Labs LLC) is a feasibility-screening tool, not tax advice or a cost segregation study. Calculator output cannot be relied on under Treasury Circular 230. Consult a qualified CPA, EA, or attorney before filing. Results are not guaranteed.