How does the mid-quarter convention interact with Section 179 and bonus depreciation for vehicles used entirely for business purposes?
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The interaction of the mid-quarter convention with Section 179 and bonus depreciation for vehicles used 100% for business purposes is governed by a specific order of operations and affects only the regular MACRS depreciation portion, not the Section 179 or bonus depreciation deductions themselves. Here’s a step-by-step explanation, with legal detail and references:
1. Order of Deductions: Section 179, Bonus Depreciation, Then MACRS
- Section 179 deduction is applied first, up to the annual dollar limit and subject to the business income limitation. For 2025, the maximum Section 179 deduction is $1,250,000, reduced dollar-for-dollar if total Section 179 property placed in service exceeds $3,130,000. For SUVs, a separate cap of $31,300 applies.
- Bonus depreciation (special depreciation allowance under IRC §168(k)) is applied next, to the remaining basis after Section 179. For vehicles acquired and placed in service in 2025, the bonus depreciation rate is 100% for property acquired after January 19, 2025, and 40% for property acquired before that date.
- MACRS depreciation is applied last, to any remaining basis after Section 179 and bonus depreciation.
2. How the Mid-Quarter Convention Applies
- The mid-quarter convention is a timing rule under IRC §168(d) and Treas. Reg. §1.168(d)-1. It applies if more than 40% of the aggregate basis of property (other than real property) is placed in service in the last three months of the tax year.
- The convention determines the portion of the first year’s MACRS depreciation deduction by treating property as placed in service at the midpoint of the quarter in which it was actually placed in service.
- Section 179 and bonus depreciation are not affected by the mid-quarter convention—they are always calculated in full in the year the property is placed in service, regardless of when during the year the property is placed in service.
3. Application to Vehicles Used 100% for Business
- For a vehicle used entirely for business, you may claim the full Section 179 deduction (up to the applicable limit), and then the full bonus depreciation on the remaining basis, regardless of the mid-quarter convention.
- The mid-quarter convention only affects the regular MACRS depreciation on any remaining basis after Section 179 and bonus depreciation. It does so by reducing the first year’s MACRS deduction, depending on the quarter in which the vehicle was placed in service:
- 1st quarter: 87.5% of the full year’s MACRS amount
- 2nd quarter: 62.5%
- 3rd quarter: 37.5%
- 4th quarter: 12.5%
- This means that if, after Section 179 and bonus depreciation, there is any remaining basis, the first-year MACRS deduction is prorated according to the mid-quarter convention.
4. Depreciation Limits for Passenger Automobiles
- For passenger automobiles (including trucks and vans under 6,000 lbs. GVWR), the total of Section 179, bonus depreciation, and MACRS depreciation is subject to annual dollar limits (for 2025, $20,400 for the first year if bonus depreciation is claimed; $12,400 if not).
- If the sum of Section 179 and bonus depreciation exceeds the first-year limit, the excess is carried forward to future years, subject to the annual limits.
5. Example Calculation
Suppose you purchase and place in service a qualifying SUV (GVWR >6,000 lbs., not subject to passenger auto limits) for $60,000 in November 2025, and you use it 100% for business:
- Section 179 deduction: $31,300 (SUV cap for 2025)
- Remaining basis: $60,000 - $31,300 = $28,700
- Bonus depreciation: $28,700 (100% for property acquired after Jan. 19, 2025)
- Remaining basis for MACRS: $0 (no basis left)
- Mid-quarter convention: Not relevant, as no basis remains for regular MACRS depreciation.
If, instead, you had a passenger car subject to the luxury auto limits, and the sum of Section 179 and bonus depreciation exceeded the first-year limit, the excess would be carried forward, and the mid-quarter convention would only affect the regular MACRS portion, not the Section 179 or bonus depreciation.
Summary:
- The mid-quarter convention does not affect the calculation of Section 179 or bonus depreciation for vehicles; both are taken in full in the year the vehicle is placed in service.
- The mid-quarter convention only affects the timing of the regular MACRS depreciation deduction on any remaining basis after Section 179 and bonus depreciation, by prorating the first-year deduction based on the quarter the vehicle is placed in service.
- For vehicles used 100% for business, apply Section 179 first, then bonus depreciation, then MACRS (subject to the mid-quarter convention if applicable), and observe the annual depreciation limits for passenger automobiles.
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