Question

A group of investors has formed SandInn Corporation to purchase a small hotel. The price is $200,000 for the land and $800,000 for the hotel building. If the purchase takes place in June, com- pute the MACRS depreciation for the first three calendar years. Then assume the hotel is sold in June of the fourth year, and compute the MACRS depreciation in that year also.

Answer 1

The MACRS depreciation for the first three calendar years is $266,640, $153,600, and $153,600 respectively. In the fourth year, the MACRS depreciation is $76,800.

Step-by-step explanation:

The MACRS depreciation stands for Modified Accelerated Cost Recovery System and is a method used to calculate the depreciation of an asset for tax purposes. In this case, we have a small hotel being purchased for $200,000 for the land and $800,000 for the hotel building. To calculate the MACRS depreciation, we need to determine the useful life of the building and use the appropriate depreciation percentages.

MACRS depreciation for the first three calendar years:

1. Year 1: Use a 3-year recovery period. The depreciation percentage is 33.33%. The depreciation expense for the building will be $800,000 x 33.33% = $266,640.
2. Year 2: Use a 5-year recovery period. The depreciation percentage is 19.20%. The depreciation expense for the building will be $800,000 x 19.20% = $153,600.
3. Year 3: Use a 5-year recovery period. The depreciation percentage is 19.20%. The depreciation expense for the building will be $800,000 x 19.20% = $153,600.

MACRS depreciation in the fourth year, when the hotel is sold:

Since the hotel is sold in June of the fourth year, we need to prorate the depreciation. Assuming a full year of depreciation is $153,600, the prorated depreciation for the first six months will be $153,600 x 6/12 = $76,800.

Therefore, the MACRS depreciation in the fourth year will be $76,800.

Answer 2

1. Land is not to be depreciated under the Modified Accelerated Cost Recovery System (MACRS) depreciation schedule.

The Building however will be depreciated over a period of 39 years as it is considered an place of business and not a residential property.

The depreciation for such assets is 1.3% in year 1 and 40, and 2.6% for the years in-between.

Year 1 = 1.3% * 800,000

= $10,400

Year 2 = 2.6% * 800,000

= $20,800

Year 3 = 2.6% * 800,000

= $20,800

The total for the first 3 years is,

= 10,400 + 20,800 + 20,800

= $52,000

2. Depreciation in Year 4

= 800,000 * 2.6%

= $20,800