Oregon Tax Consultants Practice Exam

What happens to personal property used in a business when sold for a loss?

1. The loss is not deductible

2. The loss can be fully deducted

3. The loss can reduce taxable income

4. The loss must be carried forward

The correct answer is: The loss can reduce taxable income

When personal property used in a business is sold for a loss, the loss can reduce taxable income. This is essential as it aligns with the principles of capital gains and losses. In general, if an asset is sold for less than its adjusted basis (the amount originally paid for it plus improvements minus any depreciation), the loss is indeed recognized for tax purposes. By recognizing the loss and allowing it to offset other income, such as ordinary income from the business, taxpayers can effectively lower their overall taxable income. This reduction is significant as it can lessen the tax burden for the taxpayer, making it an advantageous scenario. In contrast, if the loss were not deductible, it would mean the taxpayer could not utilize the loss to decrease their taxable income, thus missing out on a tax benefit. Similarly, if the loss needed to be fully deducted or carried forward, that would imply limitations or requirements that would not allow immediate relief in the year of sale. Recognizing the ability to reduce taxable income reflects the tax code's intent to provide relief for losses incurred in the course of conducting business.