Question

The sale at a loss of machinery that was used in a trade or business and held for more than one year results in which of the following types of loss?

1) Capital loss
2) Ordinary loss
3) Net operating loss
4) Section 1231 loss

Answer 1

The sale at a loss of machinery used in a trade or business for over a year results in a Section 1231 loss, which is deducted as an ordinary loss and can offset other types of income. Section 1231 is beneficial to taxpayers due to its favorable treatment of losses and gains.

Step-by-step explanation:

The sale at a loss of machinery that was used in a trade or business and held for more than one year would typically result in a Section 1231 loss. Section 1231 of the Internal Revenue Code applies to depreciable property and real property used in a trade or business and held for more than one year. In general, Section 1231 allows losses to be deducted as ordinary losses and gains to be taxed as long-term capital gains. This is beneficial for taxpayers because ordinary losses can offset other types of income, whereas capital losses are more restricted in their deductibility against other kinds of income.

Losses can have a profound impact on businesses, as persistent losses may lead to reducing production or even exiting the market altogether. In times of losses, firms must decide whether to continue operating in the short run or cease production as a long-term strategy.