Gray Company, a closely-held C corporation, incurs a $50,000 loss from a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Gray is not a personal service corporation, it may deduct $34,000 of the passive activity loss. a. True b. False

 b. False

The statement provided is inaccurate because, according to U.S. tax rules, C corporations cannot deduct passive activity losses against active or portfolio income. Passive activity losses can only be deducted against passive income, not against active (non-passive) business income or portfolio income, which includes interest, dividends, and capital gains.

Since Gray Company is a closely-held C corporation and not a personal service corporation (PSC), it is subject to the passive activity loss rules. The $50,000 loss from a passive activity can only be used to offset passive income. If there is no passive income, or if the passive income is less than the passive losses, the excess loss is not deductible in the current year and must be carried forward to future years to be offset against future passive income.

Given that the company has active income of $34,000 and portfolio income of $24,000, neither type of income can be used to offset the $50,000 passive activity loss. Hence, none of the passive activity loss can be deducted in the current year assuming there is no other passive income to offset the loss against.