Which of the following is a tax preference that must be added back to income?

Percentage depletion is considered a tax preference item that must be added back to income for tax purposes. This is because percentage depletion allows a taxpayer to deduct a percentage of the income derived from mining or other natural resource extraction activities. It is designed to encourage investment in these industries. However, this deduction can create a substantial tax benefit that exceeds the taxpayer's actual investment, meaning it effectively reduces their taxable income significantly.

As a result, the IRS identifies it as a preference item to ensure that these excessive deductions are added back when calculating the alternative minimum tax (AMT). This helps to prevent taxpayers from reducing their tax liability below a minimum level that is considered fair.

Conversely, capital losses, passive activity losses, and standard deductions do not fall into the same category. Capital losses can offset capital gains but are not typically added back for AMT purposes. Similarly, passive activity losses have specific limitations and rules but do not classify as preferences that require addition back to income. Standard deductions simply reduce the income taxable amount but are not considered preference items in the context of AMT calculations.