List five advantages and five disadvantages of making an S election. Briefly explain each item.

List five advantages of making an S election. (Select all that apply.)

A. Deductions, losses, and tax credits are separately stated and retain their character when passed through to the shareholders. These amounts may be subject to the various limitations at the shareholder level. This treatment can permit the shareholder to claim a tax benefit when it otherwise would be denied to the corporation (e.g., a shareholder can claim the general business credit benefit even though the S corporation reports a substantial loss for the year).

B. Capital gains, dividends, and tax-exempt income are included in S corporation income when passed through to the shareholders. Such amounts become commingled with other corporate earnings and are taxed as ordinary income at the highest tax bracket when distributed by a C corporation.

C. Undistributed income taxed to the shareholder is not taxed again when subsequently distributed unless the distribution exceeds the shareholder's basis for his or her stock.

D. An S corporation's earnings that pass through to the individual shareholders are subject to the self-employment tax.

E. Splitting the S corporation's income among family members is possible. However, income splitting is restricted by the requirement that reasonable compensation be provided to family members who provide capital and services to the S corporation.

F. An S corporation is only subject to the personal holding company tax and the accumulated earnings tax on a yearly basis if the S Corporation has more than 10 shareholders.

G. The corporation's losses pass through to its shareholders and can be used to reduce the taxes owed on other types of income. This feature can be especially important for new businesses. The corporation can make an S election, pass through the start-up losses to the owners, and terminate the election once a C corporation becomes advantageous.

H. The corporation's income is exempt from the corporate income tax. An S corporation's income is taxed only to its shareholders, whose tax bracket may be lower than a C corporation's tax bracket.