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Stan and Susan, two calendar year taxpayers, are starting a new business to manufacture and sell digital circuits. They intend to incorporate the business with

Stan and Susan, two calendar year taxpayers, are starting a new business to manufacture and sell digital circuits. They intend to incorporate the business with $600,000 of their own capital and $2 million of equity capital obtained from other investors. The company expects to incur organizational and start-up expenditures of $100,000 in the first year. Inventories are a material income-producing factor. The company also expects to incur losses of $500,000 in the first two years of operations and substantial research and development expenses during the first three years. The company expects to break even in the third year and be profitable at the end of the fourth year, even though the nature of the digital circuit business will require continual research and development activities.

Please fill in the blanks.

Stan and Susan need to determine whether they want to ________________ ( "file a short-period tax return", "make an S election", "take a dividends-received deduction") to pass through start-up losses, and how much ________________ ( "amortization", "debt and equity", "income and expense" ) they would like to use to capitalize the corporation.

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