Ted and Bill created an S corporation on January 1 of the current year, and each contributed equally to its formation. The businesss income was $200,000 and its expenses were $100,000. Ted and Bill filed their own S corporation paperwork and did not specify any profit-loss ratios. Assuming a corporate tax rate of 20%, which of the following statements best describes the respective tax attributes of the income and expenses?

Select the single best answer:

A. The S corporation will pay 20% tax on $100,000 of net income.

B. Ted and Bill will need to go to court to determine how the income and expenses will be allocated.

C. Ted and Bill will pay individual taxes on the income and expenses that are passed through the S corporation as distributed to them individually in the S corporations K-1 filing.

D. Ted and Bill are both responsible for computing their respective tax liabilities from the S corporation, since there is no agreement on income and expense sharing.

E. Ted and Bill may allocate income and expenses any way they choose in the absence of an income and expense sharing agreement.