An S corporation has C corporation accumulated earnings and profits.To guard against termination of S status, the corporation might

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The best option is to distribute the C corporation AEP and remove any threat of termination due to passive investment income, whether significant or not. This is because accumulated earnings and profits can be a trigger for termination of S corporation status if it exceeds a certain level. By distributing the AEP, the corporation reduces the risk of termination and avoids the need to make complex accounting adjustments or elect to treat the AEP as S corporation AEP. Capitalizing the AEP or electing to treat it as S corporation AEP may not be feasible or desirable depending on the corporation's financial situation and tax strategy.

An S Corporation Has C Corporation Accumulated Earnings and Profits