CFP® Practice Question: Disadvantages of S Corporations

Which of the following statements concerning potential disadvantages of S Corporations is (are) correct?

(1)   If the business continues to produce losses after the start-up period, the shareholders’ basis in their stock might become exhausted and then additional losses would not be tax-deductible.

(2)   The receipt of significant amounts of passive income by an S Corporation that was formerly a C Corporation, which had accumulated earnings and profits, might lead to termination of the S Corporation election.

(3)   S Corporations can no longer provide tax-free owner-employee benefits, such as group life insurance.


  1. (1) only
  2. (2) only
  3. (3) only
  4. (1) and (2) only
  5. (1), (2), and (3)