Answer:
When a corporation's S election is terminated mid-year, the corporation can allocate the annual income between the S Corporation short year and the C Corporation short year in two ways:
1. Pro rata allocation: In this method, the corporation allocates income and expenses based on the number of days in each short year. The allocation is prorated based on the number of days in the S Corporation and C Corporation short years. This method is commonly used when the income and expenses are consistent throughout the year.
2. Alternative method: In this method, the corporation can divide the annual income and expenses between the S Corporation short year and the C Corporation short year using a reasonable method that reflects the period of time the income and expenses were incurred. This method is used when there is a significant change in income and expenses during the year, or when a pro-rata allocation does not reflect the actual income and expenses for the short years.
It is important for the corporation to consult with a tax professional to determine the best method for allocating income and expenses for the short years.