Business Cash flow and personal/business tax

C. None of the above is probably the correct answer. You need to determine if the training expense is even deductible: if it is to qualify you for a new trade or business it probably isn't even if done in an S corporation

Even if the training expense is allowable, it may be "start up expenses." You can deduct $5,000 of these, and amortize the rest over 15 years. Since you had at least some revenue in 2004, it appears that you were "in business" as of the end of the year.

Next hurdle: how did you pay for the business expenses? If you put all the money into the business yourself, you will be able to deduct whatever loss the business generated. But if you put in a relatively small amount (say, $5,000), and the business borrowed the rest from credit cards or the bank, you can only deduct up to the amount YOU put in. See Form 6198.

That will depend on how your S corporation made the investment. If it invested in a "large" C corporation (like IBM) it would be treated like any other similar investment: you would report the dividends earned and a capital gain or loss on sale. If it invested in a small C corporation, and it owned a significant part of the business, you might have trouble keeping your S election. If it was another S corporation, your company could be the ONLY shareholder; otherwise, BOTH companies lose their S election. If it is a partnership or LLC, your company includes the information from the other company's Schedule K-1 on its own return.