I am working on the Illinois annual tax return for my S corporation. And it indicates that " If you are making the business income election to treat all nonbusiness income as business income, check the box and write 0 on Line 36 and 44". And in the instruction, it says that the decision is irrevocable.
The problem for me is that I don't know what type of income falls into the category of nonbusiness income. And I don't know what are the pros and cons for treating it as "business income". Any insightful advice on that is high appreciated.
Another question is that I have originally put some money in the business as start up costs/investment. Now it looks like I need to infuse some more cash in it (5-10k). Is it better to treat that as a loan or an investment from tax point of view? Thanks much in advance.

“The problem for me is that I don't know what type of income falls into the category of nonbusiness income.”----> Nonbusiness income is all income other than business income or EE compensation. It is income you can clearly classify as having no connection to your business. Essentially nonbusiness income is income that is not earned from transactions and activity in the regular course of your trade /business. Income from investment assets in a multistate corporation that is removed from the apportionment process and allocated to the state in which the nonbusiness asset is located. The distinction between business and nonbusiness income examines the various ways in which states determine whether income is classified as business or nonbusiness income. Because business income is apportioned among the states in which a corporation does business, and nonbusiness income is allocable solely to the state where the company is domiciled, the characterization of income has important consequences to both the taxpayer and the state.
“ And I don't know what are the pros and cons for treating it as "business income"”----> The Revenue Act defines "business income" as income arising from transactions and activities in the regular course of the your trade/business and includes income from tangible and intangible property if the acquisition, management and/or disposition of the property constitute integral parts of your regular trade/business operations. In essence, the business income of the taxpayer is that portion of the taxpayer’s entire net income which arises from the conduct of the taxpayer's trade/business operations. Most businesses incur expenses when generating income and most of these can be deducted from its income to arrive at its net profit or taxable income. It is on this amount that you pay income tax. However, certain business expenses that are paid for out of business income cannot be claimed as allowable business expenses. ALSO, if the total deductible expenses for your business are greater than its income then it will have a loss for tax purposes. The business will not have to pay tax and the loss can generally be used to reduce income in future income years. The rules for using losses depend on whether the business is run through a company, trust or as a sole trader.I guess the more your S corp has pre tax business income,due to no corporate taxation, the amount of corporate net income distributed is higher and net funds available for the S corp is higher. Yet another advantages of S-Corp. business income treatment relates to the utilization of corporate NOL Subject to certain relatively complex requirements, a shareholder may be able to offset S-Corp. losses against personal taxable income from other sources. Thus, the shareholder may be able to capitalize on the time value of money by utilizing such losses sooner than might be possible . Generally speaking a shareholder must have sufficient "basis" in the S-Corp to enable the use of losses to offset other income in the form of business income. Basis is obtained through by the corporation’s business income. The guarantee by shareholders of corporate debt does not create basis for loss utilization by shareholders.
“Another question is that I have originally put some money in the business as start up costs/investment. Now it looks like I need to infuse some more cash in it (5-10k). Is it better to treat that as a loan or an investment from tax point of view? “------>I guess it depends; as an owner/SH of the S corp, you will certainly have to contribute some form of capital into your business in what is commonly referred to as an "infusion of capital" or a “capital contribution” that would provide the necessary working capital to operate the business. The question that is of concern to all new small business owners is whether to consider this initial investment as capital contribution or as a loan has some important tax implications for each situation. If you wish to loan any money to your own business, then you should define the terms of the loan, including the repayment and the rate of interest on the loan. The interest paid to you on the debt is deductible to the S corp on W2, and taxable to you on your personal income tax return 1040. However, the principle portion of the loan repayment return of principle is not taxable to you.yu, as a shareholder of S corp, can loan money to the S corp and increase your stock basis , to possibly reduce LTCG,(loan basis, I mean)by the amount of the loan. Shareholder's making loans to their S-Corp may take a tax deduction in the current year for losses in excess of their stock basis, but only to the extent they have loan basis.But care must be taken. Basis is increased for debts only if there is an actual economic outlay by the shareholder and the S corp is obligated to pay off the debt. In essence, the loan must have substance and the taxpayer must be at risk. For example, the U.S. Court of Appeals for the Eighth Circuit, in 2004, affirmed a Tax Court opinion on this issue in a case that involved the owner of a trucking company. The owner had multiple S corps and borrowed money from one corp and loaned it to another S corp with tax losses so he would have basis to deduct the loss on his personal return. The second corporation sent the money immediately back to the first corp in another loan. The court did not have any trouble holding that the loan did not have any substance and was not at risk. The result was that the shareholder was not able to deduct losses in the amount of approximately $14 million. The tax consequences of classifying the capital infusion as an Investment into your Incorporated Business is that in this case, the funds are treated as a Capital Contribution that is reported on the Shareholders Equity Portion in the balance sheet of the S corp . Generally speaking, these amounts are not removed until the liquidation of the business. However, any withdrawals from the Capital account are treated as dividends and you would be subject to the prevailing applicable tax rate on dividends. Most financial experts suggest that a owners treat capital infusion for a small corporation as both capital Contribution and Loans to the corp.

Thank you for answering my questions and they are very helpful. But I am still a little confused about that "business income election" question. So basically you think it is better to treat it as business income for the majority of the s corporations or it depends?

“So basically you think it is better to treat it as business income for the majority of the s corporations or it depends?”---->I guess as you can see, it depends on the situation; since you have more business income, then your S corp can deduct operating expenses(as long as you have more deductible business operating expenses) against the income and can reduce tax liability on your 1040 by reducing the amount on 1120S line 21/ sch K1 of 1120s on line 1.However,your excess business(with relatively lower business operating expenses) income can increase your tax liability on 1040; OR unlike excessive net passive Income, nonbuisnessincome(Nonpassive income includes any type of active income, such as wages, business income or investment income.), your business income in AAA is not subject to double taxation on its distribution (UNLESS distribution exceeds its basis). In the situation, if the S corp's net passive income exceeds 25% of its gross receipts for the year, the S corp pays the highest corporate income tax rate on the net passive income. Which is a bummer. And, unfortunately, the excessive passive income penalty gets even worse. If an S corp suffers from the excessive passive income tax three years in a row, the S corp’s "S corp status" automatically terminates.