According to the tax attribute carryover regulations, Subchapter C E&P are profits that the S corporation inherited from a C corporation.
The existence of such e&p affect the s corporation's ability to earn passive income in the following ways -
1- If a S corporation has E&P at the end of a tax year, the excess net passive income tax applies if the passive investment income for the tax year exceeds 25% of the S corporation's gross receipts.
2- It stops the firm from generating an endless stream of passive investment income and avoiding paying the excess net passive income tax.
An S corporation cannot generate earnings and profits under current tax rules (E&P). However, if the S corporation itself was a C corporation in the past, it may have accumulated E&P from those years.
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