Final answer:
S corporations make accounting period and method elections at the corporate level, not at the individual, partnership, or shareholder level, as it is a separate legal entity with distinct taxation requirements. Option 2 is the correct answer.
Step-by-step explanation:
When determining how various business entities handle taxation and accounting decisions, it's essential to understand that different structures have distinct requirements. For an S corporation, a type of corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes, the accounting period and method elections are made at the corporate level.
Unlike partnerships or sole proprietorships, where the individual owners might make these decisions, an S corporation operates as a separate legal entity.
Therefore, the S corporation must decide on its accounting period (which is typically a calendar year or a fiscal year) and accounting method (such as cash or accrual basis) when it files its initial tax return with the IRS.
The correct answer to the student's question is: S corporations make accounting period and method elections at the corporate level.