Final answer:
An S corporation shareholder's basis is dynamic and must be adjusted annually.
Step-by-step explanation:
The statement is True. Similar to partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.
In an S corporation, shareholders' basis represents their investment in the corporation and is used to determine their share of profit or loss. The basis is initially calculated when a shareholder acquires their stock and subsequently adjusted annually based on various factors such as contributions, distributions, and income or loss allocated to the shareholder.
For example, if a shareholder contributes additional capital to the S corporation, their basis increases. Conversely, if the shareholder receives distributions from the corporation, their basis decreases. These adjustments ensure that shareholders' basis accurately reflects their economic interest in the company and helps facilitate the proper treatment of income and losses for tax purposes.