Question

Which of the following reduces a shareholder's S corporation stock basis?

1) Illegal kickbacks paid.
2) Depletion deductions in excess of the basis of property.
3) Sales income.
4) A 20
5) Nontaxable income.

Answer 1

Depletion deductions in excess of the property's basis can be used by an S corporation shareholder, leading to a reduction in the shareholder's stock basis.

Step-by-step explanation:

The statement that reduces a shareholder's S corporation stock basis among the options provided is 2) Depletion deductions in excess of the basis of property. Depletion deductions allow a taxpayer to account for the reduction of a product's reserves. For an S corporation shareholder, these deductions can reduce the stock basis if they exceed the taxpayer's basis in the property. Subject to certain limitations, this brings about a dollar-for-dollar reduction in the shareholder's basis in their S corporation stock.

In contrast, illegal kickbacks would not be a legal or an ordinary deduction, sales income increases the basis, and nontaxable income generally does not decrease the basis. The partial phrase 'A 20' is an incomplete item and doesn't provide enough information to determine a tax impact.