Depletion in excess of basis in the property will cause an upward adjustment to an S shareholder's basis.

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When a shareholder of an S corporation receives distributions that exceed their basis in the company, their basis is reduced to zero. If the distributions continue, the excess over basis is treated as a taxable gain. However, if the S corporation experiences depletion or loss in excess of the shareholder's basis, the excess amount is added to the shareholder's basis, which may enable the shareholder to take future tax benefits or distributions without triggering additional tax liabilities. This upward adjustment to the shareholder's basis is allowed under certain circumstances, as outlined in the tax code.

Depletion in Excess of Basis in the Property Will Cause