Choice "D" is correct. An S Corporation shareholder's basis is reduced by distributions to the shareholders as well as loss or expense items. However, loss deductions are limited to a shareholder's adjusted basis in S corporation stock plus direct shareholder loans to the corporation. Any losses disallowed may be carried forward indefinitely and will be deductible as the shareholder's basis is increased.

Choice "b" is incorrect. Losses are deductible only to the extent of the shareholder's basis.Choice "c" is incorrect. The shareholder cannot deduct the full loss without a sufficient amount of basis in the S corporation stock.
Choice "a" is incorrect. The shareholder cannot have a negative basis as a result of distributions and losses.