An S corporation’s stockholder's basis is generally increased by what?

The correct answer is that a stockholder's basis in an S corporation generally increases with taxable income. When an S corporation earns profit, it is passed through to the shareholders, and that income increases their basis in the shares. This increase is critical because an increased basis allows shareholders to potentially take larger losses on their tax returns in the future.

The other choices refer to items that either do not increase basis or directly reduce it. For instance, distributions decrease a shareholder's basis rather than increase it because they represent a return of capital. Nontaxable discharge of indebtedness can affect basis differently, often leading to a reduction rather than an increase. Separately stated loss items also typically decrease the basis because they reflect a loss incurred by the corporation that is passed on to shareholders and can ultimately reduce their investment basis. Hence, taxable income correctly indicates an increase in basis, making it the appropriate choice.