Nondeductible Expenses and Basis Calculation:

• S Corporation Level: On the S Corporation's 7203 form, nondeductible expenses are used to adjust the shareholder's basis in the corporation. Nondeductible expenses decrease the basis, and tax-exempt income increases it. These adjustments ensure that the basis reflects the shareholder's economic interest in the S corporation.
• Individual Level (Form 1040): When it comes to the individual's 1040 tax return, the nondeductible expenses themselves do not flow through since they are not deductible. However, the adjusted basis (which is affected by nondeductible expenses at the corporate level) is crucial for determining the amount of loss or deduction a shareholder can claim against other income on their individual tax return.