Title 35 Mississippi State Tax Commission

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Title 35 Mississippi Department of Revenue

Part III Income and Franchise

Subpart 1. Definitions and Miscellaneous

35.III.1.01 Chapter 01. Definitions…………………………………………………………page 4

35.III.1.02 Chapter 02. Accounting Methods…………………………………………….. page 5

35.III.1.03 Chapter 03. Accounting Basis………………………………………………… page 6

35.III.1.04 Chapter 04. Inventories……………………………………………………….. page 7

35.III.1.05 Chapter 05. Hobby Losses…………………………………………………….. page 7

35.III.1.06 Chapter 06. Reserved………………………………………………………….. page 7

35.III.1.07 Chapter 07. Reserved………………………………………………………….. page 7

35.III.1.08 Chapter 08. Contractors………………………………………………………..page 8

35.III.1.09 Chapter 09. Income Averaging……………………………………………….. page 8

35.III.1.10 Chapter 10. Statute of Limitations…………………………………………….page 8

35.III.1.11 Chapter 11. Extension of Time to File………………………………………. page 9

35.III.1.12 Chapter 12. Credit for Income Tax Paid to Another State……………….. page 9

35.III.1.13 Chapter 13. Reporting of Changing Elections --Changes in Reporting

Methods…………………………………………………………. page 10

Subpart 2. Gross Income

35.III.2.01 Chapter 01. Constructive Receipts…………………………………………..page 11

35.III.2.02 Chapter 02. Compensation for Personal Services…………………………page 12

35.III.2.03 Chapter 03. Gains of Loss on Disposition of Property………………….. page 12

35.III.2.04 Chapter 04. Interest Income…………………………………………………. page 13

35.III.2.05 Chapter 05. Rents and Royalties……………………………………………..page 16

35.III.2.06 Chapter 06. Dividend Income……………………………………………….. page 16

35.III.2.07 Chapter 07. Income from Retirement Allowances, Pensions, Annuities,

or Optional Retirement Allowances…………………………. page 18

35.III.2.08 Chapter 08. Income of a Minor Child or Dependent…………………….. page 18

35.III.2.09 Chapter 09. Prizes, Awards and Stipends…………………………………..page 19

35.III.2.10 Chapter 10. Reserved……………………………………………………….…page 20

35.III.2.11 Chapter 11. Individual Non-Business Deductions…………………………page 20

35.III.2.12 Chapter 12. Amounts Received Under Accident and Health Plans……..page 20

35.III.2.13 Chapter 13. Compensation for Injuries and Sicknesses…………………..page 21

35.III.2.14 Chapter 14. Strike Benefits………………………………………………….. page 21

35.III.2.15 Chapter 15. Return of Life Insurance, Annuity or Endowment Policies

……………………………………………………………………. page 21

35.III.2.16 Chapter 16. Unemployment Compensation Benefits………………………page 21

35.III.2.17 Chapter 17. Rental Allowance and Fair Rental Value of a

Parsonage ………………….……………………………………page 21

35.III.2.18 Chapter 18. Recovery of Tax Benefit Items…………………………………page 22

35.III.2.19 Chapter 19. Gross Income of Farmers…………………………………….. page 22

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Subpart 3. Exclusions from Gross Income

35.III.3.01 Chapter 01. Reserved………………………………………………………… page 23

35.III.3.02 Chapter 02. Exclusion for Improvements Erected by Lessee…………… page 23

35.III.3.03 Chapter 03. Employee Benefits……………………………………………… page 23

35.III.3.04 Chapter 04. Reserved………………………………………………………….page 24

35.III.3.05 Chapter 05. Proceeds of Life Insurance…………………………………….page 25

35.III.3.06 Chapter 06. Reserved………………………………………………………….page 25

35.III.3.07 Chapter 07. Contributions by Employer to Accident and Health Plans

……………………………………………………………………. page 25

35.III.3.08 Chapter 08. Exclusion--Military Pensions and Disability Payments for

Certain Injuries and Sicknesses……………………………… page 25

35.III.3.09 Chapter 09. Gaming Winnings and Gaming Income…………………….. page 25

Subpart 4. Adjustments to Gross Income

35.III.4.01 Chapter 01. Adjustments to Gross Income……………………………….. page 29

35.III.4.02 Chapter 02. Adjustments to Gross Income--Retirement Plans…………. page 28

Subpart 5. Business Deductions--General

35.III.5.01 Chapter 01. Business Deductions………………………………………….. page 30

35.III.5.02 Chapter 02. Expenditures Attributable to Lobbying, Political

Campaigns, Attempts to Influence Legislation, etc., and

Certain Advertising……………………………………………. page 31

35.III.5.03 Chapter 03. Taxes Paid as Business Expense…………………………….. page 32

35.III.5.04 Chapter 04. Depreciation……………………………………………………. page 32

35.III.5.05 Chapter 05. Depletion………………………………………………………... page 34

35.III.5.06 Chapter 06. Net Operating Loss……………………………………………. page 34

35.III.5.07 Chapter 07. Wage Tax Credits……………………………………………… page 35

35.III.5.08 Chapter 08. Other Business Deductions…………………………………… page 36

35.III.5.09 Chapter 09. Reforestation Tax Credit……………………………………… page 37

Subpart 6. Losses

35.III.6.01 Chapter 01. Casualty Losses of Individuals……………………………….. page 41

35.III.6.02 Chapter 02. Casualty Losses Incurred in a Trade or Business…………. page 43

Subpart 7. Individuals

35.III.7.01 Chapter 01. Residents………………………………………………………… page 44

35.III.7.02 Chapter 02. Part-Year Residents…………………………………………….page 46

35.III.7.03 Chapter 03. Non-Residents………………………………………………….. page 46

35.III.7.04 Chapter 04. Military………………………………………………………….. page 47

Subpart 8. Corporate

35.III.8.01 Chapter 01. Liquidations and Distributions………………………………. page 50

35.III.8.02 Chapter 02. Reorganizations…………………………………………………page 54

35.III.8.03 Chapter 03. Election of Certain Small Business Corporations --

(S Corporations)……………………………………………….. page 54

35.III.8.04 Chapter 04. Charitable Contributions – Corporation…………………….page 59

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35.III.8.05 Chapter 05. Foreign Sales Corporations (FSC's)……………………….. page 59

35.III.8.06 Chapter 06. Multi-state Taxation…………………………………………… page 60

35.III.8.07 Chapter 07. Consolidated or Combined Returns…………………………. page 82

35.III.8.08 Chapter 08. Interest Expense……………………………………………….. page 84

Subpart 9. Partnerships

35.III.9.01 Chapter 01. Partnerships……………………………………………………. page 85

Subpart 10. Other Entities and Miscellaneous

35.III.10.01 Chapter 01. Fiduciaries……………………………………………………… page 87

35.III.10.02 Chapter 02. Decedents and Successor's Income………………………….. page 90

35.III.10.03 Chapter 03. Insurance Companies…………………………………………. page 91

35.III.10.04 Chapter 04. Allocations by Cooperative Associations…………………… page 94

35.III.10.05 Chapter 05. Exempt Organizations………………………………………….page 96

Subpart 11. Withholding

35.III.11.01 Chapter 01. Information at Source…………………………………………. page 98

35.III.11.02 Chapter 02. Withholding -- Wages Defined……………………………….. page 99

35.III.11.03 Chapter 03. Withholding -- Exclusions from Wages……………………. page 101

35.III.11.04 Chapter 04. Withholding -- Employee Defined………………………….. page 105

35.III.11.05 Chapter 05. Withholding -- Employer Defined …………………………page 105

35.III.11.06 Chapter 06. Withholding -- Payroll Period Defined ……………………page 106

35.III.11.07 Chapter 07. Withholding of Tax -- Requirements of …………………….page 106

35.III.11.08 Chapter 08. Credit for Tax Withheld ……………………………………page 108

35.III.11.09 Chapter 09. Employees Subject to Withholding …………………………page 108

35.III.11.10 Chapter 10. Employer Liable -- Failure to Withhold ………………….page 109

35.III.11.11 Chapter 11. Report of Income Tax Withheld..……………………………page 110

35.III.11.12 Chapter 12. Payment of Income Tax Withheld …………………………page 111

35.III.11.13 Chapter 13. Reports of Withholding -- Correcting Mistakes …………..page 111

35.III.11.14 Chapter 14. Wage and Tax Statements and Reports …………………….page 112

35.III.11.15 Chapter 15. Statement Furnished Employees …………………………….page 112

35.III.11.16 Chapter 16. Determination of Income Tax to be Withheld ……………..page 113

35.III.11.17 Chapter 17. Registration of Employers……………………………………page 113

35.III.11.18 Chapter 18. Withholding Exemption Certificates ………………………..page 114

35.III.11.20 Chapter 20. Records to be Kept by Employer.……………………………page 115

35.III.11.21 Chapter 21. Estimated Tax Payments ……………………………………..page 116

35.III.11.22 Chapter 22. Withholding on Gambling Winnings………………………..page 118

35.111.11.23 Chapter 23. Transfer of Assessments .……………………………………..page 121

Subpart 12. Franchise Tax

35.III.12.01 Chapter 01. Loans from Affiliates and Shareholders ……………………page 122

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Subpart 01 Definitions and Miscellaneous

Chapter 01 Definitions

100 “Gross income” means all income from whatever source derived, unless excluded by law

and includes income realized in any form, whether in money, property, or services. Gross

income includes compensation for personal and professional services, wages, fees, business

income, profits from sales, rentals and dealings in property, interest, dividends and gains,

profits and income derived from any source whatever, including income from

governmental agencies and subdivisions thereof, annuities, reacquired property, securities,

insurance premiums, reinsurance premiums, considerations for supplemental insurance

contracts, transactions of any business carried on within the state for gain or profit, income

from intangibles if such property has acquired a business, commercial or actual situs in this

state, a partner's distributive share of partnership gross income, income in respect of a

decedent, and income from an interest in an estate or trust unless exempt or otherwise

excluded, in whole or in part, from tax by law. Gross income, however, is not limited to the

items so enumerated. In the case of a taxpayer reporting net income under this act on a

basis of receipts and disbursements, there should be included in gross income only actual

and constructive receipts of income. Taxpayers reporting on the accrual basis must include

in gross income amounts received by them or accrued to them.

101 In a manufacturing, merchandising or mining business, "gross income" means the total

sales, less the cost of goods sold, plus any income from investments and from incidental or

outside operations or sources.

102 “Net income” means gross income less allowable business expenses. The business

deductions are in general, though not exclusively, expenditures, other than capital

expenditures, in connection with the production of income.

103 “Taxable income” with respect to individuals, estates and trusts, means total gross income

less allowable expenses incurred in connection with the taxpayer's trade or business,

allowable personal deductions and applicable personal and additional exemptions. Taxable

income with respect to corporations, associations and partnerships, means total gross

income less allowable expenses and contributions.

104 “Domestic taxpayer”, when applied to any corporation, association, and partnerships,

means created, organized or domesticated under the laws of the State of Mississippi. The

fact that a domestic taxpayer moves its principal place of business without the state does

not preclude its classification as a domestic organization for income tax purposes.

105 “Foreign taxpayer”, when applied to any corporation or association, including

partnerships, means created or organized under the laws of a state other than Mississippi.

The fact that a foreign taxpayer carries on its business or occupation in Mississippi does

not set aside the foreign construction of the corporation, association or partnership.

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106 The term "farm" embraces the farm in the ordinary accepted sense, and includes, but is

not limited to stock, dairy, poultry, fish, fruit and truck farms; also plantations, and all land

used for farming operations. All individuals, partnerships or corporations that cultivate,

operate or manage farms for gain or profit, either as owners or tenants, are designated as

farmers. A fish farm is an area where fish are grown or raised, as opposed to merely caught

or harvested; that is, an area where they are artificially fed, protected, cared for, etc.

107 A taxpayer is engaged in the “business of farming” if he cultivates, operates or manages a

farm for gain or profit, either as owner or tenant. A taxpayer who receives a rental (either

in cash or in kind) which is based upon farm production is engaged in the business of

farming. However, a taxpayer who receives a fixed rental (without reference to production)

is engaged in the business of farming only if he participates to a material extent in the

operation or management of the farm. A person cultivating or operating a farm for hobby,

recreation or pleasure rather than a profit is not engaged in the business of farming.

108 (Reserved)

35.III.1.01 revised effective January 7, 2019

Chapter 02 Accounting Periods

100 Every taxpayer must compute taxable income based on their tax year. A tax year is an

annual accounting period used by the taxpayer for keeping records and reporting income

and expenses. A tax year may be a calendar year, which is a period of twelve (12)

consecutive months ending on December 31

, or a fiscal year, which is a period of twelve

(12) consecutive months ending on the last day of any month except December 31

101 Miss. Code Ann Section 27-7-13(4) provides that if a taxpayer’s annual accounting period

is not a proper fiscal year ending or if the taxpayer has no annual accounting period or does

not maintain books and records that identify an accounting period, that the taxable period

will be based on a calendar year.

102 S Corporations, fiduciaries and partnerships are required to file for the same period for

Mississippi as for federal purposes.

103 Taxpayers required to file an individual income tax return will file using a calendar year tax

period unless they have been granted permission by the Commissioner to file otherwise.

104 Pursuant to Miss. Code Ann. Section 27-7-43 a taxpayer will only be allowed to change an

accounting period when it has received approval from the Commissioner. If permission is

granted by the federal government to change the accounting period, then state permission is

automatic provided the taxpayer attaches a copy of the written federal approval to the first

state return filed for the new period. If the Commissioner determines that such change in

accounting period results in an understatement of income, the Commissioner will deny the

final approval.

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105 When the accounting period is changed, it is required that the tax on the first return be

computed by placing the income on an annual basis. The annualized income is determined

by dividing the income for the period by the number of months in the short period and

multiplying the result by twelve (12). The tax computed on the annualized taxable income

is multiplied by the number of months in the short period and divided by twelve (12).

106 (Reserved)

35.III.1.02 revised effective January 7, 2019

Chapter 03 Accounting Basis

100 Basis of accounting refers to the methodology under which income and expenses are

recognized in financial statements and records. Every taxpayer must use a consistent

accounting method to report income and expenses. The manner by which a taxpayer

computes the amount of income, gains, losses, deductions and credits, and the tax year

for which each item must be reported, constitutes the taxpayer’s tax accounting method.

The most commonly used accounting methods are the cash basis and the accrual basis.

101 The cash basis (cash receipts and disbursements) is the accounting method used by most

individuals. Income is generally reported in the year that it is actually or constructively

received in the form of cash, or its equivalent, or other property. Deductions or credits

are generally taken for the year in which the related expenditures are actually paid, unless

they should be taken in a different period to more clearly reflect income, such as

depreciation allowances and prepaid expenses.

102 Bad debts do not constitute a loss as such under the cash receipts and disbursements

method. The expenses, liabilities or credits of one year cannot be used to reduce the

income of a subsequent year.

103 The accrual basis is the accounting method that records revenues and expenses when they

are incurred, regardless of when cash is exchanged. Expense are deductible on the

accrual basis in the year incurred, regardless of when payment is made. The purpose of

an accrual method is to match income and expenses in the correct year.

104 The net income shall be determined in accordance with the accounting basis employed

by the taxpayer, whether it be a fiscal year or a calendar year and in accordance with the

method of accounting employed whether it be cash or accrual. The accounting method

used by a taxpayer must clearly reflect income and expenses. The taxpayer’s method of

accounting must be consistent; no method of accounting is regarded as clearly reflecting

income unless all items of gross profit and deduction are treated with consistency from

year to year.

105 The initial return may be filed in accordance with the basis and method elected by the

taxpayer as long as it is in keeping with generally accepted principles, is in accordance

with the basis and method of accounting regularly used by the taxpayer, and reflects the

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taxpayer's correct income. Arbitrary changes in the basis or method of accounting

employed by the taxpayer are not permitted except in cases where such changes have

been approved in advance by the Commissioner.

106 Where no accounting basis has been established by the taxpayer, or where the method

employed does not clearly reflect income, the Commissioner shall prescribe a method

that will clearly reflect income, and the taxpayer for whom the method is prescribed shall

be bound by the same until such time as it is shown to the satisfaction of the

Commissioner that a method proposed by the taxpayer will reflect such income with

equal results.

107 The expenses, liabilities, or credits of one year cannot be used to reduce the income of a

subsequent year. If a taxpayer does not within any year properly deduct their expenses,

losses, interest, taxes, or other charges, they cannot deduct them from the income of the

next or any succeeding year.

108 (Reserved)

35.III.1.03 revised effective January 7, 2019

Chapter 04 Inventories

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures

relating to inventories as are not deemed contrary to the context and intent of Mississippi

Law.

101 (Reserved)

102 (Reserved)

Chapter 05 Hobby Losses

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures

relating to Hobby Losses as are not deemed contrary to the context and intent of

Mississippi Law.

101 (Reserved)

35.III.1.05 revised effective January 7, 2019

Chapter 06 Reserved

35.III.1.06 revised effective January 7, 2019

Chapter 07 Reserved

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35.III.1.07 revised effective January 7, 2019

Chapter 08 Contractors

100 The Commissioner will follow federal rules, regulations and revenue procedures relating

to Contractors as are not deemed contrary to the context and intent of Mississippi Law.

101 (Reserved)

35.III.1.08 revised effective January 7, 2019

Chapter 09 Income Averaging

100 Mississippi law does not authorize income averaging for taxpayers having annual

fluctuations in income over several years. Income earned, realized or recognized in the

taxable year must be reported in full for that year without the benefit of any method of

averaging.

101 (Reserved)

102 (Reserved)

Chapter 10 Statute of Limitations

100 The Commissioner, pursuant to Miss. Code Ann. Section 27-7-49 has three (3) years

from the due date of the return or the date the return was filed, whichever is later, to make

a determination of tax overpayment or deficiency. Exceptions to this general rule are:

1. Where a taxpayer has been notified by certified mail prior to the expiration of the

three-year examination period that his or her return is being examined. The

Commissioner has one year after the expiration of the three-year period to examine

records and/or returns, and to assess any additional tax due.

2. Where a taxpayer filed a false or fraudulent return with the intent to evade tax or

where a taxpayer had a filing requirement but no tax return was filed.

3. Where the Internal Revenue Service has increased the income of a taxpayer.

Assessments of Mississippi income tax resulting from changes made to a taxpayer's

federal return by the Internal Revenue Service must be made within three (3) years

of the date the Internal Revenue Service disposes of the liability in question.

“Disposes of the tax liability in question” means the date the Department of

Revenue receives notice from the Internal Revenue Service of the change in the

taxpayer’s reported taxable income.

101 In the case of a taxpayer seeking a refund or a reduction in the amount due on a particular

return, a taxpayer must apply within three (3) years from the due date of the return or

where an extension was granted, three (3) years from the date the return was filed,

provided the return was filed on or before the last day of the extension period authorized

by the Commissioner.

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102 When the Internal Revenue Service has made a change which results in a decrease of a

taxpayer's Mississippi income tax liability, the Commissioner will allow the reduction

within three (3) years of the date the Internal Revenue Service disposes of the liability in

question.

103 When the reportable taxable income of a taxpayer has been decreased by the carryback of

a net casualty loss deduction or a net operating loss deduction, the three-year examination

period is determined by the tax year in which the loss was incurred.

104 (Reserved)

35.III.1.10 revised effective January 7, 2019

Chapter 11 Extension of Time to File

100 The Commissioner may grant a reasonable extension of time beyond the statutory due date

to file any income or franchise tax return or annual report. The authorized extension of

time to file does not extend the time for payment of the income or franchise tax due.

Interest and penalty shall apply on any underpayment of tax. Taxpayers having a tax

liability who request an extension of time must remit the tax due with the proper

Mississippi Application for Extension on or before the due date of their return to receive an

automatic extension of time to file their tax returns.

101 If no tax liability exists on the due date of the return, the Commissioner will automatically

recognize an extension of time authorized and granted by the Internal Revenue Service for

the filing of annual income tax returns. Proof of the authorized extension must be

maintained with the taxpayer’s records. If proof cannot be presented upon request,

extension may not be allowed.

102 (Reserved)

103 (Reserved)

Chapter 12 Credit for Income Tax Paid to Another State

100 Pursuant to Miss. Code Ann. Section 27-7-77, Mississippi residents are required to include

their total gross income from all sources on their Mississippi income tax return, regardless

of where the income was earned or realized. Mississippi residents who earned income in

other states and are required to pay an income tax to another state(s) on income that is also

subject to Mississippi income tax are allowed a credit for income tax paid to another state

against Mississippi tax due. The credit must be claimed in the same taxable year in which

the tax is paid to the other state. Non-residents are not allowed this credit.

101 “Another state” or “other state” means a state in the United States other than Mississippi, a

territory of the United States or the District of Columbia. This credit does not apply to

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taxes paid to any foreign country or to taxes imposed by any city, county or other local

taxing jurisdiction.

102 The amount of the credit is subject to the following limitations:

1. The credit may not exceed the amount of income tax due the State of Mississippi.

2. The credit may not exceed the amount of income tax actually paid to the other state.

(Any income tax credits allowed by another state will not be treated as taxes actually

paid.)

3. The credit may not exceed an amount computed by applying the highest applicable

Mississippi rates to the net taxable income reported to the other state. Highest rates

are meant to mean the highest rates at which the net taxable income reported to the

other state is taxable by the State of Mississippi.

103 Copies of withholding statements are not sufficient documentation, as they indicate the

amount withheld by the other state not the actual tax liability to the other state. The

required documentation, as outlined below, must be attached to the Mississippi Individual

Income Tax Return to claim the credit or the credit may be disallowed.

1. The Tax Credit For Income Tax Paid To One Or More Other States form; and

2. A copy of the actual income tax return(s) filed with the other state(s); or

3. Documentation of the amount of tax paid to another state on the taxpayer’s behalf by

another entity, such as a federal schedule K-1. This will only be accepted in instances

where the other state’s return is not required to be filed by the taxpayer.

104 If a taxpayer amends the amount of income tax paid to the other state on which the

Mississippi credit was based, the taxpayer must file an amended Mississippi Individual

Income Tax Return to recalculate the amount of credit allowed.

105 (Reserved)

35.III.1.12 revised effective January 7, 2019

Chapter 13 Reporting or Changing Elections—Change in Reporting Methods

100 Permission must be granted in writing by the Commissioner before any election can be

changed. If a taxpayer has an option to make an election and does not knowingly make

such election, but reports to Mississippi as though an election had been made, the

taxpayer is required to continue filing returns using the same method until granted written

permission by the Commissioner to change.

101 Additionally, if a taxpayer has an election available and completes his return incorrectly

(such as, but not limited to using method which utilizes only part of the requirements of a

certain election), the Commissioner shall determine whether, in fact, an election has been

made and what method of reporting is to be used.

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102 Also, permission must be granted in writing by the Commissioner before an accounting

method, method of filing or any other methodology change is used by the taxpayer.

103 (Reserved)

104 (Reserved)

Subpart 02 Gross Income

Chapter 01 Constructive Receipt of Income

100 Income which is credited to the account of, or set apart, for a taxpayer and which may be

used by the taxpayer at any time is subject to tax for the year during which the income is

credited or set apart, even though the taxpayer does not have direct possession. To

constitute receipt, the income must be credited or set apart to the taxpayer without any

substantial limitation or restriction as to the time or the manner of payment or condition

upon which payment is to be made, and must be made available to be drawn at any time,

and its receipts brought within the taxpayer’s control and disposition.

101 If interest coupons have matured and are payable, but have not been cashed, such interest,

though not collected when due and payable, shall be included in gross income for the year

during which the coupons mature, unless it can be shown that there are no funds available

for payment of interest during such year. The interest shall be included in gross income

even though the coupons are exchanged for other property instead of eventually being

cashed. The amount of defaulted coupons is income for the year in which paid.

102 Dividends on corporate stock are subject to tax when unqualifiedly made subject to the

demand of the shareholder. If a dividend is declared payable on December 31, and the

corporation mailed the checks so that the shareholder would not receive them until January

of the following year, the dividends are not considered to have been subject to the demand

of the shareholders prior to January, when the checks were actually received.

103 Interest credited on saving bank deposits is income to the depositor when credited. An

amount credited to shareholders of a building and loan association, when such credit passes

without restriction to the shareholder, has a taxable status as income for the year of the

credit. If the shares are restricted by a maturity date, the amount credited will be income to

the recipient when the shares mature, providing they are not available for withdrawal prior

to maturity.

104 In the case of a taxpayer reporting income on a cash basis, there should be included in gross

income only actual and constructive receipts of income. Taxpayers reporting on the accrual

basis must include in gross income amounts received by them or accrued to them.

105 (Reserved)

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35.III.2.01 revised effective June 15, 2019

Chapter 02 Compensation for Personal Services

100 Compensation means any form of payment made to an individual for services rendered as

an employee for an employer; services performed as an employee representative and any

separation or termination allowance. Compensation includes wages, salaries, bonuses,

gifts, profit-sharing, commissions, tips, vacation pay, sick pay, medical benefits, disability,

expense reimbursement, cash incentives, monetary value of non-cash incentives, and any

other form of remuneration received in return for services. Compensation can be further

defined as income received from the United States or any other state by officials or

employees, thereof, whether in a civilian capacity or in the military or naval service,

commissions paid salesmen, compensation for services on the basis of a percentage of

profits, commissions on insurance premiums, fees and other contributions received by a

clergyman, evangelist or religious worker for services rendered.

101 Amounts withheld by the employer pursuant to the requirements of Federal and State

Income Tax Laws, Federal Social Security Act, Civil Service Retirement Act, and similar

retirement systems, unemployment compensation contracts, group life and health plans,

stock purchase plans, etc., must be included in the gross income of the employee.

102 Pursuant to Miss. Code Ann. Section 27-7-16, amounts contributed to a tax-sheltered

annuity plan, qualified retirement account and authorized deferred compensation plan shall

not be considered elements of gross income in the tax year in which such amounts are

deferred.

103 (Reserved)

35.III.2.02 revised effective June 15, 2019

Chapter 03 Gain or Loss on Disposition of Property

100 The gain or loss from the sale or exchange of property is included in or deducted from

gross income, unless specifically excluded by law. Property includes tangible items, such

as buildings and office equipment, and intangible items, such as patents and goodwill.

Generally, the gain is the excess of the amount realized over the unrecovered cost or other

basis of the property sold or exchanged. The specific rules for computing the amount of

gain or loss are contained in Miss. Code Ann. Section 27-7-9.

101 When a part of a larger property is sold, the cost or other basis of the entire property shall

be equitably apportioned among the several parts, and the gain realized or loss sustained on

the part of the entire property sold is the difference between the selling price and the cost or

other basis allocated to such part. The sale of each part is treated as a separate transaction

and the gain or loss shall be computed separately on each part. Thus, the gain or loss shall

be determined at the time of sale of each part and not deferred until the disposal of the

entire property.

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102 Certain realized gains or losses on the sale or exchange of property are not included in or

deducted from gross income at the time the transaction occurs. Gains or losses from such

sales or exchanges are recognized as provided by statute.

103 Gains realized and recognized on the sale or exchange of a capital asset are treated, for

Mississippi income tax purposes, as ordinary income and the total gain recognized on such

sale must be included in gross income.

104 Tax-free exchanges of property will only be allowed when:

1. The real or personal property of both parties is located within Mississippi.

2. The gain on the exchange is recognized under Section 1031 of the Internal Revenue

Code.

105 When an exchange of property consists not only of property that qualifies as a tax-free

exchange but also other property or money, any gain must be recognized by the recipient.

A loss from this type of exchange is not recognized. The gain will not be in excess of the

fair market value of the property and the amount of money received.

106 (Reserved)

35.III.2.03 revised effective January 1, 2020

Chapter 04 Interest Income

100 Interest received by or credited to the taxpayer constitutes gross income and is fully

taxable, unless specifically exempt or excluded by statute. Interest income includes but is

not limited to, interest on savings or other bank deposits; interest on coupon bonds; interest

on an open account, a promissory note, a mortgage, or a corporate bond or debenture; the

interest portion of a condemnation award; usurious interest; interest on legacies; and

interest on life insurance proceeds held under an agreement to pay interest thereon.

101 Miss. Code Ann. Section 27-7-15(4)(d) provides that gross income does not include

interest on obligations of the United States or its possessions, securities issued under the

provisions of the Federal Farm Loan Act of 1916, bonds issued by the War Finance

Corporation, or obligations of the State of Mississippi or its political subdivisions.

102 31 U.S.C. Section 3124(a) prohibits states from imposing an income tax on interest income

from direct obligations of the United States government. In addition, the enabling

legislation for many federal obligations and or instrumentalities prohibit state taxation on

income.

103 "Obligations of the United States" refers to obligations issued to secure credit to carry on

the necessary functions of government. United States obligations can also be defined as

government obligations used to finance the national debt. Examples of United States

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obligations include U.S. Treasury Securities such as savings bonds, Treasury bills, bonds,

notes and certificates.

104 Interest on obligations of the State of Mississippi and any political subdivision thereof is

wholly exempt from tax. The term "obligations of the State of Mississippi" means any

obligation backed by the credit of the State of Mississippi. "Any political subdivision"

means any county, city or town including special districts such as road, water, sewer,

reclamation, drainage, levee, school or similar districts. Interest received upon obligations

of any state or its political subdivisions other than Mississippi is taxable.

105 Interest income earned in connection with repurchase agreements is subject to tax. A

repurchase agreement is an agreement with a commitment by the seller (dealer) to buy a

security back from the purchaser (customer) at a specified price at a designated future date.

It represents a collateralized short-term loan where the collateral may be a federal

obligation such as a treasury security or federal agency security. The interest earned is

interest on a loan of funds rather than a direct payment of interest on a federal obligation;

therefore, it does not qualify for exemption.

106 A taxpayer's pro rata portion of interest dividends distributed by a Regulated Investment

Company, as defined in I.R.C. Section 851, is nontaxable to the extent that such pro rata

portion represents interest received by the Regulated Investment Company from

governmental securities which would be exempt for Mississippi income tax purposes if

such governmental securities were directly held by the taxpayer.

107 If the governmental agency merely acts as guarantors on loans made by a private lender,

such loans are not construed to be direct obligations of the government and the interest

accruing on such loans is taxable. A governmental obligation that is secondary, indirect or

contingent, such as a guaranty of a non-governmental obligor’s primary obligation to pay

the principal amount of and interest on a note, is not an obligation of the type exempted

under 31 U.S.C. Section 3124(a).

108 Taxable interest income includes, but is not limited to, interest earned on obligations from

the following agencies, organizations, and associations:

1. Building and Loan Associations

2. Credit Unions

3. Export-Import Bank of the United States

4. Farmers Home Administration

5. Federal Agricultural Mortgage Corporation (Farmer Mac)

6. Federal Home Loan Mortgage Corporation (Freddie Mac)

7. Federal Housing Administration

8. Federal National Mortgage Association (Fannie Mae)

9. Government National Mortgage Association (Ginnie Mae)

10. Merchant Marine (Maritime Administration)

11. Money Market Certificates

12. Mortgage Participation Certificates

13. Postal Savings Account

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14. Savings and Loan Associations

15. Small Business Administration

16. Asian Development Bank

17. Inter-American Development Bank

18. International Bank for Reconstruction and Development (World Bank)

19. Washington D.C. Metro Area Transit Authority

109 Tax-exempt interest includes, but is not limited to, interest earned on obligations from the

following agencies, organizations, or associations:

1. U. S. Treasury

2. Government of American Samoa

3. Government of Guam

4. Government of Puerto Rico

5. Government of Virgin Islands

6. Government of Northern Mariana Islands

7. Bank for Cooperatives

8. Commodity Credit Corporation

9. Farm Credit Banks

10. Farm Credit System Insurance Corporations

11. Federal Deposit Insurance Corporation

12. Federal Financing Bank

13. Federal Home Loan Banks

14. Federal Intermediate Credit Banks

15. Federal Land Bank Associations

16. Financial Assistance Corporation

17. Financing Corporation

18. General Services Administration (GSA)

19. Housing and Urban Development – General Insurance Fund

i. Armed Services Mortgage Insurance

ii. Mutual Mortgage Insurance Fund

iii. National Defense Housing Insurance

iv. Rental Housing Insurance

v. War Housing Insurance

20. National Credit Union Administration Central Liquidity Facility

21. Production Credit Association

22. Student Loan Marketing Association (Sallie Mae)

23. Tennessee Valley Authority (TVA)

24. United States Postal Service

110 Interest received from a federal or state government that was earned on other than

investment obligations, such as interest on tax refunds, is subject to Mississippi income

tax and should be included in gross income.

111 (Reserved)

35.III.2.04 revised effective January 1, 2021

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Chapter 05 Rents and Royalties

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures

relating to gross income from rents and royalties as are deemed not contrary to the context

and intent of Mississippi Law.

101 (Reserved)

102 (Reserved)

Chapter 06 Dividend Income

100 Dividends are included in gross income unless specifically excluded under Miss. Code

Ann. Section 27-7-15(4)(i).

101 The term "dividend" for the purpose of the Mississippi Income Tax Law means any

distribution of property in the ordinary course of business, even though extraordinary in

amount, made by a domestic or foreign corporation to its shareholders out of earnings and

profit.

102 The earnings and profits of the taxable year shall be computed as of the close of such year,

without reduction by reason of any distributions made during the taxable year. Liquidating

dividends do not have the status of dividends for Mississippi income tax purposes. Such

distributions constitute a return of investment and the gain or loss realized or sustained is

one of capital.

103 Dividends must be included in gross income of the shareholder if such dividends have not

already borne a tax in Mississippi or another state prior to the receipt of same by such

shareholders.

104 In order for dividend interest from a domestic mutual building and loan association to be

excluded from gross income, it must be clearly shown to the satisfaction of the

Commissioner that such dividend received has been used to reduce the total interest paid.

105 Dividends are taxable to the taxpayer who has the right to receive them. If a dividend is

paid after stock is sold, whether the purchaser or seller includes the dividend in gross

income depends on when the sale took place. When stock is sold, and a dividend is both

declared and paid after the sale, such dividend is not gross income to the seller. When stock

is sold after the declaration of a dividend and after the date the seller becomes entitled to

the dividend, the dividend is income to the seller. When the sale of stock occurs between

the time of declaration and the payment of the dividend, the purchaser becomes entitled to

the dividend and the dividend is income to the purchaser. In some cases the purchaser may

be considered the recipient of the dividend even though they had not received the legal title

to the stock and they did not receive the dividend. For example, when the seller retains the

legal title to the stock as trustee solely for the purpose of securing the payment of the

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stock’s purchase price, with the understanding that the seller will apply the dividends as

payment to the stock’s purchase price. In this case, the dividends are considered to be

income to the purchaser.

106 If the purchaser includes the amount of an anticipated dividend in the stock purchase price,

this will not exempt the purchaser from income tax on the dividend. The added amount is

merely part of the purchase price of the stock.

107 Stock dividends are distributions of a company’s earnings to shareholders in the form of

additional shares of the same company according to the proportion of shares owned. Stock

dividends are not included in the shareholder’s gross income unless the distribution falls

under one of the exceptions. Stock dividends do not change the total value of the

stockholder’s stock, instead the basis of each share changes.

108 Exceptions to the general tax-free treatment of stock dividends occur when a stock

dividend results in a change in the proportionate ownership or increases a shareholder’s

interest in the assets or earnings and profits of the corporation. When an exception applies,

the stock dividend must be recognized as income at the fair market value of the distributed

stock as of the date of distribution. Stock dividends are generally gross income to

shareholders in the following situations:

a. A distribution in which any shareholder has the option to receive cash or other

property instead of stock in the distributing corporation;

b. Disproportionate distribution of stock;

c. Any distribution of stock which results in some common shareholders receiving

preferred stock and the other common shareholders receiving common stock;

d. Distribution on preferred stock; and

e. Distribution of convertible preferred stock.

109 Dividends paid in securities or other property (other than its own stock) in which the

earnings of a corporation have been invested are income to the recipients at the fair market

value of such property when distributed by the corporation to the shareholder. Scrip

dividends are payments to the company’s shareholders in the form of new shares rather

than money. Scrip dividends are subject to tax in the year in which the certificate is issued.

110 If a corporation cancels or redeems its stock at such a time and in such manner as to make

the distribution in whole or in part essentially equivalent to a taxable dividend, the amount

so distributed, to the extent it represents a distribution of earnings and profits, shall be

treated as a taxable dividend.

111 The Commissioner will follow federal rules, regulations and revenue procedures relating to

dividends to the extent that such procedures are not deemed contrary to the context and

intent of Mississippi Law.

112 (Reserved)

35.III.2.06 revised effective January 1, 2021

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Chapter 07 Income from Retirement Allowances, Pensions, Annuities or Optional

Retirement Allowances

100 Amounts received as retirement allowances, pensions, annuities or optional retirement

allowances from any Federal, State, and Private retirement system or plan are exempt from

State Income Tax.

101 Optional retirement allowances include all income from Keogh Plans, Individual

Retirement Accounts (IRA’S), and other similar tax deferred plans.

102 Optional retirement allowances also include income from deferred compensation plans to

the extent these plans are tax deferred under federal income tax law and the recipient is

qualified to receive other retirement income based on minimum age, years of service, or

other criteria at the time of receipt of the deferred compensation.

103 Amounts received as a distribution under a Roth Individual Retirement Account shall be

treated in the same manner as provided under the Internal Revenue Code of 1986, as

amended.

104 Early distributions from retirement plans do not qualify for this exemption. Although these

amounts are subject to state income tax, there is no early withdrawal penalty for state

purposes. In addition, the terms “retirement allowances, pensions, annuities or optional

retirement allowances” do not include income from investments in stocks, bonds,

intangible securities, real properties, or tangible properties.

105 The above exemption from income tax extends to the spouse or other beneficiary upon the

death of the primary retiree.

106 (Reserved)

107 (Reserved)

Chapter 08 Income of a Minor Child or Dependent

100 Compensation for personal services of a child shall, regardless of the provisions of state

law relating to whom is entitled to the earnings of the child, and regardless of whether the

income is in fact received by the child, be deemed to be the gross income of the child and

not the gross income of the parent of the child. Such compensation, therefore, shall be

included in the gross income of the child and shall be reflected in the return rendered by or

for such child. The income of a minor child is not required to be included in the gross

income of the parent for income tax purposes.

101 In the determination of taxable income or net income, all expenditures made by the parent

or the child attributable to amounts which are includible in the gross income of the child

and not of the parent are deemed to have been paid or incurred by the child. In such

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determinations, the child is entitled to take deductions not only for expenditures made on

his behalf by his parent which would be commonly considered as business expense, but

also for other expenditures such as charitable contributions made by the parent in the name

of the child and out of the child's earnings.

102 The term "parent" includes maternal parent, adoptive parent, guardian or any other person

who is legally charged with the care of the minor.

103 A tax return shall be made by the person charged with the care of a minor or his property,

unless the minor himself makes or causes to be made his tax return.

104 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures issued

under Section 73, IRC, and such other Federal Rules and Regulations relating to income of

a minor child or dependent as are deemed not contrary to the context and intent of

Mississippi Law.

105 (Reserved)

106 (Reserved)

Chapter 09 Prizes, Awards, Stipends, Scholarships and Fellowship Grants

100 Amounts received as prizes and awards are generally included in gross income. Examples

include, but are not limited to, amounts received from radio and television giveaway

shows, door prizes, awards in contests of all types, as well as any prizes and awards from

an employer to an employee in recognition of an employment related achievement.

101 For prizes or awards other than money, the fair market value of the goods or services is the

amount to be included in gross income.

102 Stipends, which are compensation for services (past, present or future), are included in

gross income.

103 Gross income does not include scholarship or fellowship grants when the funds are used for

qualified education expenses. Qualified education expenses include tuition and fees

required for enrollment or attendance at the education institution, or books, fees, supplies,

and equipment required for courses at the educational institution. Scholarship or

fellowship funds used for non-qualifying expenses are taxable. Non-qualifying expenses

include, but are not limited to, living and incidental expenses such as room and board,

travel, clerical help, research, non-required books and optional equipment.

104 The Commissioner will follow federal rules, regulations and revenue procedures regarding

prizes, awards and stipends as are deemed not contrary to the context and intent of

Mississippi Law.

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105 See Title 35 Mississippi Administrative Code, Part III, Subpart 3, Chapter 09 Gaming

Winnings and Gaming Income, for the treatment of prizes from a gaming establishment

or gaming activity.

106 (Reserved)

35.III.2.09 revised effective January 1, 2020

Chapter 10 Reserved

35.III.2.10 revised effective June 15, 2019

Chapter 11 Individual Non-Business Deductions

100 The amount allowable for individual non-business itemized deductions for federal income

tax purposes is the same for state income tax purposes with the following exceptions:

1. The federal deduction for state and local income taxes paid and any tax allowed for

federal purposes in lieu of state income tax;

2. Gambling losses from Mississippi gaming establishments; and

3. Taxes collected by Mississippi gaming establishments pursuant to Mississippi Ann.

Code Sections 27-7-901 and 27-7-903.

101 These items are not allowable deductions for state purposes in any form. If these items are

deducted on federal form Schedule A, an adjustment must be made for state purposes.

Local income taxes are to be treated the same as state income taxes.

102 A taxpayer must itemize deductions if the taxpayer’s filing status is married filing

separately and the taxpayer’s spouse itemized deductions on their return.

103 An individual may elect to take either the standard deduction or itemize their deductions

regardless of what the individual elected on their federal income tax return. If a taxpayer’s

allowable federal itemized deductions are limited due to the amount of the taxpayer’s

federal adjusted gross income, then the allowable Mississippi itemized deductions will be

correspondingly limited.

104 (Reserved)

35.III.2.11 revised effective January 1, 2020

Chapter 12 Amounts Received Under Accident and Health Plans

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures to the

extent that such procedures are not deemed contrary to the context and intent of Mississippi

Law.

101 (Reserved)

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102 (Reserved)

Chapter 13 Compensation for Injuries and Sicknesses

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures to the

extent that such procedures are not deemed contrary to the context and intent of Mississippi

Law.

101 (Reserved)

102 (Reserved)

Chapter 14 Strike Benefits

100 Amounts paid by an organized union as unemployment benefits to its unemployed

members are taxable if the benefits come out of union dues. If union members make

special payments to a fund, unemployment benefits received from the fund are includible in

gross income only to the extent they exceed the recipient's contributions. The amounts paid

into the fund are not deductible.

101 (Reserved)

102 (Reserved)

Chapter 15 Return of Life Insurance, Annuity or Endowment Policies

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures as are

deemed not contrary to the context and intent of Mississippi Law.

101 (Reserved)

102 (Reserved)

Chapter 16 Unemployment Compensation Benefits

100 Unless otherwise instructed in writing, the Commissioner will follow Federal Rules,

Regulations and Revenue Procedures relating to the taxability of unemployment benefits as

are deemed not to be contrary to the context and/or intent of Mississippi Law.

101 (Reserved)

102 (Reserved)

Chapter 17 Rental Allowance and Fair Rental Value of a Parsonage

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100 “Rental allowance” means an amount paid to a minister to rent or otherwise provide a

home if such amount is designated as rental allowance pursuant to official action taken in

advance of such payment by the employing church or other qualified organization. The

designation of an amount as rental allowance should be evidenced in an employment

contract, in minutes of or in a resolution by a church or other qualified organization or in

its budget, or in any other official document of the church or organization. Rental

allowance may be referred to as housing allowance or parsonage allowance.

101 A rental allowance must be included in the minister's gross income in the taxable year in

which it is received, to the extent that such allowance is not used by the minister during

such taxable year for rent of a home, for purchase of a home and for expenses directly

related to providing a home. Where the minister rents, purchases or owns a farm or other

business property in addition to a home, the portion of the rental allowance expended in

connection with the farm or business property shall not be excluded from the minister’s

gross income.

102 Gross income does not include the rental value of a home, including utilities, furnished to a

minister as a part of the compensation, or the rental allowance paid to the minister as part

of the compensation to the extent such allowance is used by the minister to rent or provide

a home. In order to qualify for the exclusion, the home or rental allowance must be

provided as compensation for services that are ordinarily the duties of a minister of the

gospel.

103 (Reserved)

35.III.2.17 revised effective January 1, 2021

Chapter 18 Recovery of Tax Benefit Items

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures

relating to recovery of tax benefit items as are deemed not contrary to the context and intent

of Mississippi Law.

101 (Reserved)

102 (Reserved)

Chapter 19 Gross Income of Farmers

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures to the

extent that such procedures are not deemed contrary to the context and intent of Mississippi

Law.

101 (Reserved)

102 (Reserved)

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Subpart 03 Exclusions from Gross Income

Chapter 01 (Reserved)

Chapter 02 Exclusion for Improvements Erected by Lessee

100 The value of improvements to real property, attributable to buildings erected or other

improvements made by the lessee upon the leased property is excluded from gross income

of the lessor. However, where the facts disclose that such buildings or improvements

represent, in whole or in part, a substitution for rent payments for the lease period, the

exclusion does not apply.

101 (Reserved)

102 (Reserved)

Chapter 03 Employee Benefits

100 A taxpayer may exclude from gross income compensation which is received by an

employee under a worker's compensation act, for personal injuries or sickness incurred in

the course of employment. The exclusion also applies to compensation which is paid under

a worker's compensation act to the survivor or survivors of a deceased employee. However,

the exclusion does not apply to a retirement pension or annuity to the extent that it is

determined by reference to the employee's age or length of service, or the employee's prior

contributions, even though the employee's retirement occurs from an occupational injury or

sickness. Amounts received as compensation for a non-occupational injury or sickness, and

also, amounts received as compensation for an occupational injury or sickness in excess of

the amount provided in the applicable worker's compensation act are also not subject to the

exclusion.

101 A taxpayer may exclude from gross income the amount of any damages received under a

suit or settlement of a claim on account of personal injuries or sickness.

102 A taxpayer may exclude from gross income the amounts received through accident or

health insurance for personal injuries or sickness to the extent that such amounts are not

attributable to contributions of the employer which are not includible in the gross income of

the employee, or are not paid by the employer. Therefore, if an employee received

compensation for personal injuries or sickness from an accident or health insurance policy

which the worker purchased or from a fund maintained exclusively by employee

contributions, the amounts received are excluded from gross income.

103 Amounts received by employees under employer--financed accident and health plans may

be excluded from gross income if such amounts are paid to reimburse the taxpayer for

expenses incurred for medical care of the taxpayer, spouse and dependents or to reimburse

the employee for medical care and payments for permanent injury or loss of bodily

function.

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104 The gross income of an employee does not include contributions which his employer

makes to an accident or health plan for compensation (through insurance or otherwise) to

the employee for personal injuries or sickness incurred by him, his spouse or his

dependents.

105 Gross income of an employee, his spouse or his dependents, does not include amounts

contributed by an employer on behalf of an employee, his spouse or his dependents under a

qualified group legal services plan; or the value of legal services provided, or amounts paid

for legal services, under a qualified group legal services plan to, or with respect to, an

employee, his spouse or his dependents. This benefit is found in Section 120 of the Internal

Revenue Code.

106 Nontaxable benefits under Section 125 of the Internal Revenue Code referred to as

"Cafeteria Plans" are also excludable for Mississippi Income Tax purposes to the extent

allowed by the IRC. Mississippi also recognizes Section 129 of the Internal Revenue Code

pertaining to Dependent Care Assistance Plans and Section 127 of the Internal Revenue

Code pertaining to Employer Provided Educational Assistance Plans. The benefits

mentioned above under IRC Sections 120, 125, 127 and 129 are not subject to Mississippi

Withholding.

107 The value of any meals or lodging furnished to an employee, his spouse or any of his

dependents by or on behalf of his employer for the convenience of the employer may be

excluded from gross income of an employee but only if in the case of meals, the meals are

furnished on the business premises of the employer, or in the case of lodging, the employee

is required to accept such lodging on the business premises of his employer as a condition

of his employment.

108 The rental value of a dwelling furnished to a minister of the gospel is exempt from tax as is

a rental allowance to the extent that the allowance is used to rent or provide a home. This

includes the portion of a retired minister's pension designated as a rental allowance by the

national governing body of a religious denomination having complete control over the

retirement fund. The exemption also applies to the rental value of a residence furnished to a

retired minister (but not the minister's spouse).

109 (Reserved)

110 (Reserved)

Chapter 04 (Reserved)

Chapter 05 Proceeds of Life Insurance

100 Mississippi law excludes from the definition of "Gross Income" the proceeds of life

insurance policies and contracts paid upon the death of the insured. Mississippi does not

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limit the exclusion on any death benefit paid by or for the employer of the deceased

employee.

101 All interest income on life insurance proceeds should be included in gross income.

102 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures as are

deemed not contrary to the context and intent of Mississippi Law.

103 (Reserved)

104 (Reserved)

Chapter 06 Reserved

35.III.3.06 revised effective January 1, 2020

Chapter 07 Contributions by Employer to Accident and Health Plans

100 The gross income of an employee does not include contributions which his employer

makes to an accident or health plan for compensation (through insurance or otherwise) to

the employee for personal injuries or sicknesses incurred by him, his spouse or his

dependents. The employer may contribute to an accident or health plan either by paying the

premium (or a portion of the premium) on a policy of accident or health insurance covering

one or more of his employees, or by contributing to a separate trust or fund. However, if

such insurance policy, trust or fund provides other benefits in addition to accident and

health benefits, the exclusion applies only to that portion of the employer's contribution

which is allocable to accident and health benefits.

101 (Reserved)

102 (Reserved)

Chapter 08 Exclusion Military Pensions and Disability Payments for Certain Injuries and

Sicknesses

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures

relating to the classification and tax treatment of amounts permitted as an exclusion under

this regulation to the extent that such procedures are deemed not contrary to the context and

intent of Mississippi Law.

101 (Reserved)

102 (Reserved)

Chapter 09 Gaming Winnings and Gaming Income

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100 Amounts received in cash or other remuneration from play at a gambling game or as a

prize, award, or tournament winning are subject to an income tax levy. However, the

reporting requirements and tax levy will vary depending on the source of the income.

1. TERMS:

a. The term "Mississippi gaming establishment" or "gaming establishment"

includes any establishment where gambling games are conducted or

operated within this state and any party that provides or is responsible for

the payment of cash or other remuneration resulting directly or indirectly

from play at gambling games within this state.

b. The term “Mississippi gaming winnings” or "gaming winnings" includes all

amounts that are paid, whether in cash or other form, by Mississippi gaming

establishments to patrons which are subject to the withholding and/or

reporting requirements of the Internal Revenue Code (IRC) as specified in

sections 27-7-901 and 27-7-903. Such amounts are not limited to cash or

remuneration from play at a gambling game, but include, without limitation,

amounts considered prizes, awards, tournament winnings, or similar types

of compensation.

c. The term "paid" means the gross amount of gaming winnings without

respect to any reduction for tax withholdings or other reserves and may not

be less than the amount reported for federal tax purposes.

2. MISSISSIPPI GAMING WINNINGS

a. A tax levy of 3% is made on all Mississippi gaming winnings. Such amount

is required to be withheld by the Mississippi gaming establishment. The

amount of tax withheld from gaming winnings will be reflected on Federal

Form W-2G or other information return filed by the gaming establishment

to report the transaction. The amount to be withheld is 3% of the amount

paid, whether in cash or other form, to the recipient.

b. Multi-period payoffs: If a patron is entitled to receive either a lump-sum

payment or a series of periodic payments received at least annually, then a

tax of 3% is levied on the lump-sum amount in the year it is constructively

received. The 3% levy is a liability of the Mississippi gaming establishment

which was a party to the wager, regardless of whether it is the paying agent.

c. The three percent (3%) withheld on Mississippi gaming winnings reflects

the tax due and once such proper amounts are remitted to the State Tax

Commission by the Mississippi gaming establishment, as well as a properly

completed W-2G, 1099, or other federally prescribed informational

statement (filed annually or as prescribed by the commissioner), the patron

has no further filing requirements. If the federally prescribed information

return does not allow for the recording of both state income and state tax

withholdings, then a W-2G should be completed and attached as part of the

filing of such statement.

d. The W-2G or 1099 reflecting the income and Mississippi withholding once

remitted by the Mississippi gaming establishment to the Tax Commission

serves as the patrons return filing for such income. Accordingly, Mississippi

gaming winnings are not reported on the patron's regular income tax return

filing. Likewise, the amounts withheld can not be claimed on an income tax

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return filing to offset a tax liability, create a refund, or to generate any other

type of credit or offset.

3. OTHER MISSISSIPPI GAMING INCOME

a. Except for the amounts described in paragraph II, all other gaming income

is subject to the income tax levy provided for in section 27-7-3. Any gaming

losses incurred at Mississippi gaming establishments are a reduction, as

compared to an itemized deduction, to Mississippi gaming income. The net

of such amounts, if positive, is reportable by the patron as taxable

Mississippi income. Mississippi gaming income includes any gaming

income not covered by the 3% levy described in paragraph II received from

a Mississippi gaming establishment. Mississippi gaming losses may not be

taken as a separate deduction or otherwise offset any income other than

Mississippi gaming income not subject to the 3% withholding requirement

and resulting from a wager.

4. Non-Mississippi Gaming Income

a. Mississippi follows federal rules, regulations, and revenue procedures to the

extent not contrary to the laws of this state in determining the amount of

gaming income received and gaming losses incurred by Mississippi

residents at non-Mississippi gaming establishments. Non-Mississippi

gaming income is reported apart from any non-Mississippi gaming losses

incurred. Non-Mississippi gaming losses are allowed as an itemized

deduction to the extent of any non-Mississippi gaming income. In no event

may the deduction for such losses exceed the non-Mississippi gaming

income.

101 (Reserved)

102 (Reserved)

Subpart 04 Adjustments to Gross Income

Chapter 01 Adjustments to Gross Income

100 Payments to an IRA, SEP, Keogh Retirement Plan (Retirement Plans)

A deduction is allowed for contributions to various retirement plans to the extent that such

payments are deductible for federal income tax purposes. For details, see Regulation 402.

101 Interest Penalty on Early Withdrawal of Savings

Amounts forfeited to a financial institution, such as a penalty for premature withdrawal of

funds form a time savings account, certificate of deposit, or similar class of deposit, are

allowed as a deduction from gross income. The 1099 form furnished by the financial

institution will show the amount of any interest penalty charge for early withdrawal. This

amount is deductible form gross income.

102 Alimony and Separate Maintenance Payments

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1. A deduction from gross income in determining adjusted gross income is allowable

with respect to payments in the nature of, or in lieu of alimony or an allowance for

spousal, not child, actually paid by the taxpayer during the taxable year. This same

amount must be included in the income of the spouse receiving the payment.

2. Unless otherwise instructed in writing, the Commissioner will follow the Federal

Rules, Regulations and Revenue Procedures relating to alimony and separate

maintenance payments as are deemed not to be contrary to the context and/or intent

of Mississippi Law.

103 Moving Expenses

Moving expenses are deductible as an adjustment to gross income as allowed for federal

income tax purposes. Attach a copy of the federal form to the Mississippi return. Unless

otherwise instructed in writing, the Commissioner will follow Federal Rules, Regulations

and Revenue Procedures relating to the deduction of un-reimbursed allowable moving

expenses as are deemed not to be contrary to the context and/or intent of Mississippi Law.

104 National Guard or Reserve Pay

A taxpayer is allowed a deduction to gross income for compensation received as a member

of the National Guard or Reserve Forces of the United State not to exceed the sum of Five

Thousand Dollars ($5,000.00) for any taxable year. Only compensation received as

payment for inactive duty training (monthly or special drills or meetings), active duty

training (summer camps, special schools, cruises) and state active duty (emergency duty)

qualifies for this deduction to gross income. Full-time National Guard pay is not allowed as

a deduction. Report this income as regular wages or salaries.

105 MPACT or MACS Program Payments

1. Taxpayers who make payments to a prepaid tuition contract or a college savings

account under the MPACT (Mississippi Prepaid Affordable College Tuition) or the

MACS (Mississippi Affordable College Savings) programs are allowed a deduction

for the actual amounts paid during the taxable year as an adjustment to gross

income. Each program shall provide to the taxpayer an annual statement of account

to identify the amount paid and therefore, eligible for the adjustment.

2. Unqualified distributions of previously deducted MPACT or MACS payments must

be included in gross income in the year they are received. Payments to other

prepaid tuition programs are not eligible for this deduction.

106 Self-Employed Health Insurance Deduction

Amounts paid by a self-employed individual for insurance which constitute medical care

for the taxpayer, his spouse and dependents, are deductible as an adjustment to gross

income. Unless otherwise instructed in writing, the Commissioner will follow Federal

Rules, Regulations and Revenue Procedures relating to the deduction of self-employed

health insurance as are deemed not to be contrary to the context and/or intent of

Mississippi Law.

107 (Reserved)

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108 (Reserved)

Chapter 02 Adjustments to Gross Income—Retirement Plans

100 An adjustment to gross income for contributions to a tax-sheltered annuity may be claimed

for Mississippi income tax purposes only to the extent permitted for Federal Income Tax

purposes. The Commissioner will, therefore, follow the Federal Rules, Regulations and

Revenue Procedure issued under Section 403(b), IRC, and such other Federal Rules and

Regulations relating to contributions to tax-sheltered annuities as are deemed not contrary

to the context and intent of Mississippi Law.

101 Qualified Deferred Compensation Plans. Members of the Mississippi Public Employees

Retirement System may exclude from wages and salaries (gross income) for Mississippi

income tax purposes amounts contributed by the employee to the Mississippi Public

Employees Deferred Compensation Plan, a deferred compensation program authorized by

Mississippi Code Section 25-14-11 et seq.

101.01 Beginning July 1, 1982, amounts withheld from the wages and salaries of members of the

Mississippi Public Employees Retirement System as required contributions to the

retirement fund are excludable from gross income.

101.02 The Commissioner will follow those rules and regulations issued by the Internal Revenue

Service relating to an exclusion for contributions to an authorized and qualified deferred

compensation plan as are deemed not contrary to the context and intent of Mississippi Law.

102 Self-Employed Retirement Plan. A deduction from gross income in determining adjusted

gross income is allowable for amounts contributed by a self-employed individual to a

qualified retirement plan which meets the qualifications and restrictions of a plan

established under Sections 401-405, IRC, and only to the extent that such contributions are

deductible for Federal income tax purposes.

103 Retirement Savings-IRA's. A deduction from gross income in determining adjusted gross

income is allowable for amounts paid during the taxable year of an individual by or on

behalf of such individual for his benefit to an individual retirement account described in

Section 408(b), IRC, or for a retirement bond described in Section 409, IRC, to the extent

that such amounts are deductible for Federal income tax purposes under Section 219, IRC.

Also, a deduction is allowable for amounts paid in cash for a taxable year by or on behalf

of such individual for the benefit of himself and his spouse.

103.01 Any part of a lump-sum distribution from a qualified retirement plan which is rolled over

into an individual retirement account described in Section 408(a), IRC, and an individual

retirement annuity described in Section 409, IRC, may be deducted from gross income for

Mississippi income tax purposes only to the extent that such roll over amounts are

permitted as a deduction or exclusion for Federal income tax purposes.

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104 Amounts withheld from wages as required contributions to the Federal Insurance

Contributions Act are not deductible or excludable from gross income.

105 (Reserved)

106 (Reserved)

Subpart 05 Business Deductions General

Chapter 01 Business Deductions

100 The taxable income on which the income tax is based is the gross income of the taxpayer,

less certain specific deductions allowed by law plus, in the case of individuals, trusts and

estates, certain specific amounts for personal and additional exemptions. The allowance for

deductions fall into three basic classes; namely,

1. Ordinary and necessary expenditures connected with a trade or business.

2. Adjustments to gross income.

3. Non-business individual itemized deductions or standard deduction.

101 Business deductions falling within class 1 above are deductible from the gross profit of the

trade or business to determine the net profit or loss of the business activity. Deductions

falling within class 2 above are deductible from the gross income of the taxpayer to

determine net income, commonly referred to as adjusted gross income, and may be claimed

by the individual regardless of whether non-business deductions are itemized. Deductions

falling within class 3 are generally personal in nature and may be claimed only when

itemized. In lieu of itemizing personal non-business deductions, the individual may elect to

claim the optional standard deduction.

102 Under no circumstances, may an item of expense be deducted as both a business deduction

and a non-business deduction, either in fact or in effect, in the taxable year.

103 Business expenses deductible from gross income include the ordinary and necessary

expenditures directly connected with or pertaining to the taxpayer's trade or business. The

cost of goods purchased for resale, with proper adjustment for opening and closing

inventories, is deducted from gross sales in computing gross income.

104 Among items included in business expenses are management expenses, commissions,

labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or

business, traveling expenses while away from home solely in the pursuit of a trade or

business, advertising and other selling expenses, together with insurance premiums against

fire, storm, theft, accident or other similar losses in the case of a business and rental for the

use of business property.

105 However, no such item shall be included in business expenses to the extent that it is used

by the taxpayer in computing the cost of property included in its inventory or used in

determining the gain or loss of its plant, equipment or other property. The full amount of

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the allowable deduction for ordinary and necessary expenses in carrying on a business is

deductible, even though such expenses exceed the gross income derived during the taxable

year from such business.

106 The following requirements determine whether a particular item of expense is deductible as

a business expense: It must be incurred in a trade or business carried on by the taxpayer.

This excludes all personal expenses as well as expenses sustained in earning income, but

not arising from a trade or business. Expenses directly related to earning exempt income

are not deductible.

107 The "expense" cannot be a capital expenditure.

108 The expenses must be ordinary, necessary and reasonable. To the extent that an expense is

unreasonable, it is not necessary and will not be allowed as a deduction.

109 (Reserved)

110 (Reserved)

Chapter 02 Expenditures Attributable to Lobbying, Political Campaigns, Attempts to

Influence Legislation, etc., and Certain Advertising

100 A taxpayer may take a business expense deduction for an ordinary and necessary

expenditure in regard to certain types of activities relating to promoting or combating

legislation. An expense is deductible if it is paid or incurred (1) in direct connection with an

appearance before, submission of statements to, or sending communications to,

Congressional Committees or legislative bodies of states, U. S. possessions, etc., in regard

to legislation of direct interest to the taxpayer, or (2) in direct connection with

communication of information between the taxpayer and a trade or business organization of

which he is a member concerning legislation of direct interest to both parties.

101 A portion of the dues for membership in an organization engaged in such activities is

deductible. The deduction is limited to that portion which is attributable to the expenses

incurred by the organization engaged in such activities.

102 However, expenses incurred in an attempt to influence the general public, or segments

thereof, are nondeductible. This limitation applies to a corporation's attempt to influence its

shareholders.

103 Political contributions are not deductible either as business expenses or as charitable

contributions.

104 Deductions otherwise allowable as a business expense shall not be allowed for any amount

paid or incurred for admission to any program or event identified with a political candidate

or party or if any portion of the proceeds from such program or event inures to or for the

use of the party or candidate.

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105 Expenditures for institutional or "good will" advertising which keeps the taxpayer's name

before the public are deductible business expenses if the expenditures are related to the

patronage the taxpayer might reasonably expect in the future.

106 (Reserved)

107 (Reserved)

Chapter 03 Taxes Paid as Business Expense

100 Only the following taxes shall be allowed as a business expense deduction in computing

net income for the taxable year within which paid or accrued, according to the method of

accounting used in computing taxable income:

1. State and local, and foreign, real property taxes.

2. State and local personal property taxes.

3. Cigar and cigarette taxes, gasoline taxes, and sales and use taxes if included in

business gross income, or if incurred as an item of expense in a trade or business or

in the production of taxable income.

101 In addition, there shall be allowed as a business expense deduction state and local taxes, not

described in the preceding section and not otherwise specifically excluded under the

following section of this chapter, which are paid or accrued within the taxable year in

carrying on a trade or business.

102 The following taxes shall not be allowed as a business expense deduction in computing net

income:

1. Federal and state income taxes.

2. Any taxes based on or measured by net income.

3. Estate and inheritance taxes.

4. Gift taxes.

5. Cigar and cigarette taxes, gasoline taxes, and sales and use taxes if not included in

business gross income, or if not incurred as an item of expense in a trade or

business.

103 To the extent that a specific tax is deductible under both Federal and State Law, the

Commissioner will follow Federal Rules, Regulations and Revenue Procedures relating to

the tax treatment of the specific tax.

104 (Reserved)

105 (Reserved)

Chapter 04 Depreciation

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100 Reasonable Allowance. Section 27-7-17(1)(f) provides that a reasonable allowance for the

exhaustion, wear and tear and obsolescence of property used in the trade or business or

property held by the taxpayer for the production of income shall be allowed as a

depreciation deduction. The allowance is that amount which should be set aside for the

taxable year in accordance with a consistent plan, so that the aggregate of the amounts set

aside will equal the cost or other basis of the property. The allowance shall not reflect

amounts representing a mere reduction in market value. Mississippi will follow Federal

depreciation guidelines as are not deemed contrary to the context and intent of Mississippi

Law.

101 The first year thirty-percent (30%) "bonus" depreciation as set forth in the Federal "Job

Creation and Worker Assistance Act of 2002", H.R. 3090, does not constitute a reasonable

allowance for the exhaustion, wear, and tear and obsolescence of the property in regard to

which it is taken. This thirty-percent (30%) "bonus" depreciation is therefore not an

allowable deduction for depreciation under Section 27-7-17(1)(f). Mississippi will not

follow the Federal guidelines in regard to this "bonus" depreciation since such "bonus"

depreciation is contrary to the context and intent of Mississippi Law. If such "bonus"

depreciation is used for federal income tax reporting purposes, the tax basis of property will

be different for Federal and State until such property is fully depreciated.

1. If such “bonus” depreciation is used for federal income tax reporting, each year an

adjustment must be made for reporting depreciation to this State so as to reflect an

amount of depreciation that would have otherwise been allowed using Federal

depreciation guidelines other than that contained in H.R.3090 “Job Creation and

Worker Assistance Act of 2002.”

2. If it is determined “bonus” depreciation was taken in any year and the proper State

adjustment was not made in that same year, all allowances for depreciation will be

denied on all tax returns that are within the statute of limitations until there is a full

recovery to this State of excess depreciation deductions. When the Commissioner

makes such adjustment, there shall be assessed, in addition to interest, all penalties

on any underpayment of income tax to the extent provided by law.

102 Mississippi does not recognize the Federal tax credit allowed for qualified depreciable

property acquired and placed in service during the tax year and does not require the

taxpayer's basis in the property be reduced by 50% of the investment tax credit. This affects

the computation of gain or loss upon disposition of the asset. In order for a taxpayer to

maintain the same basis in property for both Federal and state purposes, for property placed

in service after 1982, the taxpayer's basis in the property may be reduced by 50% of the

investment tax credit as additional depreciation for Mississippi income tax purposes in the

year the ITC is taken.

103 A taxpayer may elect to treat the cost of any Internal Revenue Code Section 179 property,

which is not chargeable to a capital account as an expense. Cost so treated shall be allowed

as a deduction for the taxable year in which the Section 179 property is placed in service. In

determining the amount of allowable expense deduction in any taxable year, the

Commissioner will follow Federal Rules, Regulations and Revenue Procedures issued

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under Section 179, Internal Revenue Code as are deemed not contrary to the context and

intent of Mississippi Law.

104 (Reserved)

105 (Reserved)

Chapter 05 Depletion

100 Section 27-7-17(1)(g) provides that there shall be allowed as a deduction in computing

taxable income in the case of mines, oil and gas wells, other natural deposits and timber, a

reasonable allowance for depletion and for depreciation of improvements, BASED UPON

COST, including cost of development, not otherwise deducted, or fair market value as of

March 16, 1912, if acquired prior to that date.

101 In the case of standing timber, the depletion allowance shall be computed solely upon the

adjusted cost basis of the property. In the case of other exhaustible natural resources, the

allowance for depletion shall be computed upon either the adjusted cost basis of the

property (cost depletion) or upon a percentage of gross income from the property

(percentage depletion), whichever results in the greater allowance for depletion for any

taxable year, but in no case shall the aggregate deductions for depletion allowance exceed

the cost basis of the property. In no case will depletion based upon discovery value be

allowed. Unless cost of mineral deposits can be definitely determined and substantiated, a

depletion deduction will not be allowed. Depletion is allowable only in connection with

actual production. A depletion deduction is not allowed on lease bonus or lease rental

income.

102 For the purpose of this regulation, the regulations of the Internal Revenue Service shall be

followed in computing the depletion allowance, except as stated above and in those cases

where the Mississippi Law and the Federal Law are in conflict. The percentage depletion

allowance authorized by the Federal Law may be used as a method of computing the

depletion allowance for Mississippi tax purposes. However, in no instance shall the

aggregate deduction for depletion exceed the cost basis of the property. Taxpayers having

rights to natural resources located in this state and in other states shall confine their

computation and deduction for depletion allowances to only those natural resources which

produce income for Mississippi tax purposes.

103 (Reserved)

104 (Reserved)

Chapter 06 Net Operating Loss

100 Taxpayers are allowed to carryover their net operating losses from a trade or business and

deduct such loss in the next five succeeding years. The carryover is first to the year

immediately following the loss year, then to the second year following the loss year, and so

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on until the loss is exhausted, not to exceed five years. In instances where more than one

year's net operating loss is being carried over, the first year's loss must be carried over first

until exhausted before the second year's loss may be carried over, and subsequent years'

losses must be carried over in the same manner.

101 Taxpayers entitled to the net operating loss carryover are:

1. Individuals

2. Corporations (Except for regulated investment companies, and life and mutual

insurance companies other than marine).

3. Estates and trusts

4. Partners (to the extent of their allocable share of partnership net losses).

102 In order to qualify as an operating loss carryover under the provisions of Section

27-7-17(1)(l) of the Code, the loss to be carried over must have been incurred first; from

sources within the boundaries of the State of Mississippi, or from sources within the

jurisdictional boundaries of the Income Tax Laws of the State of Mississippi; and secondly,

the loss must have been reported as such on an income tax return filed with the State of

Mississippi for the year of the loss by the taxpayer claiming the loss carryover.

103 A net operating loss incurred by any taxpayer prior to becoming subject to the jurisdiction

of the Mississippi Income Tax Laws will not be allowed as a loss carryover deduction.

104 Taxpayers who under applicable provisions of the statute are allowed or required to

exclude income earned from sources outside of Mississippi, and taxpayers who are required

to use formulas in determining Mississippi taxable net income shall determine Mississippi

net operating losses in the same manner as Mississippi taxable net income is determined.

105 In making a claim for a net operating loss deduction, the taxpayer must file with its income

tax return for the year of such deduction, a concise statement setting forth all material and

pertinent facts related thereto; including a detailed schedule showing how the deduction

was computed. If more than one net operating loss is being carried over, this schedule must

be submitted for each loss year individually.

106 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures to the

extent they are deemed not contrary to the context and intent of Mississippi Law.

107 (Reserved)

108 (Reserved)

Chapter 07 Wage Tax Credits

100 Mississippi does not recognize federal regulations issued under Section 280 or 44B, IRC

regarding tax credits allowed for work incentive programs or the employment of certain

new employees. Deduction for wages paid should be computed without regard to the

reduction for wage tax credits for Mississippi income tax purposes.

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101 (Reserved)

102 (Reserved)

Chapter 08 Other Business Deductions

100 The Commissioner will follow Federal Rules, Regulations and Revenue Procedures

relating to the following business deductions to the extent that such procedures are deemed

not contrary to the context and intent of Mississippi Law.

1. Activities Not Engaged in for Profit - Hobby Losses

2. Amortizable Bond Premium

3. Amortization of Pollution Control Facilities

4. Bad Debts

5. Bonuses to Employees

6. Bribes and Kickbacks

7. Capital Contributions to Federal National Mortgage Association (F.N.M.A.)

8. Circulation Expenditures

9. Compensation for Personal Services

10. Cost of Materials

11. Decline in Value of Stock

12. Deduction for Discount on Bonds

13. Demolition of Buildings

14. Depreciation or Amortization of Improvements made by Lessee on Lessor's

Property

15. Employee Benefits

16. Entertainment Expenses

17. Expenses and Interest Relating to Tax - Exempt Income

18. Excessive Compensation

19. Farmers' Expenditures for Clearing Land

20. Farmers' Expenditures for Fertilizer

21. Farming Expenses & Losses

22. Fines and Penalties

23. Interest Paid

24. Losses from Wash Sales of Stock or Securities

25. Obsolescence of Nondepreciable Property

26. Professional Expenses

27. Rentals

28. Repairs

29. Research and Experimental Expenditures

30. Soil and Water Conservation Expenditures

31. Trademark and Trade Name Expenditures

32. Traveling Expenses

33. Worthless Securities

101 (Reserved)

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102 (Reserved)

Chapter 09 Reforestation Tax Credit

100 Owner and Land Eligibility

1. An eligible owner may be a non-resident; however, eligible lands include only land

located within the State of Mississippi. If one person as a life tenant holds property

with remainder to another person, the life tenant is considered to be the eligible

owner of the property that may qualify as eligible land for reforestation tax credit

purposes. For purposes of this section, eligible lands shall not include leased

property. Accordingly, a lessee cannot qualify as an eligible owner with respect to

costs incurred for reforestation practices on leased land.

2. Land on which cost share assistance was received for a particular practice is not

eligible for the reforestation tax credit for that practice, unless the eligible owner's

adjusted gross income is less than the federal earned income credit level for that

taxable year. The STC will determine the federal earned income credit level each

year based on information provided by the Internal Revenue Service.

101 Credit Limitations

1. When married taxpayers own eligible land jointly and implement a reforestation

plan on that land, they are considered to be one taxpayer for purposes of applying

the limitations on the amount of reforestation tax credit earned on that property.

Each spouse may also qualify as an eligible owner, in their own right, (each being

eligible for the maximum lifetime RTC of $10,000) provided that each spouse

individually had qualified expenditures on eligible land which followed a certified

reforestation plan. When each spouse qualifies as an eligible owner, and a

reforestation tax credit was earned on eligible land owned jointly by the spouses,

each spouse will be considered to have earned one-half of the reforestation tax

credit with respect to the jointly owned property/properties. When married

taxpayers file jointly and each spouse qualifies for the reforestation tax credit, each

spouse must file a separate RTC form to claim their respective reforestation tax

credit. In computing their respective reforestation tax credit on their individual

RTC form, each spouse must use one-half of the total income tax liability reflected

on the combined return and one-half of the total amount of all other credits

available to be claimed on the joint return.

2. In the case of a pass-through entity (partnership or S Corporation), the maximum

qualifying expenditure ($20,000) giving rise to the maximum $10,000 lifetime

reforestation tax credit shall be applied at both the pass-through entity level and at

the investor (partner or shareholder) level. The maximum $10,000 reforestation tax

credit earned by the pass-through entity is allocated to each investor, partner or

shareholder based on their ownership interest.

3. Where more than one person has an undivided ownership interest in eligible land,

and two or more of the interest holders implement a reforestation plan on that land,

for purposes of this section, the project will be considered a joint venture and

treated in the same manner as a partnership. Accordingly, the joint venture will be

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considered the eligible owner and the maximum qualifying expenditure limitation

shall be applied at the joint venture level as in other pass-through entity situations.

102 Applications

1. For purposes of computing eligible costs on which the RTC is computed, total

expenditures made during the taxable year on all eligible acres must be reduced by

the amount of any cost-sharing proceeds received from federal and/or state forestry

incentives programs with respect to such eligible acres.

2. Reforestation costs generally must be capitalized and included in the adjusted basis

of the qualified timber property. Any reforestation costs incurred and paid during a

tax year must be reduced by the amount of any federal and/or state cost-sharing

proceeds received, and the adjusted basis of the property decreased accordingly. If

the taxpayer claims investment tax credit and reforestation amortization deductions

with respect to qualifying reforestation expenditures for Federal income tax

purposes, the basis of the qualified timber property (for State purposes) shall first be

reduced by 50% of the federal investment tax credit. In addition, the adjusted basis

of the property must be reduced by 100% of the reforestation tax credit earned with

respect to that property. With respect to the property on which the Federal

investment tax credit and reforestation amortization deductions are claimed,

amortization for State purposes may be claimed on the portion of the qualifying

state reforestation expenditures (after being reduced by the Federal investment tax

credit adjustment and the RTC earned) which exceeds the basis of the Federal

qualifying reforestation expenditures (after being reduced by the Federal investment

tax credit adjustment and the Federal amortization to be claimed.) Amortization for

state purposes is to be computed in the same manner as for Federal purposes.

103 Verification and Certification

1. The RTC is based on eligible expenditures made during each taxable year (as

limited in the statute) for seedlings, seed/acorns, seeding, planting by hand or

machine, site preparation, and post-planting site preparation on all eligible acres.

When an approved reforestation practice, as defined in the statute, is completed in

the taxable year, the RTC may be computed and claimed with respect to all of the

eligible costs of the completed practice. Verification by a qualified forester that the

reforestation practice(s) were completed and that the reforestation prescription or

plan was followed is required in order to claim the reforestation tax credit. A

determination must be made on a year by year basis to determine if the costs

incurred during that year are eligible expenditures for approved reforestation

practices for eligible tree species on eligible lands. The fact that expenditures made

under a prescription or plan during one year do not qualify (for example: some cost

share assistance was received and the taxpayer's adjusted gross income exceeded

the federal earned income credit level) does not mean that expenditures made under

the same prescription or plan in the subsequent or prior year would not qualify for

the credit (for example: some cost share assistance was received in the subsequent

year, but, in that year, the taxpayer's adjusted gross income was less than the federal

earned income credit level). In the event that RTC is earned with respect to a

practice completed during a taxable year, and the overall prescription or plan is, for

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any reason, not subsequently completed in its entirety, any RTC previously earned

must be recaptured in full.

2. When a pass-through entity (generally, a partnership or S Corporation) is the

eligible owner and makes expenditures qualifying for the RTC, the credit is passed

through to the investors who may utilize the credit to offset all or a portion of their

income tax liability. The Schedule K-1 issued by the pass-through entity to the

investor should indicate the investor's allocated RTC. Also, a copy of the pass-

through entity's RTC form containing the certification of a qualified forester as

required by the statute, should be furnished to the investor to substantiate his claim

for the credit on his income tax return. A copy of the RTC form provided by the

pass-through entity should be attached to the investor's RTC form prepared and

filed with the investor's income tax return. Regulation 803 provides that an income

tax credit allowed to an S corporation may be passed on to the shareholders but may

only be used to offset and reduce tax on income of the S corporation allocated to

the shareholders. Similar restrictions are implied with respect to income tax credits

allowed to partnerships and other pass-through entities which are passed on to their

investors. Notwithstanding this statement in Regulation 803 and the similar

implied restrictions relating to partnerships and other pass-through entities, the

reforestation tax credit received from pass-through entities may, subject to the

limitations stated in Section 27-7-22.15, be used by investors to offset all or a

portion of their income tax liability.

104 Record Keeping

Since the RTC may be carried forward and claimed until such time as 100% of the credit is

utilized, the taxpayer must maintain appropriate records to substantiate the amount of the

credit earned, by year, up to the maximum lifetime $10,000 credit; copies of the

reforestation prescription(s) or plan(s); copies of the RTC forms containing the signature of

the forester certifying the completion of the prescription or plan; and copies of all RTC

forms filed so that the utilization of the credit against tax liability can be verified. When

claiming RTC carried over from an earlier year or years, a copy of the RTC form

containing the original certification of a qualified forester for the tax year in which the

RTC was earned should be attached to the RTC form filed for the current year.

Recordkeeping is extremely important since failure to adequately document the credit may

result in the disallowance of the credit claimed.

105 Other

In order to provide statistical information concerning the participation in reforestation

activities, a copy of the "Reforestation Tax Credit - Cost Worksheet" (page 2 only of each

RTC form filed), must be mailed to the Mississippi Forestry Commission at the address

shown on the form.

106 Example 1

During taxable year 1, Taxpayer incurs qualifying reforestation costs in the amount of

$15,000. All of the costs incurred qualify for federal investment credit and reforestation

amortization and for the Mississippi reforestation tax credit. The taxpayer elects to claim

the investment tax credit and to amortize the maximum expenditure ($10,000) for federal

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tax purposes. Taxpayer also claims a reforestation tax credit of $7,500 ($15,000 X 50%)

for Mississippi tax purposes. The taxpayer must make the following basis adjustments and

is entitled to reforestation amortization deductions for both federal and state purposes as

shown below:

Year

Item

Amortization

Basis

Federal

State

Qualifying Reforestation Costs

$15,000

Investment Credit (Federal)

-500

Reforestation Tax Credit Earned

-7,500

Remaining Basis

14,500

7,000

Federal Amortization to be Claimed

9,500

Remaining Basis After Federal Amortization

5,000

-5,000

State Amortization to be Claimed

2,000

Amortization: $9,500/84 = 113 x 6 months

679

Amortization: $2,000/84 = 24 x 6 months

142

Amortization: $9,500/84 = 113 x 12 months

1,357