35 Miss. Admin. Code Pt. III, Subpt. 8, Ch. 03 — Election of Certain Small Business Corporations- (S Corporations)

100 Definitions: As they pertain to this regulation:

# 1.

"Small business corporation" or "S corporation" means a domestic corporation
which is not an ineligible corporation and does not:
a. have more than 35 shareholders,
b. have as a shareholder a person who is not an individual, other than an estate
and certain trusts,
c. have a nonresident alien as a shareholder, and
d. have more than one (1) class of stock.

# 2.

"Electing small business corporation" means with respect to any taxable year, a
small business corporation for which an election under section 1362 (a), I. R. C., is
in effect for such year.

# 3.

For purposes of this regulation, the term "domestic corporation" means a
corporation created or organized in the United States or under the law of the United
States or of any State or Territory.
101 Conformity with Internal Revenue Code . The provisions of section 1361 et seq. (S
corporation) of the Internal Revenue Code with respect to definitions, elections,
qualifications, special rules, etc., not in direct conflict with the provisions of the Mississippi
Income Tax Law of 1952, as amended , shall have full effect and force as to the
administration of this regulation.
102 Election by S corporation . An S corporation having made a valid election for Federal
income tax purposes must make a similar election for Mississippi income tax purposes. The
granting of the election for Mississippi purposes is contingent upon the granting and
approval of the election for Federal purposes. Such election shall be filed with the State
Tax Commission within 60 days of the date filed for Federal purposes. The prescribed form
shall contain, in addition to any required information, a consent statement from each
shareholder of the corporation.
102.01 Termination of an election for Federal purposes shall automatically terminate the election
for Mississippi purposes.
103 Corporation undistributed taxable income taxed to shareholders.
1. Inclusion in gross income. Each person who is a shareholder during the year of an
electing S corporation shall include in his gross income, for his taxable year in
which or with which the taxable year of the corporation ends, the pro rata amount
he would have received as income (or deduction) by the corporation as determined
below.
2. Determination of amount included by shareholder. A shareholder's pro rata share
of an S corporation item of income (or deduction) is generally determined by:
a. assigning an equal portion of each day of the corporation's taxable year
(1/365 except for a leap year or a short taxable year),
b. allocating that daily portion pro rata among the shares outstanding on each
such day, and
c. totaling the shareholder's daily portion of the item as determined under (a)
and (b) above.
3. A transferee shareholder is considered to be the owner of stock on the day it is
transferred.

# 4.

In years in which there is no change in shareholders or in the relative interest of
those shareholders, a shareholder's pro rata share of an item is simply the annual
amount of that item multiplied by the shareholder's percentage of total stock
outstanding.
104 Net Operating losses involving S corporations.
1. Deduction not allowed to corporation. An S corporation is not allowed a deduction
for a net operating loss. The net operating loss is passed through to the shareholders
subject to the following restrictions.
2. Limitation on deduction for shareholders.
a. The amount of the net operating loss of the S corporation for any taxable
year which may be deducted by any shareholder shall not exceed the sum
of:
i. The adjusted basis of the shareholder 's stock in the S corporation,
and
ii. The adjusted basis of any indebtedness of the corporation to the
shareholder.
iii. If a shareholder 's pro rata share of the corporation's net operating
loss exceeds the limitation imposed, such excess is allowable as a
net operating loss carryover or carryback as allowed under Section
27-7-17.
b. Time for determining basis of stock and indebtedness. The adjusted basis of
the stock of, or indebtedness to, a shareholder for purposes of the limitation
in (a) above is determined as of the close of the taxable year of the
corporation, except that
i. the adjusted basis of stock which is sold or otherwise disposed of
during the taxable year of the corporation is determined as of the
close of the day before the day of such sale or other dispositions,
and
ii. If the shareholder is not a shareholder as of close of the taxable year
of the corporation, the adjusted basis of any indebtedness of the
corporation to the shareholder is determined as of the close of the
last day which he was a shareholder in such taxable year.
3. A shareholder is not allowed to deduct any loss attributable to the corporation prior
to electing an S corporation status.
105 Special rules application to capital gains. Mississippi Law does not conform with Federal
Law with respect to the tax treatment of capital gains, therefore, the amount includable by a
shareholder in gross income from an S corporation during any taxable year of such
corporation shall be treated as ordinary income.
106 Adjustments to the basis of stock of, and indebtedness owing shareholders.
1. Increase in basis of stock . The basis of shareholder 's stock in an S corporation is
increased by the amount required to be included in the gross income of such
shareholder, but only to the extent to which such amount is actually included in his
gross income on his income tax return, increased or decreased by any adjustment of
such amount in any redetermination of the shareholder's tax liability. This increase
in basis will affect only those shares of stock of the S corporation which the
shareholder owned at the end of the corporation's taxable year and is apportioned in
equal amounts to each share. The increase is effective as of such last day, and
survives a termination of the corporation's election.
2. Reduction in basis of stock. The basis of a shareholder's stock in an S corporation is
reduced by an amount equal to his portion of the corporation's net operating loss for
any taxable year attributable to such stock. However, the basis of such stock is not
to be reduced below zero.
3. Reduction in basis of indebtedness . The basis of any indebtedness of an S
corporation to a shareholder is reduced by an amount equal to the shareholder's
portion of the corporation's net operating loss for the taxable year, but only to the
extent that such amount exceeds the basis of the shareholder's stock in the
corporation. Thus, the amount of the shareholder's portion of the net operating loss
is first applied in reduction of the basis of his stock in accordance with the rules of
subparagraph (2) above, and only the remainder, if any, reduces the basis of the
indebtedness.
107 Special rules. The Commissioner will follow the provisions of Section 1371, IRC, and
Regulations thereunder, with respect to the special rules applicable to earnings and profits
of S corporations.
108 Special tax (Federal) on S corporations. Mississippi Law does not impose a special tax on
capital gains of S corporations, therefore, the Commissioner will not follow the provisions
of the IRC. Since capital gains are not taxed directly to the S corporation, the amount of
such capital gains shall not be used to reduce the amount of income taxable to the
shareholder.
108.01 Mississippi Law does not have a special tax on passive investment income, therefore, the
pass-through income to shareholders shall not be reduced by the amount assessed at the
federal level, and will not follow the provisions of Section 1375 in this respect.
109 Liability of corporation. If any of the shareholders of the S corporation are nonresidents of
the State of Mississippi, the corporation shall be subject to Mississippi income tax on the
part of the corporate income allocable to the share of stock owned by the nonresident
shareholders unless the corporation files with its Mississippi return for the taxable year an
agreement executed by each nonresident shareholder wherein said shareholder agrees to
pay Mississippi income tax on his proportionate part of the corporation's Mississippi
taxable income. Nonresident agreements shall be executed by completing Form 62 -381.
Failure to secure an agreement from nonresident shareholders for the taxable year or failure
of the nonresident shareholder to file a timely return and pay the tax when due, even in
cases where Form 62-381 is executed, shall render the S corporation liable for the tax due.
110 Liability of shareholders. A resident shareholder in a qualified S corporation must report
his share of taxable income on his Mississippi Resident Individual Income Tax Return. A
nonresident shareholder in such corporation must report on his Mississippi nonresident
individual income tax return, income that was derived from sources within Mississippi. If
the total taxable income of the corporation is from Mississippi sources, the total pro rata
share of income to each nonresident shall be reported in full to Mississippi.
110.01 If the corporation's taxable income is from sources within and without Mississippi and
would have been apportioned or allocated partly within and partly without Mississippi by
the corporation, only that part of taxable income of the corporation assignable to
Mississippi shall be considered in reporting distributions to nonresidents.
111 Resident shareholders in nonresident (foreign) S corporation . A resident of Mississippi
owning stock in an S corporation doing business and realizing taxable income in a foreign
state shall include in Mississippi gross income his pro rata share of taxable income (or loss)
of the S corporation but only to the extent that the state in which the taxable income was
earned by the corporation has adopted the Federal tax treatment (Subchapter S, IRC) of an
S corporation and such corporation has so elected to be treated as an S corporation in such
state. A tax credit shall be allowed against the Mississippi tax due on such taxable income
reported to another state by the Mississippi resident.
111.01 If the foreign state in which the taxable income of an S corporation is earned or realized has
not, for the corporation's taxable year, adopted the Federal tax treatment of an S
corporation, the Mississippi resident's pro rata share of taxable income (or loss) of the S
corporation shall be excluded from the gross income of the Mississippi resident. In such
case, the Mississippi resident must report only dividends or other income actually
distributed to such resident by the corporation in the taxable year of the resident.
112 Filing requirements. An S corporation chartered under the laws of Mississippi, or an S
corporation chartered under the laws of another state or territory and "doing business" in
Mississippi and having an election in effect to be treated as an S corporation within the
purview of Section 1362 (a), IRC, and as automatically provided in Section 27 -7-29 (b),
Mississippi Code, and this Regulation, shall, on or before the 15th day of the third month
following the close of its taxable year, file an annual combined return of corporation
income and franchise tax, on Mississippi Form 62-300. All schedules, where applicable, in
Form 62-300 must be completed by the S corporation in the same manner as for any other
corporation, with the exception of Schedule B, relating to computation of income tax. If
the S corporation is not, as otherwise provided in paragraph (J), liable for Mississippi tax,
so indicate on Line 11, Schedule B, that the taxpayer is an S corporation. All S
corporations must complete Schedule X and Schedule Y. If any of the shareholders listed in
Schedule Y are not legal or actual residents of Mississippi, a nonresident agreement (Form
62-381) for each such nonresident must be attached to and made a part of Form 62-300 as
filed by the corporation. Failure on the part of the corporation to secure a complete Form
62-381 from each of its nonresident shareholders renders the corporation liable for
Mississippi income tax.
112.01 An S corporation is allowed to file a composite return on behalf of its shareholders in very
limited circumstances. A composite return is a return in which an S corporation pays the
income tax due for some, or all, of its shareholders. The only shareholders who are eligible
to be included in the composite return are nonresident shareholders without any activity in
Mississippi other than that from the S corporation.
112.02 Resident shareholders and nonresident shareholders with other activity in Mississippi
cannot be included in a composite return. Each of these shareholders must file his own
return.
112.03 If a composite return is filed, the S corporation return is completed like any other S
corporation return, but an additional schedule is attached listing the shareholder's
identification or social security number and the shareholder's distribution that is to be
included in the composite return. The S corporation then pays the tax on this income at the
regular corporate rate. If the S corporation wants a deduction for the individual's personal
exemptions and standard deductions, then instead of paying tax on the corporate return, the
composite return income is reported on one nonreside nt individual return under the S
corporations name and identification number. On this return, the corporation is allowed to
deduct 10% of the adjusted gross income of the nonresident individuals reported on this
return up to a maximum of $5,000 per composite return.
112.04 Once an S corporation begins filing a composite return, it must continue unless permission
to change is granted in writing by the Commissioner.
112.05 An S corporation is not relieved from the payment of franchise tax. Schedules in Form
62-300 relating to such levy must be completed and made a part of the return. The
franchise tax, plus any penalty, interest, or applicable income tax, are due and payable in
full by the original due date of the return.
112.06 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. The shareholders are not allowed to receive a greater benefit than the
corporation would have received, if the corporation were taxable.
113 (Reserved)
114 (Reserved)