The Mississippi Research and Development Skills Tax Credit: A Comprehensive Analysis of Compensation and Regulatory Compliance

In the context of the Mississippi Research and Development Skills Tax Credit, compensation is defined as the total professional-level salary paid to a full-time employee, excluding non-taxable benefits, as a prerequisite for claiming the per-employee credit. To satisfy the statutory requirement, this remuneration must align with the prevailing market rates for skilled roles requiring advanced scientific or technical degrees and at least two years of specialized experience. 1

The Socio-Economic Architecture of Mississippi’s Research Incentives

The Mississippi Research and Development (R&D) Skills Tax Credit represents a specialized legislative effort to bolster the state’s knowledge-based economy by incentivizing the recruitment and retention of high-skilled technical talent. Unlike many other states that mirror the federal research credit structure under Internal Revenue Code (IRC) § 41—which focuses primarily on incremental spending across wages, supplies, and contract research—Mississippi has carved out a unique policy space. The state’s primary internal R&D incentive is not a spending-based credit but rather an employment-based credit. It targets the human capital necessary to drive innovation, providing a significant reduction in state income tax liability for businesses that hire and retain individuals in roles demanding specific technical expertise. 1

The statutory authority for this credit is codified within Mississippi Code Annotated § 57-73-21(6). This provision establishes an additional incentive for jobs requiring R&D skills, such as those held by chemists, engineers, and biotechnologists. 6 While the state does not offer a broad, spending-based credit that mirrors the federal framework, it utilizes the R&D Skills Tax Credit as a strategic tool to attract and scale industries that are critical to the state’s industrial future, including aerospace, manufacturing, agriculture, and biotechnology. 4 The focus on “skills” rather than “expenditure” reflects a localized economic strategy aimed at ensuring that Mississippi-based projects are staffed by qualified professionals who contribute to the state’s long-term intellectual and economic infrastructure. 4

The Legal Framework of Section 57-73-21

The Research and Development Skills Tax Credit is not a standalone provision but is integrated into the broader Economic Development Reform Act. 8 Section 57-73-21 provides a tiered structure for various job-based credits, with subsection (6) specifically addressing the “additional” credit available for R&D roles. 6 To understand the meaning of compensation within this context, one must first understand the classification of the businesses and jobs that qualify.

The law applies to permanent business enterprises primarily engaged in manufacturing, processing, warehousing, distribution, wholesaling, and research and development. 6 For these enterprises, the R&D Skills Credit serves as a “bonus” overlay on top of the standard Jobs Tax Credit. 1 The standard Jobs Tax Credit is calculated as a percentage of the enterprise’s total payroll, whereas the R&D Skills Credit is a flat-dollar amount per qualifying employee. 1 This distinction is vital: while the Jobs Tax Credit incentivizes the total volume of payroll, the R&D Skills Credit specifically rewards the technical caliber and individual expertise of the staff being hired. 6

Defining Compensation at the Professional Level

For a business to qualify for the $1,000 annual credit per employee, the Mississippi Department of Revenue (DOR) mandates that the employee be compensated at a “professional level.” 1 The interpretation of this phrase is one of the most critical aspects of compliance, as it distinguishes between general labor and the high-value technical roles the state intends to subsidize. 3

In the eyes of the Mississippi Department of Revenue, “compensation” or “salary” generally refers to the gross wages subject to Mississippi withholding tax. 10 Administrative guidelines and tax forms specify that the compensation must exclude benefits not subject to Mississippi income tax. 9 This typically means that employer-paid health insurance premiums, 401(k) matching, and other pre-tax benefit deductions are stripped away from the calculation when determining if the salary meets the “professional level” threshold. 9 This alignment with the state’s income tax base ensures that the credit is linked to economic activity that also generates state withholding revenue, creating a neutral or positive fiscal loop for the state treasury. 2

The “professional level” standard is qualitative and contextual rather than being tied to a single, static statewide dollar threshold. Instead, the DOR evaluates the salary in relation to the specific role—such as a chemist or an engineer—and the educational requirements of the position. 2 Because the law requires a minimum of a bachelor’s degree in a scientific or technical field and at least two years of experience, the law implicitly sets a floor for compensation; market rates for such qualified individuals naturally exceed those of entry-level or non-technical staff. 1

The Regulatory Nexus: Department of Revenue and Administrative Code

The Mississippi Department of Revenue provides specific instructions for taxpayers seeking to monetize these credits. Under the Mississippi Administrative Code, Title 35, Part 10, Chapter 03, the DOR clarifies the qualifications and the rigid application process. 12 The administrative code is the primary source of the “professional level” definition, emphasizing that the role must require a bachelor’s degree from an accredited four-year college or university and the employee must be employed in their area of expertise. 12

Taxpayers are strictly prohibited from claiming the credit on their year-end return without prior authorization from the Department of Revenue. 5 The regulatory mechanism requires a formal letter of request before the credit is taken. This letter must contain exhaustive detail regarding the employee’s compensation and professional standing:

1. Job Title and Purpose: A description of how the role directly contributes to research and development activities. 5
2. Educational Requirements: Proof that the position requires a Bachelor’s degree in a scientific or technical field. 1
3. Experience Documentation: Verification that the employee possesses at least two years of related job experience. 3
4. Weekly Hours: Evidence that the position is full-time, which the DOR defines as at least 35 hours per week. 3
5. Compensation Data: The specific salary or wage amount, excluding non-taxable benefits. 18

Once the DOR determines that the role and its corresponding compensation meet the professional criteria, it issues a letter of authorization. 18 This letter, along with a computation schedule, must be attached to the Mississippi income tax return. 5 For individual taxpayers, this is typically done using Form 80-401 (Tax Credit Summary Schedule), while corporations use Form 83-401 and pass-through entities use Form 84-401. 20

Educational Prerequisites as a Proxy for Compensation Standards

The requirement for a bachelor’s degree in a scientific or technical field from an accredited four-year institution is a non-negotiable anchor for the credit. 1 This requirement directly informs the compensation analysis. Because the position must require this level of education, the salary offered must be commensurate with the market value of such a degree. This prevents businesses from attempting to claim the credit for lower-skilled technical support roles or “lab assistants” who do not meet the professional educational threshold. 2

Furthermore, the employee must be employed in their “area of expertise.” 1 If a chemist is hired but primarily performs administrative or clerical tasks, the DOR may disqualify the position regardless of the salary paid. 2 The compensation is only “professional” if it is paid for professional R&D work. 1 This ensures that the state’s tax expenditure is directly funding the technical innovation it seeks to encourage. 2

Comparison with Other Mississippi State Incentives

Mississippi offers several other incentives that utilize different definitions of salary and compensation, which often creates a complex web for corporate tax departments to navigate. Distinguishing these is essential for accurate financial modeling and compliance.

The National or Regional Headquarters Credit

Under § 57-73-21(5), the Headquarters Credit provides varying amounts based on the specific salary level relative to the state’s average annual wage. 9 Unlike the R&D Skills Credit, which remains a flat $1,000 as long as the “professional level” is met, the Headquarters Credit scales its reward based on higher compensation levels:

• $500 per employee for general full-time roles at a headquarters. 11
• $1,000 per employee if the employee’s salary is 125% of the average annual state wage. 9
• $2,000 per employee if the employee’s salary is 200% of the average annual state wage. 9

The “average annual wage” is the most recently published average as determined by the Mississippi Employment Security Commission (now MDES). 13 For the R&D Skills Credit, there is no such explicit scaling; however, many practitioners use these headquarters thresholds as a “safe harbor” benchmark for what the DOR might consider “professional level” compensation. 9 If an engineer is paid 125% of the state average wage, it is significantly more likely that the DOR will accept the role as “professional” during the letter-of-request phase. 12

The SMART Business Act (Academic Research Investor Rebate)

The Strengthening Mississippi Academic Research Through Business (SMART) Act provides a 25% rebate for “qualified research costs” when a company partners with a Mississippi public university. 15 While the R&D Skills Credit focuses on internal payroll, the SMART Act rebate focuses on contract research performed by a third party (the university). 16

The definition of compensation under the SMART Act is more restrictive in certain areas. For example, it explicitly excludes salaries or wages associated with a licensee of state-owned intellectual property when calculating the rebate for validation expenses. 16 This highlights a critical distinction: the state provides tax credits for hiring its own R&D staff but uses cash rebates to encourage outsourcing specific projects to state institutions. 15 A business cannot use the same expenditure to claim both the Skills Credit and the SMART rebate. 18

Interaction with Federal IRC Section 41 and Section 174

Mississippi does not conform to the federal R&D tax credit for the purpose of state tax computation. 4 This means that a taxpayer’s federal credit calculation (Form 6765) does not automatically flow through to a Mississippi tax benefit. 4 Instead, the state credit must be calculated and claimed separately. 4

However, the federal definition of “wages” under IRC § 3401(a) is often used as a reference point for state audits. 14 Federal qualified research expenses include wages for qualified services—namely, performing, supervising, or supporting research. 14 This includes federal taxable wages reported on Form W-2, including bonuses and certain stock option redemptions. 14 Nontaxable items, such as 401(k) contributions and health insurance contributions, are excluded from the federal wage QRE, mirroring Mississippi’s exclusion of non-taxable benefits in the R&D Skills context. 13

While Mississippi’s $1,000 credit is simpler to calculate than the federal incremental credit, the underlying activities must still meet the general principles of research and development. In federal law, this is established by the “four-part test,” which many state auditors use as a qualitative guide for state R&D incentives:

1. Elimination of Uncertainty: The activity must aim to discover information to solve a technical uncertainty concerning the development of a product or process. 5
2. Process of Experimentation: It must involve evaluating alternatives through testing, modeling, or systematic trial and error. 5
3. Technological in Nature: The research must rely on principles of physical science, biological science, engineering, or computer science. 5
4. Qualified Purpose: The goal must be to create a new or improved business component’s function, performance, reliability, or quality. 26

Mississippi businesses can claim the federal credit to reduce their federal tax liability and the R&D Skills Credit to reduce their state liability, creating a dual benefit for hiring high-value labor. 4

Pro-rating and Calculating the Credit: A Practical Example

The R&D Skills Credit is calculated based on filled positions and is pro-rated for employees who are not employed for the full 12 months of the tax year. 2 This is a critical distinction from other credits that might only be available for year-end headcounts. The formula for a pro-rated credit is:

$$Credit_{prorated} = \left( \frac{Months_{employed}}{12} \right) \times \$1,000$$

Where $Months_{employed}$ is the number of months the employee was employed in the state and subject to Mississippi withholding. 2

Case Study: Meridian Aerospace Dynamics, LLC

Consider an aerospace engineering firm located in Lauderdale County, Mississippi. In 2024, the firm hires three new employees to staff its innovative drone propulsion division:

• Employee A (Senior Engineer): Holds a Master’s degree in Aerospace Engineering with 8 years of experience. Hired on February 1, 2024, with an annual salary of $110,000.
• Employee B (Lead Chemist): Holds a Ph.D. in Chemistry with 5 years of experience. Hired on June 1, 2024, with an annual salary of $105,000.
• Employee C (Junior Engineer): Holds a Bachelor’s degree in Mechanical Engineering with 2 years of experience. Hired on September 1, 2024, with an annual salary of $68,000.

Step 1: Determine Eligibility

• Employee A: Meets degree, expertise, and experience requirements. Salary is clearly “professional level.”
• Employee B: Meets degree, expertise, and experience requirements. Salary is clearly “professional level.”
• Employee C: Meets minimum degree requirement (Bachelor’s), expertise requirement, and minimum experience (2 years). A $68,000 salary is above the state average wage and commensurate with a professional junior engineering role.

Step 2: Calculate the 2024 Credit

• Employee A: Employed for 11 months (February–December).
  
  $$Credit_A = \left( \frac{11}{12} \right) \times \$1,000 = \$916.67$$
• Employee B: Employed for 7 months (June–December).
  
  $$Credit_B = \left( \frac{7}{12} \right) \times \$1,000 = \$583.33$$
• Employee C: Employed for 4 months (September–December).
  
  $$Credit_C = \left( \frac{4}{12} \right) \times \$1,000 = \$333.33$$

Total 2024 R&D Skills Credit: $1,833.33$

Step 3: Application of Limits and Carryforwards

If Meridian Aerospace has a total Mississippi income tax liability of $3,000 for 2024, the credit utilization is capped at 50% of that liability. 1

• Maximum Credit Allowed for 2024: $\$3,000 \times 0.50 = \$1,500.00$
• Credit Actually Used: $1,500.00$
• Unused Credit Amount: $\$1,833.33 – \$1,500.00 = \$333.33$
• Carryforward: This $333.33$ can be carried forward for up to 5 years (through the 2029 tax year). 1

Documentation and Verification of Professional Compensation

The Mississippi Department of Revenue maintains strict standards for documenting payroll to ensure compliance with the “professional level” mandate. 18 Businesses must maintain contemporaneous records that link the salary paid to the specific technical research conducted.

A common pitfall for businesses is attempting to claim the credit for part-time employees or contractors. The credit is only available for full-time employees subject to Mississippi withholding. 3 Additionally, part-time jobs cannot be combined to equal a single full-time job for the purpose of this credit. 2

Pass-Through Entity and S-Corporation Nuances

For businesses organized as S-Corporations, Partnerships, or LLCs, the R&D Skills Credit is earned at the entity level but “passes through” to the individual owners, shareholders, or partners. 13 The credit retains its character and is subject to the same 50% liability limitation on the individual’s Mississippi income tax return. 10

A critical restriction exists regarding owner compensation: the credit cannot be used to offset the tax due on the salaries or wages paid to the owners themselves (in the case of S-Corporations) or guaranteed payments to partners (in the case of Partnerships). 13 The legislative intent is to incentivize the creation of new technical jobs for the workforce, rather than providing a tax-free salary for the principals of the business. 10 Therefore, the compensation analysis must strictly distinguish between third-party employees and business owners.

Economic and Geographic Context of Mississippi Wages

Understanding what constitutes “professional level” compensation requires looking at the broader Mississippi labor market. According to the Bureau of Labor Statistics (BLS) and the Mississippi Department of Employment Security (MDES), the average annual wage in the state varies significantly by county. 32

Because the R&D Skills Credit requires both a degree and two years of experience, the DOR typically expects the salary to be at or above these average wage figures to be considered “professional.” 12 In high-demand fields like aerospace engineering or chemical research, salaries often range between $75,000 and $120,000, making the $1,000 credit a modest but useful offset to the high cost of talent. 5

Legislative Evolution and the Future of R&D Incentives

The Mississippi tax landscape is currently undergoing a significant shift toward a flatter tax structure and enhanced deductions for business investment. House Bill 1733, passed in April 2023, allows businesses to fully deduct research or experimental (R&E) expenditures in the year they are incurred. 26 This aligns the state more closely with the historical federal treatment of R&D costs under § 174, providing a “deduction” benefit that operates alongside the “credit” benefit of the R&D Skills program. 24

Furthermore, the state has begun a phase-out of the corporate franchise tax, which will be fully repealed by January 1, 2028. 35 As the tax burden shifts, the relative value of the R&D Skills Credit remains stable because it is a fixed $1,000 per employee, rather than a percentage of taxable income. 1 This predictability is a key selling point for economic development agencies like the Mississippi Development Authority (MDA) when recruiting tech firms to the state. 1

The Regulatory Impact of “Filled Positions” and “New Jobs”

The credit is fundamentally based on filled positions. This means the employee must be a resident of Mississippi or at least perform their work within the state and be subject to Mississippi withholding tax. 3 If a company hires a remote researcher living in another state, the compensation paid to that individual generally does not qualify the business for the R&D Skills Tax Credit, even if the research benefits a Mississippi-based project. 2

The 5-Year Window and Job Fluctuations

A business can earn the credit for a specific employee for a maximum of five years. 1 The five-year window begins in the year the job is created (Year 1) and allows the credit to be taken in Years 2 through 6, provided the minimum employment increase is maintained. 10 If a company’s total employment level falls below the level required for qualification in a given year, the credit is lost for that year. 10

Crucially, Mississippi law does not require the “recapture” of credits taken in previous years if the employment level later drops. 10 This provides businesses with a degree of certainty—if they hire a researcher and claim the credit for three years before a market downturn forces a layoff, they do not have to pay back the $3,000 in credits already utilized. 10 However, they cannot “re-qualify” for credits on those same jobs for at least five years after a layoff, preventing businesses from cycling through positions simply to reset the credit clock. 10

Industry-Specific Applicability and Exclusions

While the credit is available to most industries, certain sectors are excluded to meet public policy goals. Commercial ventures engaged in the storage, handling, or disposal of hazardous waste are explicitly disqualified from the R&D Skills Tax Credit. 18 Conversely, the state actively encourages participation from the following sectors which are defined as “permanent business enterprises”:

• Manufacturing and Processing. 6
• Wholesaling and Distribution. 7
• Computer Software Development. 26
• Telecommunications and Data Processing. 38
• Air Transportation Maintenance Facilities. 6

For software companies, the “professional level” compensation is often scrutinized to distinguish between standard coding (which may not qualify) and innovative software engineering aimed at solving technical uncertainties. 4

Conclusion: Strategic Implementation for Mississippi Businesses

The Mississippi Research and Development Skills Tax Credit is a precisely targeted incentive that rewards technical caliber and educational attainment within the state’s workforce. Its focus on “compensation at a professional level” ensures that the state’s financial support is reserved for high-value positions that contribute to long-term industrial and scientific growth. 1 By understanding the administrative necessity of the DOR authorization letter, the exclusion of non-taxable benefits from the salary calculation, and the pro-rated nature of the $1,000 credit, businesses can effectively integrate this incentive into their multi-year hiring and expansion strategies. 3

As Mississippi continues to refine its tax code and provide new universal incentives like the Mississippi Flexible Tax Incentive (MFLEX), the stability and specificity of the R&D Skills Credit remains a cornerstone of its economic development toolkit. For businesses looking to maximize their return on investment in human capital, the path forward involves rigorous contemporaneous documentation, clear alignment with technical degree requirements, and a proactive relationship with the Department of Revenue before the first credit is claimed. 1

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