Delaware Franchise Taxes
Delaware Franchise Taxes
Delaware is one of the most popular states in which new businesses choose to incorporate. There are several reasons why, with one being the significant tax advantages it offers. Delaware does not impose corporate income taxes, sales taxes or personal property taxes, which can present material tax savings to growing corporations.
However, one key tax consideration that Delaware corporations need to plan for is the Annual Report, which includes a required franchise tax payment. The Delaware Annual Report is due on March 1st of each year and must be filed online here.
The amount of the franchise tax can vary, as it is based on a formula that includes the following parameters:
- Total authorized shares of stock
- Total gross assets as reported for income tax purposes
- Total issued shares of stock
- Par value per share of each class of stock
There are two different methods for calculating the franchise tax which can often produce vastly different results, and the state allows the taxpayer to use the more favorable method. The two methods are the Authorized Shares Method and the Assumed Par Value Capital Method. For most startup and emerging corporations that have millions of authorized shares with a small par value per share (i.e. one penny or a fraction of a penny), the Assumed Par Value Capital Method will likely result in a lower tax calculation. The more authorized shares these corporations have, the greater the difference can be.
It is often the case that when corporations receive notices concerning upcoming Delaware franchise tax liabilities, the notice will present them with a substantial estimated liability using the less-favorable Authorized Shares Method. These amounts can often come as a shock to the taxpayer, so it is important for these businesses to know that what they owe will ultimately be determined when they log into the website linked above and complete the form themselves. Once the information for all parameters is entered, the correct tax will calculate using the more favorable method. More details on the calculations for each method can be found here.
Lastly, it is important to note that if a corporation’s Delaware franchise tax liability exceeds $5,000 in any year, then the corporation will be required to make quarterly estimated payments throughout the following year. The estimated payment requirements are as follows:
- 40% of the previous year’s tax liability is due on June 1st
- 20% of the previous year’s tax liability is due on September 1st
- 20% of the previous year’s tax liability is due on December 1st
- The remainder is due on March 1st upon filing the next Annual Report
