Delaware is one of the most preferred states by entrepreneurs who want to establish a company in the US. The state of Delaware offers many benefits for small business owners, including a favorable tax environment. The franchise tax is the only tax that anyone who wants to start a business in Delaware must pay. In this article, you can find all the information you need to know about the Delaware franchise tax.
Why do companies incorporate in Delaware?
Delaware has a low franchise tax and also has no state income tax, which makes it an ideal place to start a business. The Delaware franchise tax is only 1 percent of annual gross receipts. This is one of the lowest franchise tax rates in the country. The state also has a relatively shorter franchise disclosure period than most states, which is six months. Delaware also has a low threshold for qualifying as a franchise, at only $1 million in annual gross receipts.
In addition, Delaware has a number of other business-friendly policies. The state has a low corporate income tax rate of 8.7 percent, and there is no state sales tax. Delaware is also one of only a few states that allow businesses to deduct state and local taxes from their federal taxes.
What is Delaware franchise tax?
Delaware franchise tax is a tax levied by the state of Delaware on businesses that are incorporated in Delaware. The tax is based on the value of the company’s assets, and it is paid every year. The tax is used to fund the state’s budget, and it is one of the main sources of revenue for the state.
In the state of Delaware, all corporations are required to file an annual report and pay a franchise tax. Domestic corporations that are exempt from tax do not have to pay a tax, but they must file an annual report. The filing fee for all other domestic corporations is $50, plus any taxes that are due when the annual report is filed. All registered corporations are required to pay taxes and file their annual reports before the 1st of March.
When is Delaware franchise tax due?
Taxpayers who owe $5.000 or more will have to pay estimated taxes in quarterly installments, with 40% due on the 1st of June, 20% due on the 1st of September, 20% due on the 1st of December, and the remainder due on the 1st of March.
How to calculate Delaware Franchise Tax
As of January 2018, all for-profit corporations incorporated in Delaware must pay an annual franchise tax. The minimum tax is $175 for corporations using the authorized shares method and $400 for those using the assumed par value capital method. There is a maximum tax of $200.000 regardless of which method is used. Corporations owing $5.000 or more must make estimated payments. They need to pay 40% by June 1st, 20% by September 1st, 20% by December 1st, and the balance by March 1st.
The amount of your annual Delaware franchise tax is based on the number of authorized shares. To calculate your tax, use the method that results in a lower amount. In any case, the total tax cannot be more than $200.000 or less than $175.
Authorized shares calculation (corporations with zero par value stock)
- 5,000 shares or less – minimum tax of $175
- 5,001 to 10,000 shares – Fixed tax rate of $250
- Add $85 for every additional 10.000 shares or a portion thereof
- Maximum annual Delaware franchise tax – $200.000
- A company incorporated in Delaware with 10.500 shares authorized has to pay $335 ($250 + $85).
- A company incorporated in Delaware with 100.000 shares authorized has to pay $1,015 ($250 + $765 [$85 x 9]).
Assumed par value capital method
This method requires that you enter the treasury shares as well as all other issued shares and total gross assets into spaces provided for these details in your annual Delaware franchise tax report. The total gross assets should be the “total assets” reported on US form 1120, schedule L (federal return) for the company’s fiscal year ending the calendar year of the report. The tax rate considered in this calculation is $400 per million.
If you have an assumed par value capital of less than $1.000.000, you can calculate the tax by dividing the assumed par value capital by $1.000.000, then multiplying the result by $400.
The corporation has $1 par value shares totaling $1.000.000, $5 par value shares totaling $250.000, gross assets of $1.000.000 and 515.000 issued shares.
- Dividing the total gross assets by the total issued shares carrying to 6 decimal places gives the assumed par value of $1.941,747 (1.000.000 / 515.000)
- Multiply the assumed par value by the number of authorized shares that have a par value less than the assumed par ($1.941,747 X 1.000.000 = $1.941.747)
- Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value (250.000 X $5 = $1.250.000)
- Adding the results of #2 and #3 above gives the assumed par value capital of $3.191.747.
- The tax can now be calculated by dividing this assumed par value capital (take the next million to avoid a fraction) that we calculated by 1.000.000 and multiplying it by the minimum tax rate of $400.
How to pay Delaware franchise tax
Different incorporated entities in Delaware have to pay different taxes. Taxes are assessed if the corporation is active at any point during the calendar year, from January 1st to December 31st.
Foreign corporations that wish to do business in the state of Delaware are required to file an annual report with the secretary of state on or before June 30th every year. The filing fee is currently set at $125 and must be paid upon submitting the report. If the annual report and corresponding fee are not received by the due date, a $125 late penalty will be added to the original filing fee.
LLCs and partnerships
All limited liability companies (LLCs), limited partnerships (LPs), and general partnerships (GPs) registered in Delaware are required to pay an annual tax of $300 by June 1st. If the taxes are not paid, there is a penalty of $200 plus 1.5% interest per month on the tax and penalty.
What happens if I don’t pay Delaware franchise tax?
If your annual report for franchise tax is not filed and the Delaware franchise tax is not paid for two years in a row, the corporation will be dissolved by the State of Delaware.
Set up a company in Delaware with Workhy
Overall, Delaware is an ideal place to start and run a business. The state has a low franchise tax rate, a short disclosure period, and a number of other business-friendly policies. Workhy can help you set up a company in Delaware and prepare your franchise tax returns, even if you are not a US resident. Contact us now for more information.