Delaware is known to be one of the most business-friendly states in the US, which is why it’s a popular choice for incorporating businesses. However, incorporating a business in Delaware comes with a cost, and that’s the Delaware franchise tax. This tax is a yearly fee that all corporations incorporated in Delaware must pay to maintain their status as a Delaware corporation.

Calculating the Delaware franchise tax can be a bit confusing, especially for first-time business owners. There are two methods for calculating the tax: the Authorized Shares Method and the Assumed Par Value Capital Method. The Authorized Shares Method is a straightforward calculation based on the number of authorized shares a corporation has. On the other hand, the Assumed Par Value Capital Method is a more complex calculation based on a corporation’s gross assets and issued shares. Understanding the differences between these two methods and knowing which one to use can be a challenge for many business owners.

Understanding Delaware Franchise Tax

Definition and Purpose

Delaware Franchise Tax is a fee that corporations incorporated in Delaware are required to pay annually to maintain their existence. The tax is not based on the income or profits of the corporation, but rather on the corporation's authorized shares or the assumed par value capital of the corporation. The purpose of the tax is to provide revenue for the state and to encourage corporations to incorporate in Delaware, which has favorable corporate laws.

The amount of the tax varies depending on the method of calculation used. The two methods of calculation are the Authorized Shares Method and the Assumed Par Value Capital Method. The Authorized Shares Method is based on the number of authorized shares of the corporation, while the Assumed Par Value Capital Method is based on the corporation's assumed par value capital.

Applicability to Delaware Corporations

All corporations incorporated in Delaware, including those that do not conduct business in the state, are subject to the Delaware Franchise Tax. The tax is due on or before March 1st of each year, and failure to pay the tax can result in penalties and interest charges.

It is important for corporations to understand the requirements and methods of calculation for the Delaware Franchise Tax to ensure compliance with state regulations. Corporations can consult with their tax advisors or visit the State of Delaware Division of Corporations website for more information on the tax and how to calculate it.

Franchise Tax Calculation Methods

When it comes to calculating Delaware Franchise Tax, there are two methods: Authorized Shares Method and Assumed Par Value Capital Method.

Authorized Shares Method

The Authorized Shares Method is the simpler of the two methods. It involves multiplying the number of authorized shares by a predetermined tax rate. This rate is based on the company's total assets in Delaware. The minimum tax under this method is $75, and the maximum is $180,000.

Assumed Par Value Capital Method

The Assumed Par Value Capital Method is more complicated than the Authorized Shares Method. It involves calculating the company's Assumed Par Value Capital (APVC) by dividing the company's total gross assets by the total number of issued shares. The resulting APVC is then multiplied by a tax rate of $400. The minimum tax under this method is $400.

In general, the APVC method is more beneficial for companies with a high number of authorized shares but a low number of issued shares. On the other hand, the Authorized Shares Method may be more advantageous for companies with a high number of issued shares.

It's important to note that companies must pay the higher of the two tax amounts calculated under each method. Additionally, the tax rates and minimum fees are subject to change each year, so it's important to stay up-to-date on the latest regulations and requirements.

Overall, understanding the two methods of calculating Delaware Franchise Tax can help companies make informed decisions about their tax obligations and ensure compliance with state regulations.

Step-by-Step Calculation Guide

Determining the Appropriate Method

Before calculating Delaware franchise tax, it is important to determine the appropriate method based on the company's structure and assets. There are two methods to calculate the tax: the Authorized Shares Method and the Assumed Par Value Capital Method.

The Authorized Shares Method is based on the number of authorized shares of stock that a company has. If a company has not issued all of its authorized shares, it will still be taxed based on the total number of authorized shares. On the other hand, the Assumed Par Value Capital Method is based on the company's gross assets and issued shares.

Calculating Tax Using the Authorized Shares Method

To calculate tax using the Authorized Shares Method, a company needs to multiply the number of authorized shares by the tax rate. The tax rate is $175 per 1,000 shares for corporations with 5,000 authorized shares or less. For corporations with more than 5,000 authorized shares, the tax rate is $350 per 1,000 shares.

For example, if a company has 10,000 authorized shares, the tax calculation would be as follows:

10,000 shares ÷ 1,000 = 10
10 x $350 = $3,500

In this case, the company's Delaware franchise tax would be $3,500.

Calculating Tax Using the Assumed Par Value Capital Method

To calculate tax using the Assumed Par Value Capital Method, a company needs to determine its assumed par value capital, which is the sum of the company's issued shares multiplied by the par value per share. The par value is the minimum price at which a share can be issued.

After determining the assumed par value capital, a company needs to divide it by 1,000,000 and then multiply the result by $400. The minimum tax for this method is $400, and there is no cap on the maximum tax.

For example, if a company has 1,000,000 issued shares with a par value of $0.01 per share and gross assets of $10,000,000, the tax calculation would be as follows:

1,000,000 shares x $0.01 par value = $10,000
$10,000,000 + $10,000 = $10,010,000
$10,010,000 ÷ 1,000,000 = 10.01
10.01 x $400 = $4,004

In this case, the company's Delaware franchise tax would be $4,004.

By following these step-by-step guides, companies can accurately calculate their Delaware franchise tax based on their structure and assets.

Filing Requirements and Deadlines

Annual Report Filing

All corporations, limited partnerships, limited liability companies, and general partnerships formed in the state of Delaware must file an annual report with the Delaware Division of Corporations. The annual report must be filed on or before March 1st of each year. The filing fee for the annual report is $125.00. Foreign corporations are assessed a penalty of $125 if the annual report is not filed.

Payment Submission

Although limited partnerships, limited liability companies, and general partnerships formed in the state of Delaware do not file an annual report, they are required to pay an annual tax of $300.00. The mortgage payment calculator massachusetts must be submitted on or before June 1st of each year. The minimum franchise tax is $400, and the maximum is $200,000. Corporations must calculate their franchise tax using the assumed par value capital method. The formula for calculating the franchise tax is as follows:

(Total Assumed Par Value Capital / $1,000,000) x $400.00

If the assumed par value capital is over $1,000,000, it should be rounded up to the next million before dividing by $1,000,000. For example, if the assumed par value capital is $1,500,000, it should be rounded up to $2,000,000 before dividing by $1,000,000. The resulting quotient should then be multiplied by $400.00 to determine the franchise tax amount.

Corporations may use the Delaware Division of Corporations' franchise tax calculator to determine their franchise tax amount. The franchise tax payment may be submitted online using the Division of Corporations' online payment system.

Penalties for Late Payment

Delaware franchise tax payments are due on or before June 1st of each year. Failure to pay the required taxes by the due date will result in penalties and interest charges.

The penalty for not filing a completed Annual Report by March 1st is $200.00. Interest accrues on the tax and penalty at the rate of 1.5% per month on any unpaid tax balance.

For LLC/LP/GP entities, failure to pay the required annual taxes will result in a penalty of $200.00 plus 1.5% interest per month on tax and penalty. There is no proration on alternative entity taxes. Annual taxes are assessed if the entity is active in the records of the Division of Corporations anytime during January 1st through December 31st of the current tax year.

It is important to note that penalties apply for late payments or non-filing. It is recommended that taxpayers pay their taxes on time to avoid penalties and interest charges. Taxpayers can pay their taxes online using the ACH Debit method for all transactions over $5,000.00.

Common Misconceptions and Errors

Despite the straightforward nature of Delaware franchise tax calculation, there are still common misconceptions and errors that can lead to overpayment or underpayment of taxes. Here are some of the most common misconceptions and errors:

Misconception: Franchise taxes are only applicable to corporations

This is a common misconception. Franchise taxes are not only applicable to corporations but also to limited liability companies (LLCs), limited partnerships, and general partnerships. The tax rate and calculation method may vary depending on the type of entity.

Misconception: The tax amount is based on the number of shares issued

The tax amount is not based on the number of shares issued. Instead, it is based on the entity's assumed par value capital, which is calculated by dividing the entity's total gross assets by the total number of authorized shares. The tax rate is then applied to the assumed par value capital to arrive at the tax amount.

Error: Failing to file the annual report

Failing to file the annual report can result in a penalty of $200 plus interest. The annual report is due on or before March 1 of each year. It is important to file the annual report on time to avoid penalties and interest.

Error: Using the wrong calculation method

There are two methods to calculate Delaware franchise tax: the Authorized Shares Method and the Assumed Par Value Capital Method. Using the wrong method can result in overpayment or underpayment of taxes. It is important to use the correct method based on the entity's structure and assets.

Error: Using the wrong tax rate

The tax rate varies depending on the entity's assumed par value capital. Using the wrong tax rate can result in overpayment or underpayment of taxes. It is important to use the correct tax rate based on the entity's assumed par value capital.

By understanding these common misconceptions and errors, individuals and entities can ensure that they are accurately calculating and paying their Delaware franchise tax.

Resources and Assistance

Official State Resources

The Delaware Division of Corporations offers a variety of resources to assist with franchise tax calculations. Their website provides a Franchise Tax Calculator that can be used to estimate tax liabilities. Additionally, the Division of Corporations has a Franchise Tax FAQ page that answers common questions about franchise taxes.

For those who prefer to speak with someone directly, the Division of Corporations has a customer service hotline at (302) 739-3073. They can assist with questions related to franchise tax calculations, as well as other matters related to incorporating in Delaware.

Professional Legal and Accounting Help

While it is possible to calculate and file franchise taxes independently, some business owners may prefer to seek assistance from legal or accounting professionals. These professionals can provide guidance on tax calculations and ensure that all necessary forms are filed correctly and on time.

The Delaware State Bar Association offers a Lawyer Referral Service that can connect business owners with attorneys who specialize in corporate law. Additionally, the Delaware Society of Certified Public Accountants can provide referrals to accounting professionals who can assist with franchise tax calculations.

It is important to note that while professional assistance can be valuable, it is not necessary for all businesses. Small businesses with straightforward tax situations may be able to handle franchise tax calculations and filings on their own.

Frequently Asked Questions

How can I calculate Delaware franchise tax based on gross assets?

Delaware franchise tax can be calculated based on gross assets by using the Authorized Shares Method. This method involves multiplying the number of authorized shares by the par value of the stock, and then multiplying that amount by the appropriate tax rate. The minimum tax for this method is $175, and the maximum tax is $200,000.

What are the steps to pay Delaware franchise tax online?

To pay Delaware franchise tax online, you must first register for an account on the Delaware Division of Corporations website. Once you have registered, you can log in and select the "Franchise Tax" option from the menu. You will then be prompted to enter your company information and the amount of tax owed. You can pay the tax using a credit card or electronic check.

What is the current rate for Delaware franchise tax?

The current rate for Delaware franchise tax is $400 per $1,000,000 of assumed par value capital. The minimum tax for this method is $400.

How do I determine the amount for estimated payments for Delaware franchise tax?

To determine the amount for estimated payments for Delaware franchise tax, you can use the Estimated Franchise Tax Worksheet provided by the Delaware Division of Corporations. This worksheet will help you calculate the amount of tax owed based on your company's gross assets and authorized shares.

Are the Delaware Annual Report and franchise tax the same thing?

No, the Delaware Annual Report and franchise tax are not the same thing. The Annual Report is a separate filing that must be submitted to the Delaware Division of Corporations each year, while franchise tax is a tax that must be paid to the state of Delaware.

Where can I find Delaware franchise tax instructions for filing?

You can find Delaware franchise tax instructions for filing on the Delaware Division of Corporations website. The instructions provide detailed information on how to calculate and pay franchise tax, as well as how to file the required forms.