Delaware franchise tax is an annual fee paid by businesses that are incorporated in the state, irrespective of whether they conduct business in Delaware or not. This tax is a requirement for maintaining good standing and compliance within the Delaware Division of Corporations. Business entities such as corporations and limited liability companies (LLCs) are affected by this tax, with each having specific payment and filing obligations.
The tax calculation method and the amount of the Delaware franchise tax differ based on the type of business entity. For instance, corporations can choose between the Authorized Share Method and the Assumed Par Value Capital Method. Companies are also obligated to file an annual report, which goes hand-in-hand with the payment of franchise tax, to ensure the accuracy of the entity’s information on record.
Various tools and resources, including the Franchise Tax Calculator, have been designed to assist companies in estimating their franchise tax due accurately. Companies are encouraged to reach out to the Delaware Division of Corporations for further guidance and assistance in adhering to the annual filing requirements and maintaining their good standing within the state.
Key Takeaways
- Delaware franchise tax is an annual fee for businesses incorporated in the state, such as corporations and LLCs.
- Tax calculation methods differ based on the type of business entity, and companies must also file an annual report.
- Companies can utilize the Franchise Tax Calculator and seek guidance from the Delaware Division of Corporations for assistance.
Delaware Franchise Tax Overview
Definition and Purpose
The Delaware Franchise Tax is an annual fee imposed on corporations that are incorporated in the state of Delaware, regardless of whether they conduct business in the state or not. The objective of this tax is to provide a straightforward and affordable taxation process to encourage businesses to incorporate in Delaware. Corporations are required to pay this fee for the privilege of doing business in the state.
The tax rates vary depending on the method used to calculate the tax:
- Authorized Shares Method: The minimum franchise tax is $175, while the maximum is $200,000.
- Assumed Par Value Capital Method: The minimum franchise tax is $350 (increasing to $400 for the 2018 tax year and beyond), with a maximum of $200,000.
Franchise taxes contribute to Delaware’s state revenue and are essential for the maintenance of state services.
Franchise Taxes vs. Corporate Income Tax
It’s crucial to note that Delaware Franchise Tax differs from the Corporate Income Tax. Franchise taxes are levied on corporations for benefitting from the legal and other advantages offered by the State of Delaware, while the Corporate Income Tax is imposed on a corporation’s earnings.
Interestingly, corporations incorporated in Delaware but not conducting business within the state are not subject to the Corporate Income Tax1. However, they are still required to pay the Franchise Tax, which is administered by the Delaware Division of Corporations2. All incorporated entities in Delaware must file an annual report and pay the corresponding franchise tax. Exempt domestic corporations are not subjected to the tax but still need to file an annual report with a filing fee of $253.
Calculation Methods
There are two primary methods for calculating Delaware franchise tax: the Authorized Shares Method and the Assumed Par Value Capital Method. Each method has its own specific calculation formula and is suited for different types of businesses. It is essential to understand and choose the most cost-efficient method for your specific company.
Authorized Shares Method
The Authorized Shares Method is based on the number of authorized shares of a corporation. It works in the following way:
- Determine the number of authorized shares.
- Apply the corresponding franchise tax rate to the various share ranges.
Here is a brief outline of the franchise tax rates per share range:
| Authorized Shares | Franchise Tax |
|---|---|
| Up to 10,000 | $175 |
| 10,001 – 20,000 | $250 |
| 20,001 or more | $350 + variable rate |
Depending on the size of the corporation, this method can be a more straightforward approach to calculating the Delaware franchise tax. However, it does not take into consideration the actual value of issued shares, making it potentially less accurate in some cases.
Assumed Par Value Capital Method
In contrast, the Assumed Par Value Capital Method takes into account both the par value of authorized shares and the capital of the company. This method requires additional effort compared to the Authorized Shares Method, as it involves several steps:
- Multiply each class of authorized shares having a par value by their respective par value.
- Add the par value of all authorized shares to get the total assumed par value capital.
- Divide the corporation’s gross assets by the total number of issued shares.
- Multiply the result from step 3 by the number of authorized shares.
- Add the result of steps 2 and 4 to get the final assumed par value capital.
The franchise tax in this method is based on a minimum of $400 and a maximum of $200,000. Companies with no-par value stock need to contact a franchise tax specialist for assistance in calculating their taxes using this method.
The Assumed Par Value Capital Method is more complex but usually results in a more accurate representation of a corporation’s financial status, as it takes into account the par value of issued shares and gross assets. The choice between these two methods ultimately depends on the nature and size of the specific corporation, as well as its financial structure and performance.
Annual Filing Requirements
Filing the Annual Franchise Tax Report
All corporations incorporated in the State of Delaware are required to file an Annual Franchise Tax Report and pay the associated franchise tax. Exempt domestic corporations, although not subject to the tax, must still file an Annual Report. To file the report, corporations can use the Authorized Shares Method or the Assumed Par Value Capital Method. The minimum annual tax for corporations using the Authorized Shares Method is $175.00, while the minimum tax for those using the Assumed Par Value Capital Method is $400.00.
- Filing fees:
- Exempt domestic corporations: $25
- Other domestic corporations: $50 plus taxes due
Filing the Annual Franchise Tax Report involves providing the corporation’s file number and other relevant information to the Delaware Secretary of State.
Due Dates and Penalties
The Annual Franchise Tax Report and payment for the prior year must be submitted by March 1st annually. The State of Delaware requires all filings to be done online. Failure to file the report and pay the required franchise taxes by the due date will incur a penalty of $200.00, in addition to a 1.5% interest per month on both the tax and penalty. This emphasizes the importance of adhering to the given deadline to avoid accumulating penalties and additional financial burdens.
In summary, it is crucial for Delaware corporations to be aware of the annual filing requirements, including completing the Annual Franchise Tax Report, paying the respective fees, and meeting the due dates. This ensures compliance with state regulations and avoids unnecessary penalties and interest charges.
Payment of Delaware Franchise Tax
Acceptable Payment Methods
When it comes to paying the Delaware Franchise Tax, businesses have several options available to them. These include credit cards and ACH debit payments. For credit card payments, major credit cards such as Visa, Mastercard, and American Express are typically accepted. To use an ACH debit payment, a business must provide their checking account information to allow for the tax charge to be directly withdrawn from their account.
It’s essential for companies to submit their payments on time and following the given guidelines to avoid penalties or additional interest on unpaid taxes.
Quarterly Payments and Estimates
In certain cases, businesses may be required to make quarterly estimated tax payments. These payments are determined based on the expected income and expenses of the business for that particular year, along with any other relevant factors such as tax credits or deductions.
To calculate the estimated quarterly tax payments, businesses should use their previous year’s tax return as a starting point and then adjust the figures accordingly based on any changes in their financial situation.
Here’s a summary of the payment methods:
| Payment Type | Details |
|---|---|
| Credit Card | Accepts Visa, Mastercard, and American Express |
| ACH Debit | Requires providing checking account information |
Considering the payable tax deadlines and abiding by the requirements ensures businesses stay in good standing with the Delaware tax authorities. It’s vital for companies to be proactive in handling their franchise tax obligations to maintain a smooth and hassle-free tax filing experience.
Types of Business Entities Affected
Corporations
In Delaware, corporations are subject to the Franchise Tax, which is administered by the Delaware Department of State. Both domestic and non-domestic corporations must pay this tax. It is important to note that corporations incorporated in Delaware but not conducting business in the state are not subject to corporate income tax, as per 30 Del.C, Section 1902 (b) (6). The Franchise Tax is a requirement for maintaining good standing status in Delaware, regardless of whether a corporation conducts business within the state or not.
Limited Liability Companies and Partnerships
In addition to corporations, other business entities in Delaware, such as Limited Liability Companies (LLCs), Limited Partnerships (LPs), and General Partnerships, are impacted by the Franchise Tax.
- LLCs: Limited Liability Companies are not subject to corporate income tax in Delaware. However, they are required to pay an annual Franchise Tax to maintain their good standing in the state. This tax is required regardless of whether the LLC conducts business within Delaware or not.
- LPs and General Partnerships: Like corporations and LLCs, Limited Partnerships and General Partnerships are also required to pay the Delaware Franchise Tax. This applies to both domestic and non-domestic partnerships doing business in the state.
In summary, Delaware’s Franchise Tax affects various business entities, including corporations, LLCs, LPs, and General Partnerships. Maintaining good standing in the state requires these entities to pay this tax, irrespective of whether they conduct business within Delaware or not.
Special Considerations for Specific Entities
In this section, we will discuss two specific types of entities and their relationship with Delaware Franchise Tax: Exempt Domestic Corporations and S Corporations and Large Corporate Filers.
Exempt Domestic Corporations
Exempt domestic corporations in Delaware are not required to pay franchise tax, but they must still file an annual report. The annual report filing fee for these corporations is $50.00. These entities might include non-profit organizations, educational institutions, and certain religious organizations. Since they are exempt from the tax, it is crucial for them to comply with their annual reporting obligations.
S Corporations and Large Corporate Filers
S Corporations, as well as large corporate filers, governed by the state of Delaware are subject to Franchise Tax, with different considerations for calculating the amount due.
- S Corporations generally utilize the Assumed Par Value Capital Method for calculating their franchise tax. This method involves dividing the assumed par value capital, rounded up to the next million if it’s over $1,000,000, by 1,000,000 and then multiplying by $400.00. For example, if the assumed par value capital is $4,000,000, the calculation would be: 4 x $400.00 = $1,600.00. The minimum tax for this method is $400.00.
- Large Corporate Filers, who have a significant number of authorized shares, might face a higher franchise tax amount. However, the maximum amount of franchise tax any entity would need to pay is capped at $200,000 per year. This cap helps to maintain a fair and balanced approach, preventing excessively high taxes for large corporations.
In summary, special considerations must be given to Exempt Domestic Corporations, S Corporations, and Large Corporate Filers when dealing with Delaware Franchise Tax. Being aware and knowledgeable of the specific tax requirements for each type of entity will ensure accurate calculations and compliance with Delaware regulations.
Using the Franchise Tax Calculator
The Delaware Franchise Tax Calculator is a convenient tool available for calculating the annual tax owed by corporations operating in the state of Delaware. This easy-to-use service is helpful for businesses looking to estimate their franchise tax payment as accurately as possible.
To utilize the Delaware Franchise Tax Calculator, follow these simple steps:
- Navigate to the appropriate online platform and select your Entity Type (e.g., Corporations: General, Close, Public Benefit) from the dropdown menu.
- Enter the Total Number of Authorized Shares the corporation has. For instance, if your corporation has 15,000,000 authorized shares, enter that number.
- Provide the Par Value of the shares. An example of par value might be $0.001 per share.
Once the required information is inputted, the calculator will generate an estimate of your franchise taxes due based on your Total Gross Assets and other relevant data. It should be noted that the calculator is primarily intended for stocks with a par value, and taxes will be calculated using the Authorized Share Method.
Moreover, the Delaware Franchise Tax Calculator is designed to be user-friendly, allowing businesses to effortlessly determine their annual tax liabilities. However, it is essential to remember that the calculator is merely a tool, and the actual tax owed may vary slightly.
By utilizing the Delaware Franchise Tax Calculator, business owners can stay informed and prepared, ensuring they meet the state’s tax obligations and avoid any penalties. This valuable service makes managing Delaware franchise tax requirements more accessible and clear for businesses of all sizes.
Additional Resources and Assistance
Division of Corporations
The Division of Corporations is a part of the Delaware Department of State that handles franchise tax administration. Corporations not conducting business in Delaware still have to pay a franchise tax, which is collected annually by the Department of State. The minimum franchise tax is $175 for corporations using the Authorized Shares method and $400 for corporations using the Assumed Par Value Capital Method.
The Department of State provides comprehensive resources to help businesses understand and calculate their franchise tax obligation. Their website offers:
- Guides for determining which method to use for calculating franchise tax.
- Examples of calculations using both Authorized Shares and Assumed Par Value Capital methods.
- An online filing system for Annual Reports and franchise tax payments.
Visit the Division of Corporations website to learn more about Delaware franchise tax: Delaware Department of State – Division of Corporations
Consumer Alerts and Service Information
To stay updated on important consumer alerts and service information related to Delaware franchise tax, it is recommended to monitor the State of Delaware’s official website for updates. In light of the ongoing COVID-19 pandemic, the government may announce relief initiatives or temporary changes to regulations that could affect your franchise tax obligations. Some pertinent updates might include:
- Deadline extensions for filing Annual Reports and franchise tax payments.
- Special provisions or relief programs aimed at assisting businesses affected by the pandemic.
Keep track of the latest information and announcements by visiting the State of Delaware’s official website: Delaware.gov
In conclusion, the Delaware Division of Corporations and official state government resources provide a wealth of information and assistance for businesses to understand and meet their franchise tax obligations. Be sure to stay informed, and consult these resources as you navigate the franchise tax process.
Frequently Asked Questions
How can I pay my Delaware franchise tax online?
To pay your Delaware franchise tax online, visit the Delaware Department of State’s Division of Corporations website. Follow the prompts for filing your annual report and submitting the franchise tax payment. Payment methods generally include credit cards and ACH transactions.
What is the process for obtaining a Delaware franchise tax refund?
In case of an overpayment of your franchise tax, you may be eligible for a refund. To request a refund, contact the Franchise Tax department at:
Phone: (302) 739-3073 option 3
Fax: (302) 739-5831
Email: [email protected]
Provide all relevant documentation such as proof of payment and the reason for the refund request. Refunds are processed on a case-by-case basis, and approvals are not guaranteed.
What is the due date for Delaware franchise tax payments?
For corporations, the annual franchise tax payment and annual report are both due by March 1st. For LLCs, annual franchise tax payments are due by June 1st.
How can I calculate my owed Delaware franchise tax?
For corporations, there are two methods to calculate franchise tax – Authorized Shares method and Assumed Par Value Capital method. The minimum tax for the Authorized Shares method is $175.00, while the minimum tax for the Assumed Par Value Capital Method is $400.00.
To calculate franchise tax for LLCs, refer to the state’s flat fee structure. Regardless of income or activity, all LLCs are required to pay a flat annual franchise tax of $300.
To get the specific calculations for your business, visit the Division of Corporations website and follow the instructions provided.
What are the consequences of failing to pay Delaware franchise tax on time?
Failure to pay the franchise tax on time can result in penalties and interest. Corporations may be charged a penalty of $200 and accrue a 1.5% monthly interest for late payments. For LLCs, a late fee of $200 and a 1.5% monthly interest are also applicable.
Prolonged non-payment can lead to the loss of good standing status or even administrative dissolution of the business entity.
How is the franchise tax for LLCs determined in Delaware?
In Delaware, the franchise tax for LLCs is a flat fee of $300, regardless of company size, income, or activity. This flat fee structure simplifies the process and allows for easier compliance for LLCs, due annually by June 1st.
