Delaware Franchise Tax
Delaware Franchise Tax Information
How the Franchise Tax Works in Delaware:
Delaware corporations, whether foreign or domestic, are required to pay an annual Franchise Tax. This is above and beyond the annual report fee of $50.
There are two methods for calculating the Delaware Franchise Tax:
|Authorized Shares Method||$175 minimum owed|
|Assumed Par Value Method||$350 minimum owed|
The franchise tax is paid online at the Division of Corporations website.
The State of Delaware calculates the amount you owe using the Authorized Shares Method, but companies are given the option of calculating their tax on their own using either.
While it may appear that you should go with the Authorized Shares Method (the minimum owed is lower), the final actual tax may be quite different once the calculations are through. For companies receiving an annual bill larger than $350, it is in their best interest to calculate using the Assumed Par Value Method. Many companies can lower their tax burden considerably.
Shares and Par Value
Regardless of which method is used, it is important to realize that two things drastically impact the amount of tax a company owes each year in Delaware: the amount of stock a company authorizes, and the par value of that stock.
Many Delaware corporation owners form companies and authorize huge numbers of shares (millions, in some cases). While this may seem like a fine idea at the time, it leads to major tax consequences later. In Delaware, less stock and a smaller par value will result in a far smaller tax bill each year (a Delaware LLC, by contrast, will pay a flat tax each year that does not fluctuate).
Authorized Shares Method
The ASM is based upon the amount of stock a corporation has authorized (as opposed to the number of shares it has actually issued to shareholders). Stock is generally authorized on the Certificate of Incorporation (whereas stock is issued in the bylaws or sold on a public exchange).
The tax is calculated upon number of authorized shares as follows:
|5000 or less||$175|
|5001 to 10,000||$250|
|Each 10,000 additional shares above 10,000||$75 per 10,000|
For example: a corporation that authorizes one million shares (1,000,000) of stock will pay the initial $250 for shares between 5001 and 10,000. Between 10,000 and 1,000,000 there are 99 sets of 10,000. The corporation must pay $75 for each set above the first. This comes to $7,425. Add this to the initial $250.
The total Franchise Tax bill would be $7,450.
Delaware Franchise Tax Assumed Par Value Method
The APVM is based upon a combination of factors: authorized stock, issued stock, and total gross assets. Gross assets are reported on your federal tax return (Form 1120, Schedule L) for Delaware franchise tax.
- Divide the gross assets by the number of issued shares. The result is called the Assumed Par Value.
- Multiply the APV by the number of authorized shares. The result is called the Assumed Par Value Capital.
- The amount of tax owed is $350 for every $1,000,000 of Assumed Par Value Capital.
When completing the calculation, you must round up to the next million. If your APVC is $1,000,001, you do not owe $350, you must round up to $2,000,000, which means you owe $700.