Many founders decide to incorporate their business in the State of Delaware, often at the advice of corporate attorneys and investors. While the corporation may not have an income tax imposed simply for incorporating in the state, the corporation remains subject to Delaware’s franchise tax.
All active domestic corporations (i.e. those incorporated in Delaware) must file an Annual Franchise Tax Return by March 1st online.
The annual filing fee is $50. There are two methods of calculating the tax due. The authorized shares method and the assumed par value capital method. The taxpayer can use whichever method results in the lesser tax.
Corporations owing more than $5,000 should make estimated payments with 40% due June 1st, 20% due September 1st, 20% due by December 1st, and the remaining due March 1st.
Note that the Franchise taxes are assessed if the Corporation is active in the records of the Delaware Division of Corporations anytime during the year. If the Company has dissolved it must be properly dissolved with Delaware, otherwise the Company will continue to be liable for the Annual Franchise Tax.
Methods of Calculating the Tax
Authorized Shares Method
Under the authorized shares method corporations having no par value stock will always result in a lesser tax.
5,000 shares or less = minimum due $175
5,001 – 10,000 shares = $250
Each additional 10,000 shares add $85 with the maximum annual tax due of $200,000. Unless the Corporation has been identified as a Large Corporate Filer, the maximum tax is $250,000.
Example – Authorized Shares Method
Total authorized shares = 11,000 with $0 par value
$250 + $85 = $335
Assumed Par Value Capital Method
Under the assumed par value capital method, the Corporation must provide the total of all issued shares (including treasury shares) and total gross assets reported on the Corporate Income Tax Form 1120 Schedule L line 15 relative to the Company’s fiscal or calendar year of the report. The minimum tax due for this method is $400 and the maximum is $200,000. Unless the Corporation has been identified as a Large Corporate Filer, the maximum tax is $250,000.
The calculation of tax due is affected by stock issuances throughout the year and is prorated for each period between the issuances.
- The tax is calculated by dividing the total gross assets (as reported on the Corporate Income Tax Form 1120 Sch L line 15) by the total issued shares. This is the assumed par.
- The assumed par is then multiplied by the number of authorized shares.
- Divide the assumed par value capital (rounded up to the next million if over $1,000,000) by 1,000,000 and multiply by $400.
Example – Assumed Par Value Capital Method
Total gross assets = $2,000,000
Total issued shares = 5,000,000
Total authorized shares = 7,000,000 with par value of $.0001
- Total gross assets/Total issued shares = assumed par
a. $2,000,000/5,000,000 = $.40 - Assumed par * number of authorized shares = assumed par value capital
a. $.40 * 7,000,000 = $2,800,000 - Assumed par value capital (rounded up to next $1,000,000 if greater than $1,000,000) /1,000,000 * $400
a. $3,000,000/1,000,000 * $400 = $1,200 – minimum franchise tax due - Total amount due = minimum franchise tax plus annual filing fee
a. $ 1,200 + $50 = $ 1,250
- Total gross assets/Total issued shares = assumed par
Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and start-up/emerging growth companies. Building connections beyond the code.