Have you recently received a notice from Delaware requiring you to file a franchise tax? Is the tax amount listed a crazy high amount? Each year, many Delaware incorporated businesses are shocked to receive a franchise tax notice for an amount that seems outrageous for their business. Don’t panic! The below article will help answer some of your questions and help walk you through Delaware’s franchise tax process.
What is the Delaware Franchise Tax?
First, the term “franchise tax” does not mean that your company is a franchise. Delaware uses the term “franchise tax” as the fee imposed for the right or privilege to be a Delaware corporation. The “tax” is not tied to your corporation’s income or activities, it is required to maintain a good standing status with Delaware’s Secretary of State.
What is the Delaware Annual Report?
In addition to the franchise tax, Delaware requires your corporation to file an annual report. This annual report will either confirm your current information or provide updated information to the state of Delaware. The Annual Report fee is $50*.
When are the Franchise Tax and Annual Report due?
The Franchise Tax for a corporation is due by March 1st of every year. If you are late, Delaware imposes a $200* late penalty, plus a monthly interest fee of 1.5%* on the tax and penalty.
The annual report is due at the same time you file your franchise taxes.
Why is my Franchise Tax so high?
Delaware uses 2 different methods for determining a corporation’s franchise tax amount – the Authorized Shares Method and the Assumed Par Value Capital Method. When Delaware sends you the tax notice, Delaware defaults to using the larger of the 2 methods.
However, when you go to file your franchise tax, you can select the lower of the 2 methods. You should note that your tax will never be lower than $175* or more than $200,0000*.
How do I calculate my Franchise Tax?
A corporation’s Franchise Tax is usually based on the number of authorized shares your corporation has. You can find the authorized shares amount in your Certificate of Incorporation. The total filing fee is comprised of an annual report fee and the tax due.
When you go to file your franchise taxes at Delaware Division of Corporations’ Annual Report and Tax Instructions, remember there are 2 methods to choose from and you can select the lesser of the 2. The 2 methods are:
The Authorized Shares Method – Delaware uses this method to initially calculate your taxes. This method is calculated based on the number of authorized shares.
The Assumed Par Value Capital Method – To use this filing method, you will need to provide the company’s total gross assets as reported on the Form 1120, Schedule L and the total number of issued shares.
Before you go to file, Delaware has provided detailed instructions on how to calculate franchise taxes and provided an excel worksheet, titled Franchise Tax Calculator, for you to use before you login in to pay. Make sure to check both methods to see which is lower for your corporation. You can find the excel at the bottom of Delaware’s page.
How Do I Pay My Franchise Tax?
You can pay your Delaware franchise tax online: https://corp.delaware.gov/paytaxes/
*Amount are subject to change by Delaware.
The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Tara M. Vitale at firstname.lastname@example.org.
Special Note for Nonprofit Organizations
In Delaware, if your organization is an “exempt domestic corporation” then no franchise tax shall be owed. However, even an exempt domestic corporation must file an annual report (at the reduced rate of $25*).
An exempt domestic corporation is defined as a corporation that is formed under the laws of Delaware and:
(1) Is exempt from taxation under Section 501(c) of the Internal Revenue Code;
(2) Qualifies as a civic organization under Section 8110(a)(1) of Title 9 or Section 6840(4) of Title 16 of the Delaware Code;
(3) Qualifies as a charitable/fraternal organization under § 2593(1) of Title 6 of the Delaware Code;
(4) Is listed in § 8106(a) of Title 9 of the Delaware Code (the list can be found by following this link);
(5) Is organized primarily or exclusively for religious or charitable purposes, or is a religious corporation or purely charitable or educational association, or is a company, association or society, which, by its certificate of incorporation, has for its object the assistance of sick, needy or disabled members, or the defraying of funeral expenses of deceased members, or to provide for the wants of the widows or widowers and families after death of its members; or
(6) a. Is organized not for profit; and
b. No part of its net earnings inures to the benefit of any member or individual.