By Trent Dykes, Ossie Ravid and Jennifer Tornow
Just a reminder to those who have Delaware corporations: your annual report and franchise tax payment are both due by March 1. At this point, you have likely already received from Delaware your notification of annual report and franchise tax due, which is sent to a corporation’s registered agent in December or January of each year. Delaware requires these reports to be filed electronically.
There are two methods that you can use to calculate the amount of Delaware franchise tax due for your corporation (the Authorized Shares Method and the Assumed Par Value Capital Method), which result in vastly different amounts due. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which will almost always result in a much higher amount due for startups with limited assets.
For corporations using the Authorized Shares Method, the minimum franchise tax is $175 and the maximum franchise tax is $200,000. For corporations using the Assumed Par Value Capital Method, the minimum franchise tax is $400.
Effective for the 2017 tax year, a new fixed annual franchise tax of $250,000 was applied to certain large publicly traded corporations (Large Corporate Filers) identified by the Delaware Secretary of State.
Franchise taxes are generally due in arrears for the prior calendar year. However, note that Delaware requires corporations owing $5,000 or more for the prior year to make estimated payments for the current (going-forward) year’s franchise tax with 40 percent due June 1, 20 percent due by September 1, 20 percent due by December 1 and the remainder due March 1. The penalty for failing to make a timely filing and payment is $200 plus penalty interest of 1.5 percent per month on the unpaid tax balance (and your entity will not be in good standing with Delaware until paid, which can cause delays if your company is anticipating a financing or sale).
Here are some examples showing how the different methods can dramatically impact the amount of Delaware franchise tax due:
Authorized Shares Method
The franchise tax rate for the Authorized Shares Method is as follows:
- 5,000 authorized shares or less (minimum tax) = $175
- 5,001 – 10,000 authorized shares = $250
- and for each additional 10,000 authorized shares or portion thereof = add $85
- maximum annual tax is $200,000
For example, under the Authorized Shares Method, a corporation with 15 million authorized shares would pay $127,665 (i.e., $250 plus $127,415 [$85 x 1,499]).
Assumed Par Value Capital Method
To use this method, you must give figures for all issued and outstanding shares and total gross assets in the spaces provided in your annual franchise tax report. Total gross assets shall be those “total assets” reported on the US Form 1120, Schedule L (Federal Return) relative to the corporation’s fiscal year ending the calendar year of the report. The tax rate under this method is $400 per million or portion of a million. If the assumed par value capital is less than $1 million, the tax is calculated by dividing the assumed par value capital by $1 million then multiplying that result by $400.
Under this example, using the same corporation above having 15 million authorized shares of stock with a par value of $0.01, gross assets of $1.2 million and issued shares totaling 10 million, the Assumed Par Value Capital Method of calculation would result in a franchise tax due of only $800 (i.e., $1.2 million / 10 million = $0.12 * 15 million = $1.8 million, rounded up to the next million, so $2 million. $2 million / 1 million = 2 * $400 = $800).
Here is a helpful Franchise Tax Calculator spreadsheet provided by Delaware to assist in estimating your franchise taxes (note there is a different calculator for each of the 2017 and 2018 tax years, make sure to use the 2018 calculator). In addition to the franchise tax, there is also a $50 filing fee for the annual report.
Also, be careful of scams and other deceptive practices that use the Delaware franchise tax payment as cover. The official notification of annual report and franchise tax due is issued directly from Delaware (although it will likely be routed to you through your registered agent). The Delaware website describes two recent scams.
If you are a company incorporated in Delaware but conducting business in another state, you must qualify to do business in that state and pay the franchise tax (if any). California, for example, imposes a minimum franchise tax of $800 on corporations “doing business” or registered to do business in California. A corporation is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if it satisfies any of the conditions in California Revenue and Taxation Code section 23101.