Understanding Delaware Franchise Tax
What to Do When You Receive a Hundred Thousand Franchise Tax Notice from the State: Understanding Delaware Franchise Tax: What it is, How it’s Calculated
If you’re a business owner in Delaware, it’s important to understand the State’s franchise tax. In this post, we’ll explore what the franchise tax is, how it’s calculated, and what you should do when you receive a tax notice. We’ll also explain how we can help solve any franchise tax issues you may face.
What is the Delaware franchise tax?
The Delaware franchise tax is an annual tax that businesses are required to pay for the privilege of operating in the state. Regardless of their business income, model, or structure, all companies incorporated in Delaware are required to pay it. The total amount can vary based on your company type, and the number of authorized shares your company has. Even if your business doesn’t have any activity or income in Delaware, you may still be subject to the franchise tax.
Each year, an annual Franchise Tax Notification is mailed directly to the corporation’s registered agent. Franchise tax must be paid no later than March 1 for Corporations and June 1 for LLCs. This is why it is very important to have a responsible registered agent who will notify you swiftly. You can check our Compliance Reminder and Registered Agents to never miss your legal obligations.
How is the franchise tax calculated?
Delaware Franchise tax requirement depends on your company type. For LLCs it is very straightforward, the Franchise tax is 300$ annually.
Two methods can be used to calculate the franchise tax for corporations, and it’s essential to structure your tax in a way that benefits your business. Delaware also charges a state processing fee of $50 to report and file your tax.For expert and prompt guidance on your tax matters, feel free to contact us at info@registate.com.
1. Authorized Share Method
Under the Authorized Shares Method, the franchise tax is calculated based on the total number of authorized shares, which is the number of shares that can be legally issued to shareholders:
5,000 shares or less (minimum tax) $175.00.
5,001–10,000 shares — $250.00,
each additional 10,000 shares or portion thereof add $85.00
For example, A corporation with 100,000 shares authorized will pay $1,065.00($250.00 plus $765.00[$85.00 x 9] + $50 filing fee).
This method will be more advantageous for corporations having no par value stock or corporations with less than 10,000 authorized shares.
2. Assumed Par Value Capital Method
The Assumed Par Value Capital Method is calculated based on a formula that takes into account a company’s total gross assets, issued shares, and authorized shares. According to the State of Delaware, total gross asset means total assets reported on the U.S. Form 1120, Schedule L in Federal Tax Return to the company’s fiscal year ending the calendar year of the report.
To calculate your tax total, use the following steps:
1) Divide your total gross assets by your total issued shares, the result is your “assumed par”.
2) Multiply the “assumed par” by the number of authorized shares having a par value of less than the “assumed par”.
3) Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value.
4) Add the results of #2 and #3 above. The result is your assumed par value capital.
5) Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000, and then multiply by $400.00.
Let’s use the example of a corporation having 1,000,000 shares of stock with a par value of $1.00 and 250,000 shares of stock with a par value of $5.00, gross assets of $1,000,000.00, and issued shares totaling 485,000
1) Gross assets / total issued shares
1,000,000/485,000 = $2.061856 assumed par
2) Assumed par * authorized shares valued less than assumed par
$2.061856 * 1,000,000 = $2,061,856
3) Authorized shares valued more than assumed par * their values
250,000 * $5 = $1,250,000
4) Add results of #2 and #3 and rounding up to the next million
$1,250,000 + $2,061,856 = $3,311,856 -> $4,000,000
5) Divide the result by 1,000,000 and then multiply by $400.00
$4 * $400.00 = $1,600.00
What to do if you get a tax notice?
If you receive a tax notice or are unsure about how to calculate your franchise tax, it’s important to seek professional guidance. Ignoring the notice or attempting to handle the issue on your own can result in a penalty for non-payment or late payment of $200,000. Interest accrues on the tax and penalty at the rate of 1.5% per month. Also, non-payment of Franchise tax can lead to losing your company’s certificate of good standing, which can lead to multiple problems.
At Registate, we specialize in helping businesses navigate Delaware’s tax laws and regulations. Our team of experienced professionals can assist with everything from calculating your franchise tax to responding to tax notices and resolving any issues that may arise. By using our worry-free services you can focus on the important aspects of running your business.
Author: Emir Bodakçı