How to Calculate the Delaware Franchise Tax for Technology & Life Sciences C Corporations

Key Takeaways:

• Delaware corporations must file an annual report and pay the Delaware franchise tax by March 1 each year.
• Delaware offers two calculation methods, the Authorized Shares Method and the Assumed Par Value Capital Method, and a corporation may use whichever produces the lower tax.
• Delaware defaults to the Authorized Shares Method, which often overstates the tax for startups; recalculating under the Assumed Par Value Capital Method frequently lowers the bill substantially.
• The minimum tax is $175 under the Authorized Shares Method and $400 under the Assumed Par Value Capital Method, with a maximum of $200,000, or $250,000 for a Large Corporate Filer.
• The annual report filing fee for a non-exempt domestic corporation is $50, and corporations owing $5,000 or more must pay estimated tax in quarterly installments.
• Assigning a low par value instead of no-par-value stock, and reviewing both methods before filing, can reduce a corporation's Delaware franchise tax liability.

Technology and life sciences are two separate industries, but companies in both frequently incorporate in Delaware and owe an annual Delaware franchise tax.

This article discusses how the tax is calculated, filing and payment due dates, and other requirements applicable to for-profit C corporations that incorporate in Delaware.

Key Considerations of Franchise Taxes 

Authorizing excessive shares of stock can result in a higher annual franchise tax liability. A large, widely held public company might have difficulty reducing their authorized and/or issued shares, but a startup technology or life sciences organization may have more flexibility. Ideally, Delaware Franchise Tax liability should be quantified before incorporating in the state and before any new shares are authorized or issued.

When Is the Delaware Franchise Tax Due?

A corporation that is incorporated in Delaware must file an Annual Report online at https://corp.delaware.gov/paytaxes/ by March 1 each year and pay any taxes that are due.

Annual Report Filing Fee

The Delaware Annual Report filing fee for a non-exempt domestic corporation is $50 per year.

Annual Report Franchise Tax

In addition to the filing fee, a domestic corporation (which refers to a corporation incorporated in Delaware) must pay a Delaware Franchise Tax each year by March 1. There are two methods to calculate the tax: 

1. The Authorized Shares Method
2. The Assumed Par Value Capital Method

A corporation has a choice as to which method to use. Delaware provides a calculation for each taxpayer using the Authorized Shares Method, but it is up to each taxpayer to also calculate their franchise tax using the Assumed Par Value Method (and to use that method if it results in a lower tax).

The minimum franchise tax is $175 for corporations using the Authorized Shares Method and $400 for corporations using the Assumed Par Value Capital Method. All corporations using either method will have a maximum tax of $200,000, unless it has been identified as a Large Corporate Filer, in which case the tax will be $250,000.

Large Corporate Filer

A Large Corporate Filer is an entity that meets two conditions. First, it had a class or series of stock listed on a national securities exchange. Second, in financial statements prepared under US GAAP or International Financial Reporting Standards (IFRS) and included in its most recent annual report filed with the US Securities and Exchange Commission (SEC), or with a comparable authority outside the US that enforces securities laws or maintains the corporation's public financial disclosures, it reported both of the following:

1. Consolidated annual gross revenues equal to or greater than $750,000,000 or consolidated assets equal to or greater than $750,000,000; and
2. Consolidated annual gross revenues not less than $250,000,000 and consolidated assets not less than $250,000,000.

Estimated Tax

Taxpayers owing $5,000 or more must pay estimated taxes in quarterly installments with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due by March 1.

How Do You Calculate the Delaware Franchise Tax?

Authorized Shares Method

The following table is used to compute a corporation’s Delaware Franchise Tax using the Authorized Shares Method:

Authorized Shares Method Example

The Assumed Par Value Capital Method 

There are several variables that enter the Assumed Par Value Capital Method, including the corporation’s gross assets, issued shares, number of authorized shares, and their par value. Delaware provides a Microsoft Excel worksheet that can be used to show the tax based on various assumptions. The tax under this method is $400 per $1,000,000, or portion thereof, of assumed par value.

The formula for this method is a three-step process:

1. Total Gross Assets Divided by Total Issued Shares = Assumed Par Value;
2. The Assumed Par Value in Step 1 is multiplied by the number of authorized shares to arrive at the Assumed Par Value Capital; and
3. Divide total Assumed Value Capital in Step 2 by 1 million. Round up any partial quotient by 1 and multiply x $400 to arrive at the tax using the Assumed Par Value Capital Method.

Assumed Par Value Capital Method Example

• Assume a Delaware corporation has 20 million of authorized shares with a par value of .001, $50,000,000 of total gross assets and 15,000,000 of issued shares.
• As discussed above, the tax on 20 million of authorized shares is $170,165 ($250 plus $169,915 [$85 x 1999]).

The tax using the Assumed Par Value Capital Method is $26,800 computed as follows:

1. $50,000,000 gross assets/15,000,000 issued shares = 3.333333 of Assumed Par Value
2. 3.333333 x 20,000,000 authorized shares = $66,666,660 Assumed Par Value Stock
3. $66,666,660 / 1 million =66.66666; round up to 67 x $400 per million = $26,800

Authorized Shares Method vs. Assumed Par Value Capital Method: Which Is Right for You?

The Assumed Par Value Capital Method in the above example results in a much lower tax ($26,800 vs. $170,165). Delaware would automatically show the higher tax due on their website using the authorized shares method. It is up to the taxpayer to select the Assumed Par Value Capital Method if it results in a lower tax.

In this example, we assumed a .001 par value. No par value stock is assigned a value of $100 per share for purposes of the above calculation. In our example, this would have resulted in a $200,000 maximum tax. Thus, it is generally advisable to avoid no par value stock and to assign a very low par value to shares if possible.

The above calculations must be done for each class of stock that is authorized by a corporation.

Delaware Franchise Tax calculations are prorated if a corporation’s authorized and/or issued shares change during the year.

Other Considerations for Delaware Franchise Taxes 

Total gross assets are “total assets” reported on US Form 1120 Schedule L for tax year ending prior to filing the Delaware franchise tax report. Thus, for a calendar-year taxpayer, total assets reflected in a corporation’s March 1, 2021, Delaware franchise tax filing should tie to Form 1120, Schedule L for the tax year ending in 2020. If the federal income tax return is on extension, other financial data will need to be used for total gross assets. Interests in entities that are consolidated with the Delaware reporting company must be included in “total gross assets” at a value determined in accordance with GAAP.

A corporation generally has one year from the date of filing to amend a Delaware Franchise Tax return and claim a refund. A refund might be available if the Assumed Par Value Capital Method was not considered.

In addition to paying the Franchise Tax, Delaware requires every corporation to have and maintain a registered agent in the State. This is a person or a representative who is physically located in Delaware. If a company doesn’t have a physical presence in Delaware, professional registered agents are available for hire; prices and levels of service vary.

Incorporating in a state usually creates income tax nexus with the jurisdiction. However, in addition to incorporation, a corporation must be “doing business” in Delaware to be subject to the state income tax.