Technology & Life Sciences C Corporations: How Do I Compute the Delaware Franchise Tax?
- Jan 14, 2022
Technology and life sciences companies that choose to incorporate in Delaware must pay an annual franchise tax.
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 start-up technology or life sciences company may have more flexibility. Ideally, Delaware Franchise Tax liability should be quantified prior to incorporating in the state and prior to any new shares being authorized or issued.
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.
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 $50.00 per year.
Annual Report Franchise Tax:
In addition to the filing fee, a domestic corporation (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; and 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 $175.00 for corporations using the Authorized Shares Method and $400.00 for corporations using the Assumed Par Value Capital Method. All corporations using either method will have a maximum tax of $200,000.00 unless it has been identified as a Large Corporate Filer, then the tax will be $250,000.00.
Large Corporate Filer
A Large Corporate Filer is an entity that had a class or series of stock listed on a national securities exchange and reported in its financial statements, prepared in accordance with U.S. GAAP or International Financial Reporting Standards (IFRS), and included in its most recent annual report filed with the U.S. Securities and Exchange Commission (SEC) or any similar agency outside the U.S. with responsibility for enforcing securities laws or serving as a public repository for the corporation’s financial disclosures, both of the following:
- Consolidated annual gross revenues equal to or greater than $750,000,000 or consolidated assets equal to or greater than $750,000,000; and
- Consolidated annual gross revenues not less than $250,000,000 and consolidated assets not less than $250,000,000.
Taxpayers owing $5,000.00 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 March 1.
Calculating the Delaware Franchise Tax:
The Authorized Shares Method
The following table is used to compute a corporation’s Delaware Franchise Tax using the Authorized Shares Method:
- 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.
- Maximum annual tax is $200,000.00.
Authorized Shares Method Example
A corporation with 20,000 shares authorized pays $335 ($250 plus $85).
A corporation with 1,000,000 shares authorized pays $8,665 ($250 plus $8,415[$85 x 99]).
A corporation with 20,000,000 shares authorized pays $170,165 ($250.00 plus $169,915[$85 x 1999]).
The Assumed Par Value Capital Method
There are several variables that enter into 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:
- Total Gross Assets Divided by Total Issued Shares = Assumed Par Value;
- The Assumed Par Value in Step 1 is multiplied by the number of authorized shares to arrive at the Assumed Par Value Capital; and
- 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 ($250.00 plus $169,915.00[$85.00 x 1999]).
The tax using the Assumed Par Value Capital Method is $26,800 computed as follows:
- $50,000,000 gross assets/15,000,000 issued shares = 3.333333 of Assumed Par Value
- 3.333333 x 20,000,000 authorized shares = $66,666,660 Assumed Par Value Stock
- $66,666,660 / 1 million =66.66666; round up to 67 x $400 per million = $26,800
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.
Total gross assets are “total assets” reported on U.S. 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 that is physically located in Delaware. If a company doesn’t have a physical presence in Delaware, there are professional registered agents 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 actually be “doing business” in Delaware to be subject to the state income tax.
What's on Your Mind?
William Gentilesco is a State and Local Tax Group Director focusing on state and local income taxation and sales and use tax consulting.
Start a conversation with William
Explore More Insights
It's Not You, It's Your Software | Embracing the Future as a Digital CFORead More
Receive the latest business insights, analysis, and perspectives from EisnerAmper professionals.