How to Calculate Delaware Franchise Tax

The Delaware Franchise Tax is an annual obligation for corporations incorporated in the state, regardless of where they conduct business. This tax serves to maintain a company’s good standing with the state. Corporations must pay this fee for the privilege of incorporating in Delaware.

Understanding the Two Calculation Methods

Delaware provides two distinct methods for calculating the franchise tax: the Authorized Shares Method and the Assumed Par Value Capital Method. Companies are required to calculate their tax liability using both methods and pay the lower of the two amounts. This approach allows businesses to minimize their tax burden.

The Authorized Shares Method bases the tax on the total number of shares a company is legally permitted to issue, as stated in its Certificate of Incorporation. This method can result in a higher tax for companies with a large number of authorized shares, even if those shares are not issued. In contrast, the Assumed Par Value Capital Method considers a company’s gross assets and the number of issued shares. This method often benefits companies with many authorized shares but limited actual assets.

Information Needed for Calculation

Before beginning the calculation, a company needs to gather specific financial and corporate data. This information is crucial for accurately applying either the Authorized Shares Method or the Assumed Par Value Capital Method. Having these details readily available streamlines the entire process.

First, the total number of authorized shares is required, which can be found in the company’s Certificate of Incorporation. Second, the par value per share is needed, also typically stated in the Certificate of Incorporation. While many companies set a very low par value, it is a necessary input for the Assumed Par Value Capital Method.

The total number of issued shares is another piece of information that can be obtained from the company’s stock ledger or internal records. Finally, the total gross assets from the company’s financial statements, specifically the balance sheet for the year ending on December 31st prior to the tax year, must be used.

Performing the Calculation

Once all the necessary information has been gathered, the franchise tax can be calculated using both prescribed methods. The goal is to determine the lower of the two resulting tax amounts.

Authorized Shares Method

For the Authorized Shares Method, the tax calculation follows a tiered structure.
If a corporation has 5,000 authorized shares or less, the minimum tax is $175.00.
For companies with 5,001 to 10,000 authorized shares, the tax is $250.00.
For corporations exceeding 10,000 shares, the tax starts at $250.00, with an additional $85.00 for each block of 10,000 shares or a portion thereof.
The maximum annual tax under this method is $200,000.00.

As an example, if a company has 10,000,000 authorized shares, the calculation proceeds as follows: the first 10,000 shares incur a $250.00 tax. The remaining 9,990,000 shares are divided by 10,000, resulting in 999 additional blocks. Multiplying 999 by $85.00 yields $84,915.00. Adding the initial $250.00 to this amount results in a total tax of $85,165.00 under the Authorized Shares Method.

Assumed Par Value Capital Method

The Assumed Par Value Capital Method involves a more detailed calculation. First, divide the total gross assets by the total issued shares to arrive at the assumed par value. Next, multiply this assumed par value by the total number of authorized shares to determine the assumed par value capital. If the company has shares with a par value greater than the assumed par, their actual par value is used for those shares, and this amount is added to the calculation.

The tax rate under this method is $400.00 per million dollars, or portion of a million, of assumed par value capital. The minimum tax for this method is $400.00, and the maximum is $200,000.00. For instance, if a company has $50,000,000 in gross assets, 15,000,000 issued shares, and 20,000,000 authorized shares, the assumed par value is approximately $3.33 ($50,000,000 / 15,000,000). Multiplying this by 20,000,000 authorized shares results in an assumed par value capital of approximately $66,666,660. Dividing this by $1,000,000 and rounding up to 67, then multiplying by $400, yields a tax of $26,800.00.

Filing and Payment Process

Once the franchise tax has been calculated using the more advantageous method, the next step is to file the annual report and make the payment. All corporations incorporated in Delaware are required to file an Annual Report and pay the associated franchise tax. This process helps maintain the company’s good standing with the state.

The annual report and franchise tax payment for corporations are generally due by March 1st of each year for the preceding calendar year. The Delaware Division of Corporations requires these reports to be filed electronically through their official website. Payment methods commonly include credit card, ACH transfer, or check.

Corporations owing $5,000 or more for the prior year are required to make estimated payments for the current year’s franchise tax. These estimated payments are due in quarterly installments: 40% by June 1, 20% by September 1, 20% by December 1, and the remaining balance by March 1. Failure to file a completed annual report by March 1st incurs a penalty of $200.00, plus interest of 1.5% per month on any unpaid tax balance.