Calculate your Delaware Franchise Tax outstanding

The second method is the “assumed par value” method and is a more complicated formula based on shares issued and the company’s gross assets. This second method often results in lower tax bills for VC-backed startups. If DE sent your startup a huge tax bill for their annual franchise tax, don’t panic – you can likely reduce your Delaware Franchise Tax by using an alternative calculation method. We typically recommend calculating the franchise tax by using the assumed par value method, which our calculator above does, vs. the authorized share method. The authorized share method is generally Delaware’s tax team’s default method of calculating the franchise tax, and it can result in a much higher tax bill vs. the assumed par value method.

It is important to consult with a tax CPA to ensure compliance with all tax requirements. In addition to paying the franchise tax, businesses incorporated in Delaware must also file an annual report and pay a small filing fee. In addition to corporations, Delaware limited liability companies (LLCs), general partnerships, limited partnerships (LPs) and limited liability partnerships (LLPs) must also pay franchise taxes. The minimum tax for companies using the Authorized Shares Method is $175, and the maximum annual tax is $200,000. We’ve seen startups get a huge tax bill when this calculation method is used; let’s do an example of a typical, venture backed startup. If you’re trying to figure out if you owe Delaware franchise tax, Bench can help.

1. You must file your annual report if your business is a corporation and pay your franchise tax and filing fee by March 1.
2. Franchise Taxes and annual Reports are due no later than March 1st of each year.
3. If you’ve received a bill for $75K, it is because Delaware has calculated the tax using the Authorized Shares Method.
4. All Delaware C-Corps are required to file a federal income tax return on Form 1120, even if they have incurred losses.

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These include a business-friendly court system, flexible incorporation rules, and the fact that businesses operating only outside of Delaware don’t have to pay state corporate income tax. C corporations conducting business in Delaware must pay an annual fee known as the Delaware state franchise tax, a privilege fee for operating within the state’s jurisdiction. Now, imagine all your authorised shares have a par value of less than $10 (which is pretty standard for startups), and you’re trying to calculate your franchise tax based on this method. Don’t panic – your Delaware Franchise Tax is likely so high because your accountant has used the wrong calculation method.

Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report. The tax rate under this method is $400.00 per million or portion of a million. If the assumed equity stock based compensation audit techniques guide par value capital is less than $1,000,000, the tax is calculated by dividing the assumed par value capital by $1,000,000 then multiplying that result by $400.00.

What date should I use to value the Gross Assets?

The actual value of your business as estimated by the State of Delaware. Delaware lets you use whichever method amounts to the least tax owed. Learn how to build, read, and use financial statements for your business so you can make more informed decisions.

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Certain exempt domestic corporations like charities, civic organizations and religious organizations do not have to pay the franchise tax. However, they must still file an annual report and pay the filing fee. This method is a bit more complicated and involves multiple variables, including the total gross assets, total shares issued, and total authorized shares by class with their respective par values. Basically, a company pays $400 per million dollars of par value, but the way par value gets calculated is a bit complex. The Delaware Division of Corporations provides two methods to calculate Delaware franchise tax. The first method is based on the authorized share count, and VC-backed startups with option pools can quickly get to thousands of dollars in taxes due.

You’ll also pay 1.5% per month applied against any unpaid tax and penalty. Let’s imagine a Delaware-incorporated company reported total gross assets of $1,000,000 on their federal taxes this year. Most VC backed startups will have very low par value shares, meaning that you’ll end up using the assumed par value in the franchise tax calculation. So step 1 in the directions below is what you’ll multiply against your total number of shares, then you divide by 400/1,000,000 to get to what you owe.

If you incorporated in Delaware, you need to pay a Delaware Franchise Tax. Learn more about Bench, our mission, and the dedicated team behind your financial success. Just want to highlight that Justin Damiani is one of the BEST customer support reps I have ever interfaced with. You could do a lot worse than sending him an email to get your business started & sorted with HBS. That’s an extra 99 chunks of 10,000 shares, each chunk costing you $85. Manage your business with a virtual U.S. address, and registered agent.

You must file your annual report if your business is a corporation and pay your franchise tax and filing fee by March 1. All LLCs, Limited Partnerships, and General Partnerships formed in Delaware are required to pay the annual franchise tax by June 1. All Delaware-incorporated businesses must, however, still pay the annual franchise tax, submit an annual report, and pay a filing fee.