Why is my Delaware tax bill so high?
It’s that time of year when Delaware corporations start receiving franchise tax notices for annual taxes due by March 1st. Business owners may be shocked to see the total amount due for their corporation but they shouldn’t panic; they could owe significantly less than they think.
Delaware has two methods for calculating annual franchise taxes: the Authorized Shares Method and the Assumed Par Value Capital Method. By default, Delaware will invoice corporations for taxes calculated using the Authorized Shares Method. We will describe each of these methods in more detail below.
Authorized Shares Method
The Authorized Shares Method uses the total number of shares authorized by a corporation to calculate taxes. A corporation with 5,000 authorized shares or fewer will pay $175 total while a corporation with greater than 5,000 authorized shares but less than 10,000 authorized shares will pay $250 total. For anything above 10,000 authorized shares, the franchise tax increases an additional $85 per every 10,000 shares. This can often create significant tax bills for corporations with a high number of authorized shares.
Assumed Par Value Capital Method
The Assumed Par Value Capital Method uses a more complicated calculation that ties the annual franchise tax amount to total gross assets and the total number of issued shares. The total gross assets can be found on Schedule L of Form 1120 of the corporate tax return. This alternative method will often result in a lower tax bill for startups and new businesses since they tend to have a lower value on gross assets. Rather than explaining how this formula works, we think it’s easier to provide an example of the two methods at work.
Examples of each method
Here’s an example of how the two methods result in vastly different taxes for the same corporation. Let’s say ABC Corporation has 10,000,000 authorized shares of common stock with a par value of $0.001. The Company has issued 5,000,000 shares of common stock to founders and the company has $10,000 of total gross assets. Using the Authorized Shares Method, ABC Corporation owes $85,165 in annual franchise taxes. If ABC Corporation used the Assumed Par Value Capital Method instead, it would only owe $400 in franchise taxes.
The Delaware Secretary of State has a calculator here to estimate corporate franchise taxes for each year. Corporations can pay their annual franchise taxes online here. Before business owners pay the amount shown on their tax invoice, they should make sure the Assumed Par Value Capital Method isn’t a better option for their corporation.