2020 Delaware Franchise Tax Primer

January 18, 2020
Each year, the State of Delaware sends out franchise tax notices to companies that are incorporated in the state. The headline figure of tax due causes many a jaw to drop, followed by a frantic call to the company’s counsel. Some pay the tax first and then call the lawyer. Eventually, it becomes clear that there’s another, more complicated way to determine your Delaware franchise tax that results in a much lower tax. Save yourself headaches, confusion and cost, use SingleFile for your Delaware franchise taxes.

As part of the quid pro quo for being a Delaware corporation, you must file an annual report. For Delaware corporations, the due date is March 1, 2020. If you miss the filing due date, your company is no longer in good standing in Delaware. This can affect your ability to close major corporate transactions, including financings or acquisitions, and could eventually lead to Delaware dissolving your corporate entity. 

The Delaware Annual Report consists of two parts: 1) provision of current company information (physical address, name & address of an officer, names and addresses of directors) and 2) payment of franchise taxes. Franchise taxes, sometimes called a privilege tax, are part of the price that Delaware charges for the protection of Delaware law, the Secretary of State services and access to its court system. 

In Delaware, there are two methods of calculating franchise taxes. The default method (the Authorized Share method) uses information that the state already knows, but often results in a high tax amount. The other method (the Assumed Par Value Capital method) requires a little more work but can produce a much more reasonable tax amount.

The Authorized Share method 

This method is what Delaware uses to calculate the tax that appears in the official notice and is based solely on the number of shares your company has authorized in its Certificate of Incorporation (sometimes referred to as Articles), as amended. If you have a large amount of authorized shares, this can become a big tax bill. Here’s how it works. If 5,000 or fewer shares are authorized, the tax is $175. If 5,001 - 10,000 shares are authorized, the tax is $250. If more than 10,000 shares are authorized, the tax is $250 + $85 per additional 10,000 lot above the initial 10,000.

Here’s an example where a company has 5,000,000 shares of common stock and 500,000 shares of preferred stock. 

The franchise tax using the Authorized Share method would be 

$250 + $85 x (5,500,000-10,000)/10,000 = $46,915

The Assumed Par Value Capital method

In contrast to the Authorized Share method, this method takes into account a few more variables:  the outstanding share capital and “total gross assets.” For these purposes, you will need 

  • Number of issued shares as of 12/31/20. If your company changed the authorized shares (you would’ve filed an amendment to do this) during the year, you will also need the  number of issued and outstanding shares as of the day before the change;
  • “Gross assets,” which can be found in schedule L in the 2018 IRS Form 1120 or 1120S corporate tax return; and
  • Number of authorized shares and the par value of each class of stock.
Here are the steps... 
Step 1
Divide total gross assets by total issued and outstanding shares, carrying the result to six decimal places, which is the Assumed Par Value. 
Step 2
Multiply number of authorized shares with a par value less than the Assumed Par Value by Assumed Par Value.
Step 3
Multiply number of authorized shares with a par value greater than the Assumed Par Value by their par value. 
Step 4
Add the results of #2 and #3 together, which is the Assumed Par Value Capital.
Step 5
Round Assumed Par Value Capital up to next million, divide that by one million and multiply this result by $400.

In the example from above (a company with 5,000,000 shares of common stock and 500,000 shares of preferred stock), 500,000 shares of common stock, $.0001 par value, and 500,000 shares of preferred stock, $.0001 par value, have been issued. The gross assets at the end of the calendar year is $4 million.

The franchise tax using the Assumed Par Value Capital method would be... 
Step 1 
Assumed Par Value is $4,000,000/1,000,000 = $4  
Step 2
5,500,000 x $4 = $22,000,000
Step 3
Step 4
Assumed Par Value Capital is $22,000,000 + 0 = $22,000,000
Step 5 
22,000,000 rounded up to nearest million is 22,000,000; 
$400 x 22,000,000/1,000,000 = $8800

As you can see there’s a significant difference between the default calculation — $46,915 — and the alternative method — $8,800.

A few notes. If the company changed its authorized shares during the reporting year, Delaware requires a prorated calculation (which we take care of once you provide us with the details). If your gross assets have declined more than $10 million since your prior year’s annual report, you will need to provide documentation to the state. If you were required to file an annual report last year but haven’t yet done so, you need to file last year’s annual report before filing this year’s annual report. If you’ve missed the deadline, the state charges late fees of 1.5% interest per month + $15.

At SingleFile, we've developed a simplified online workflow that walks you through each step of the way so you can determine the lowest tax to pay and file your Delaware Annual Franchise Tax and Report within minutes. We’ll remind you when it’s time to file and make sure you get it right the first time.
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