published July 28, 2021
So the State of Delaware sent you a friendly message, letting you know you owe them thousands of dollars in franchise tax.
Great. Now what?
The bad news: you’ll have to pay franchise tax. It’s one of the costs of being incorporated in Delaware.
The good news: there are two methods for calculating franchise tax in Delaware; naturally, the State defaults to the one most expensive for you. But crunch some numbers, and you’ll be able to knock a couple dollars off your tax bill.
Here are the two methods of calculating Delaware franchise tax, and what you can do to lower your tax bill.
Calculating Delaware franchise tax with the authorized share method
This is the First State’s pricier approach to calculating franchise tax. It’s based on how many shares your company has authorized in its charter:
- ≤ 5,000 shares: $175 (this is the minimum tax)
- 5,001 – 10,000 shares: $250
- Each additional 10,000 shares (or 10,001 – 20,000): add $85
The maximum you can be taxed per year is $200,000.
This gets pricey. If your company has authorized 10,000,000 shares—a typical number at company formation—you’ll owe $75,175.00 in Delaware franchise tax.
That’s using the authorized share method. Luckily, there’s a less expensive alternative.
Calculating Delaware franchise tax with the assumed par value method
The assumed par value method is more complicated than the authorized share method, but it results in a lower tax bill. The amount you’re taxed is based on the par value of your company’s shares.
Delaware has its own method for calculating the par value of your shares, typically resulting in a higher value per share than the one you set when you formed your company. (It’s common to set a par value of $0.001 or even $0.0001.)
How to calculate your Delaware par value:
- Add up your gross assets (listed on US Form 1120, Schedule L of your tax return. If you haven’t filed federal taxes for the year, take your gross asset value from your most recent balance sheet. This can be amended later when you file.)
- Divide your gross assets by the total number of issued and outstanding shares in your company.
If the resulting par value is higher than the par value you set in your corporate charter, it will be used to calculate your franchise tax liability. If the par value in your charter is higher, that number will be used instead.
How your tax is calculated:
- Your par value per share is multiplied by the number of shares you have authorized
- That number is rounded up to the nearest million dollars
- The State of Delaware charges you 0.04% of that amount as franchise tax
Choosing this method when you file typically results in a lower tax bill than the authorized share method.
A warning about assumed par value
Assumed par value will reduce your tax bill so long as your issued shares make up around 30 – 50% of your total authorized shares.
If you have a large number of authorized shares, but you’ve issued only a tiny number of them, you could end up owing a large tax bill—even if your gross assets are relatively small.
How to file your Delaware franchise tax
Your Delaware franchise tax is due every year on March 1st. Here’s how to file.
1. Go to the franchise tax filing website for the State of Delaware Division of Corporations.
2. Enter your business entity file number. You can find this number stamped in the margin of your Certificate of Formation or Certificate of Incorporation. (Capbase users can find this information in their document room.) Click continue.
3. You’ll find a list of tax years during which your business has been eligible for franchise tax. Next to the year you’d like to file for, click File Annual Report.
4. The next page will show you your tax liability, using the authorized share method (the most expensive option) by default. To calculate your tax liability with the assumed par value method (the cheapest option), enter the following information under Stock Information:
- Number of issued shares
- Gross assets
- The last day of the year for which you are filing taxes (under “Asset Date.”)
Click “Recalculate Tax.”
5. Your tax liability should be lower than it was by default. The minimum charge is $450.
6. Enter your EIN/FEIN at the top of the page. (Capbase users can find this on their dashboard.)
7. Enter information about one of your company’s officers (ie. President, Treasurer, or Secretary) in the spaces provided. For this, as well as Steps 8 and 9, you’ll need:
First, middle, and last names
- Street address (not a P.O. box)
- Zip code
- Country (if you checked “Non-US Address”)
8. Enter the information above for all of your board members.
9. Enter the information above for yourself, and check the box confirming you have read the terms and conditions. Click “Continue Filing.”
10. On the next page, review the information provided, and make sure everything is correct before you submit.