How to calculate the Delaware franchise tax
Delaware limited liability companies (LLC), limited partnerships, and general partnerships pay a flat annual franchise tax of $300. However, franchise taxes for Delaware corporations can vary significantly.
Unless your corporation qualifies as a large corporate filer—which always pay the maximum tax of $250,000—its franchise Delaware tax can range from $175 to $200,000 per year.
You can calculate it using the Authorized Shares Method or the Assumed Par Value Capital Method—whichever results in a lesser tax bill.
Authorized Shares Method
The Authorized Shares Method bases your business taxes on your total authorized shares—the maximum number of shares your Delaware corporation can legally issue, as specified in your articles of incorporation. Here’s how the tax calculation works:
For example, Corporation A with 10,500 authorized shares would owe $250 + ($85 x 1) = $335 in annual franchise taxes. Meanwhile, Corporation B with 755,000 authorized shares would owe $250 + ($85 x 75) = $6,625.
Assumed Par Value Capital Method
The Assumed Par Value Capital Method is a more complex method of calculating your annual tax bill, as it also involves your company’s total gross assets and share structure. Here are the steps:
- Divide your gross assets by your total number of issued shares to determine your “assumed par” per share.
- Multiply your assumed par by the number of authorized shares with an actual par value below the assumed par.
- Multiply the number of authorized shares with an actual par value above the assumed par by their actual par.
- Add the results from steps 2 and 3 to get your total “assumed par value capital.”
- Round this total up to the next million, divide it by $1 million, and multiply it by $400 to get your franchise tax.
Let’s use Corporation B from the example above to demonstrate. Half of its 755,000 authorized shares have a par value of $1.00, while the other half have a par value of $5.00. Corporation B also has $1,500,000 in gross assets and 400,000 issued shares.
- $1,500,000 total assets ÷ 400,000 total issued shares = $3.75 assumed par per share
- 377,500 authorized shares x $3.75 assumed par = $1,415,625
- 377,500 authorized shares x $5 actual par = $1,887,500
- $1,415,625 + $1,887,500 = $3,303,125 assumed par value capital
- $3.3 million rounded up to the next million is $4 million, and $4 million ÷ $1 million = 4.
- 4 x $400 = $1,600 corporate franchise tax
Since the Assumed Par Value Capital Method resulted in a lower tax liability than the Authorized Shares method, Corporation B should choose it for the current tax year.
When are Delaware franchise taxes due?
For Delaware LLCs and partnerships, franchise taxes are due on a quarterly basis starting on June 1st. Failing to pay on time triggers a penalty of $200 plus 1.5% interest per month on the tax amount and the penalty.
For corporations, an annual report—which costs $50 to file—and your franchise taxes are due by March 1st. However, if you expect your Delaware corporation to owe $5,000 or more in franchise taxes, you must make estimated payments. In that case:
- 40% is due by June 1st
- 20% is due by September 1st
- 20% due by December 1st
- The remainder is due by March 1st
How to minimize Delaware franchise tax
The Delaware Department of Revenue uses the Authorized Shares Method by default, but you can often get a lower franchise tax bill using the Assumed Par Value Capital Method—especially if your business has relatively few assets, like many startups.
Each year, use a franchise tax calculator to determine your liability according to both methods and choose whichever is lower. Make sure to pay and file your annual franchise tax report on time to avoid penalties and interest.
Advanced tactics around the number of shares you authorize and issue can also reduce your minimum franchise tax. However, if you’re not careful, they could disrupt other aspects of your business, such as your fundraising or income tax planning.
As a result, it’s best to work with an expert startup tax accountant to avoid mistakes. They can also help ensure you’re maximizing your business tax credits, deductions, and overall tax savings.
At Zeni, we can help you get the best business tax benefits possible. Book our Demo today!
