Delaware Incorporation: What to Know

If you’re like many just starting a business, you may be considering a Delaware incorporation. While even Nevada is a preferred state in which to incorporate, most tech start-ups favor Delaware for their favorable tax shelters and flexible corporate laws.

Here are four critical tax realities you need to know about if you have a Delaware incorporation:

Income Tax

As you may know, most US corporations file two separate returns for each taxable year: a federal tax return filed with the IRS and a state tax return filed with their state of incorporation or residence. Corporations formed in Delaware (DE) do not need to file a corporate tax return if they are not doing business in Delaware. They must file only when they generate income within the state of Delaware. Business owners can e-file Delaware corporate income tax with the federal tax return. It is due on the same date as the federal income tax return.

Franchise Tax

Businesses formed in Delaware must file an annual report and should pay annual franchise tax. Unlike other states where franchise tax is based on income, Delaware’s franchise tax is based on authorized shares. You can compute franchise tax in two ways:

Authorized Shares Method – compute franchise tax based on authorized shares

• 5,000 shares or less (minimum tax) – $175.00
• 5,001 – 10,000 shares – $250.00
• Each additional 10,000 shares or portion thereof – add $85.00

To illustrate, let’s assume that ABC, Inc. incorporated last June 01, 2018 with 10,000,000 authorized shares. The franchise tax is $250 for the first 10,000 shares and $85 for every 10,000 after. The total franchise tax that ABC will pay on March 1, 2019 will be $85,165.

Assumed Par Value Capital Method – under this method, assumed par is being computed by dividing the total assets over the issued shares. Authorized shares will be then be multiplied with the assumed par to get the assumed par value capital.  Round up the assumed par value capital to the nearest million and divide it by a million then multiply the answer by $400.

Assuming the same scenario on above example, let’s add that ABC, Inc. has 1,000,000 issued shares and total assets of $500,000. The assumed par value will be $.50, and the assumed par value capital will be $5,000,000. Divide 5M by 1M to get 5 and multiply this by $400. The total franchise tax will be $2,000.

The minimum franchise tax will be $175 under the authorized shares method and $400 under the assumed par value capital method. For both methods, maximum franchise tax cannot be more than $200,000.

Franchise tax is due every March 1st. Failure to file on the due date results in an automatic penalty of $200 plus interest.

Sales Tax

Delaware is one of the states in the US with no sales tax. The tax collection from the corporate tax combined with the personal income tax allows Delaware to have no sales tax.

Gross Receipts Tax

The IRS imposes a gross receipts tax on the seller of goods and services. The tax is applied to their gross revenue regardless of the source. You cannot apply deductions when determining the gross receipts tax, but most businesses can apply exclusions depending on their business activity. Due dates for gross receipts tax are either monthly or quarterly depending on the business’ total gross receipts. Late filing of gross receipts tax return is subject to a penalty of 5% per month plus interest of .5% per month from the date the gross receipts tax due should have been paid.

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