Filing Delaware Franchise Tax can be a confusing process for business owners, especially when it comes to choosing between the Assumed Par Value and Authorized Share methods. These two methods are used to calculate your corporation's franchise tax liability in Delaware, but they differ in how the tax is calculated and when each method is most beneficial.
In this blog post, we’ll break down the differences between these two methods and guide you on how to file Delaware Franchise Tax using either one.
What is Delaware Franchise Tax?
Delaware Franchise Tax is a fee that businesses are required to pay annually to maintain their corporate status in Delaware. It’s not related to income but is instead based on the corporation's structure and assets. The amount of tax you owe is based on either the Assumed Par Value Method or the Authorized Share Method—two distinct ways of calculating your franchise tax liability.
What is the Assumed Par Value Method?
This method is based on the assumed par value of your company’s shares and the number of shares that have been issued.
How the Assumed Par Value Method Works:
Assumed Par Value: Instead of using the actual par value of your shares, this method allows you to use an assumed par value for your shares, which may not be the actual value of your stock but helps in calculating a more favorable tax for some companies.
Issued Shares: The number of shares you have issued plays a significant role. The more shares you issue, the higher your tax will be.
Assets: The total gross assets of your company are also considered in this method. Total Gross Assets are “total assets” reported on the U.S. Form 1120, Schedule L (Federal Return) relative to the company’s fiscal year ending the calendar year of the report.
When to Use the Assumed Par Value Method:
This method is particularly beneficial for companies with significant issued shares and low par values. It can result in a lower tax bill compared to the Authorized Share Method, especially for companies with many shares but fewer assets.The minimum tax for the Assumed Par Value Capital Method of calculation is $400.00.
How to File Using the Assumed Par Value Method:
Determine Your Assumed Par Value: You need to calculate an assumed par value per share, which is typically based on the total value of your company’s assets divided by the number of issued shares.
Find Your Issued Shares: Review your corporate records to determine how many shares have been issued.
Calculate Your Franchise Tax: Use Delaware's Franchise Tax Calculator for the Assumed Par Value Method to determine your tax liability.
Submit Your Filing: Once you have calculated your franchise tax, file your report online with the Delaware Division of Corporations. Make sure to enter your assumed par value, the number of shares issued, and the total assets of your company.
What is the Authorized Share Method?
The Authorized Share Method is another way to calculate Delaware Franchise Tax. This method is simpler than the Assumed Par Value Method because it focuses solely on the number of authorized shares (the total number of shares your company is allowed to issue, as stated in your company’s certificate of incorporation).
How the Authorized Share Method Works:
Authorized Shares: The tax is calculated based on the number of shares that your company is authorized to issue, regardless of whether those shares are issued or not.
Flat Rate: The tax is applied according to a flat rate that increases based on the number of authorized shares. The more authorized shares you have, the higher your tax.
When to Use the Authorized Share Method:
For corporations that issue stock with no par value, the Authorized Shares Method typically results in a lower franchise tax liability.
For up to 5,000 authorized shares, the minimum tax is $175.
For 5,001 to 10,000 authorized shares, the tax is $250.
For each additional block of up to 10,000 shares (or a portion thereof), an extra $85 is added.
The maximum annual tax liability is capped at $200,000.
How to File Using the Authorized Share Method:
Determine Your Authorized Shares: Review your corporate records to find the total number of authorized shares in your certificate of incorporation.
Calculate Your Franchise Tax: Based on the number of authorized shares, use Delaware’s tax tables or the Franchise Tax Calculator to determine the amount of tax you owe.
Submit Your Filing: Once you've calculated the tax, submit your filing through the Delaware Division of Corporations' online portal.
Final Thoughts: How to File
After choosing the method that works best for your business, you can file your Delaware Franchise Tax online via the Delaware Division of Corporations’ website. The process involves entering your company’s details, such as the number of authorized shares or issued shares, and your company’s assets (if using the Assumed Par Value Method). Delaware will then calculate your tax based on the method you selected. If you're looking for help with filing your Franchise Taxes, please contact us at sales@abstractops.com for more information.
Be mindful of the filing deadline, which is usually March 1st each year, to avoid late fees or penalties.
