Do I Really Owe Delaware $75,000??? Explaining Delaware Franchise Tax Calculations
By Kevin Vela
Every year around January or February we receive frantic calls and emails from a handful of clients who are utterly shocked by the franchise bill they just received from Delaware. “How can I owe $75,075 in franchise taxes??? We don’t have that kind of cash; do I have to raise more money just to pay this bill? Does this happen every year??”
Our response is always the same – “It’s okay; what that letter failed to say is that there is another, much less expensive way of calculating annual Delaware franchise taxes.”
For example, assume that startup B2B2C2B App Co. was organized in Delaware with 10,000,000 common shares issued and outstanding to its founders, par value $.00001 (a pretty typical initial share structure for a startup).
Under the Authorized Shares method, B2B2C2B App Co. is taxed for the number of shares authorized. For example: $175 for 1–5,000 shares, $250 for 5,001–10,000 shares, or $250 (for the first 10,000 shares) PLUS $85 for each additional 10,000 authorized shares (or portion thereof). Therefore, the franchise taxed owed is $85,165 in total for the 10,000,000 shares ($250 + ((9,990,000/10,000) * $85)).
But, using the Assumed Par Value method, the franchise tax owed will be significantly lower and will often only be the $400 minimum fee for using the Assumed Par Value method. It does require some math, however.
Divide total gross assets by total issued shares, which equates to the “Assumed Par Value.” (We’ll use $500,000 as total gross assets for this example – you can find that number on your federal tax return.)
Multiply Assumed Par Value (used in most cases) or actual par value by the total authorized shares, which gives you the “Assumed Par Value Capital,” but keep in mind, Step 2 applies the greater of the Assumed Par Value or the actual par value of the shares.
Calculate $400 in franchise tax owed per million or portion of a million of Assumed Par Value Capital. If the Assumed Par Value Capital is less than $1 million, the tax is calculated by dividing the Assumed Par Value Capital by $1 million, then multiplying that result by $400. The math looks like this:
- $500,000/10,000,000= $0.05 Assumed Par Value. Here, the $.05 Assumed Par Value would be used in Step 2 because it is greater than the actual par value of $.00001.
- $0.05 * 10,000,000 shares = $500,000 Assumed Par Value Capital.
- $400 * ($500,000/$1,000,000) = $200.00, which is rounded to the minimum $400 franchise tax owed.
Thus, don’t fret; assumed par value is here to save the day. If you need help with this, call us or your CPA. But in any event, MAKE SURE YOU GET YOUR REPORT FILED ON TIME. And while we’re here, make sure you keep your registered agent info up to date – because that is where your reports get sent. But even if you don’t receive a report, know that the filing is due every year on or before March 1 for corporations and LLCs (and later for limited partnership).