Delaware Franchise Tax Calculation: A Guide for Founders
In our previous article, we introduced the Delaware franchise tax and explained the difference between the two calculation methods: the Authorized Shares Method and the Assumed Par Value Capital Method. Choosing the right method can save your startup thousands of dollars.
Now, it is time to get practical. This guide explains the Delaware Franchise Tax calculation process using both methods, so you can compare the results and understand how your tax liability is determined.
Before You Begin: Gather Your Key Information
To calculate your Delaware Franchise Tax, you will need four important details from your corporate records and financial statements:
- Total Authorized Shares: The maximum number of shares your corporation is legally allowed to issue. You can find this in your Certificate of Incorporation.
- Total Issued Shares: The number of shares actually issued to founders, investors, and employees. You can find this on your cap table.
- Par Value: The nominal value assigned to each share. This is stated in your Certificate of Incorporation.
- Total Gross Assets: The total assets of your company at the end of the tax year. This is typically found on your company’s balance sheet and Schedule L of your federal tax return, Form 1120.
Let’s use a hypothetical startup, Taxculate Inc., for our examples.
- Authorized Shares: 10,000,000
- Issued Shares: 8,000,000
- Par Value: $0.00001
- Total Gross Assets: $100,000
Method 1: The Authorized Shares Method
Before proceeding, you can review the official guidance from the Delaware Division of Corporations on Delaware Franchise Tax calculations.
The Authorized Shares Method calculates your franchise tax based on the total number of shares your corporation is authorized to issue.
Taxculate Inc. has 10,000,000 authorized shares, which is above the 10,000-share threshold.
Here is the calculation:
- Tax on the first 10,000 shares: $250
- Calculate additional share blocks: (10,000,000 – 10,000) = 9,990,000 additional shares.
- Divide by the block size: 9,990,000 / 10,000 = 999 additional blocks.
- Calculate the additional tax: 999 blocks × $85/block = $84,915.
- Total Tax: $250 + $84,915 = $85,165.
Using the default method, Innovate Inc. would face a tax bill of $85,165.
Method 2: The Assumed Par Value Capital Method Calculation
This method involves a few more steps. However, it can be a better option for startups, depending on their financial information.
Step 1: Calculate Your Assumed Par Value
Divide your Total Gross Assets by your Total Issued Shares.
Formula: Total Gross Assets / Total Issued Shares = Assumed Par Value
Calculation for Innovate Inc.: $100,000 / 2,000,000 = $0.02.
Step 2: Calculate Your Assumed Par Value Capital
Multiply the Assumed Par Value by your Total Authorized Shares.
Formula: Assumed Par Value × Total Authorized Shares = Assumed Par Value Capital
Calculation for Innovate Inc.: $0.02 × 10,000,000 = $200,000.
Step 3: Calculate the Final Tax
Delaware applies a tax rate of $400 for every $1,000,000, or fraction thereof, of your Assumed Par Value Capital. The minimum tax for this method is $400.
Follow these steps:
- Divide Capital by $1,000,000: $200,000 / $1,000,000 = 0.2.
- Multiply by the tax rate: 0.2 × $400 = $80.
Using this method, the tax for Innovate Inc. is $400.Insert Image 2 here, before the next heading.
The Result: A Clear Winner
Let’s compare the outcomes:
- Authorized Shares Method Tax: $85,165
- Assumed Par Value Capital Method Tax: $400
By performing both calculations, Innovate Inc. can legally choose to pay the lesser amount, of $85,165 or $450. Remember, you must also pay the $50 Annual Report filing fee, making the total payment $450.
While the math may seem straightforward, errors can be costly. Therefore, it is important to ensure your asset values are correct and your calculations are performed properly.
How Taxculate Can Help
At Taxculate, we specialize in helping businesses get their Delaware Franchise Tax calculations right. We take the complexity off your plate so you can focus on growing your business, with greater confidence that you are not overpaying on your state franchise taxes.
