What you need to know about Delaware tax policies
The First State, Delaware, is one of the most tax-friendly states in the US, not only for individuals but for investors as well. The state is considered a tax shelter in the US, making it a very attractive state for companies to incorporate. In this article, we go over the key tax policies in Delaware and why these can benefit entrepreneurs looking to incorporate in the state.
No sales tax in Delaware
Delaware does not impose sales or state taxes. However, the state does levy gross receipt tax. It offsets the absence of sales tax with moderate income taxes for individuals, as well as excise taxes. The state imposes a flat rate of excise tax on motor fuel and alcohol (per gallon) and $2.10 per pack of cigarettes.
In addition, Delaware’s property tax is only 0.56%, which is among the lowest in the country.
Delaware Franchise Tax
If you wish to establish a corporation in Delaware, please note that the state collects an annual franchise tax, even if you don’t operate here. The franchise tax depends on the corporation’s number of authorized shares and is paid to the Delaware Division of Corporations. Along with the franchise tax, a corporation must submit an annual report. The fee for filing annual reports is $50. Both are due every March 1st.
However, there are entities that are exempted from paying the franchise tax. According to the Delaware Code, the following are eligible for filing as exempt corporations:
- Entities exempt from taxation as provided for by the § 501(c) of the United States Internal Revenue Code or any similar provisions of the Internal Revenue Code
- Qualified civic organization under on § 8110(c)(1) of Title 9 or § 6840(4) of Title 16;
- Qualified charitable/fraternal organization under § 2593(1) of Title 6;
- Listed in § 8106(a) of Title 9;
- Organized primarily or exclusively for religious or charitable purposes
- Organized not for profit and no part of its net earnings inures to the benefit of any member or individual.
Here is an overview of franchise taxes to be paid by different business structure:
| Busines Structure | Annual Franchise Tax |
|---|---|
| Corporations using Authorized Shares Method | Minimum: $175; Maximum: $200,000 |
| Corporations using the Assumed Par Value Capital Method | Minimum: $400; Maximum: $200,000 |
| Large Corporate Filer | Maximum: $250,000 |
| Corporations owing $5000 | 40% due June 1st; 20% due Sept. 1st; 20% due Dec. 1st; 20% due March 1st |
| LLC | $300 (due June 1st) |
| LP | $300 (due June 1st) |
| General Partnerships | $300 (due June 1st) |
| LLP | Maximum for a partner: $120,000 |
| Non-stock, for profit, non-exempt corporations | $175 |
Franchise tax calculation for Delaware corporations
Authorized Shares Method
Corporations with 5,000 or fewer shares pay the flat rate of $175 franchise tax. Corporations with 5,001 to 10,000 shares pay $200 franchise tax. Additional 10,000 (or a portion thereof) shares charged $85. Franchise tax must not exceed $200,000.
Example
Corporations with
- 12,000 authorized shares ($250 + $85 = $335)
- 150,000 authorized shares ($250 + $1190* = $1440)
*$85×14
Assumed Par Value Capital Method
Delaware corporations using this method must declare the figures for all issued shares, treasury shares, and total gross assets. Under this method, the tax rate is $400 per million (or a portion thereof).
Less than 1,000,000 assumed par value capital
Divide assumed par value capital by 1,000,000, then multiply by $400
Example: 900,000 / 1,000,000 = 0.9 x 400 = $360
1,000,000 or more assumed par value capital
This is a sample computation by the Delaware Division of Corporations:
- Divide your total gross assets by your total issued shares carrying to 6 decimal places. The result is your “assumed par”.
Example: $1,000,000 assets, 485,000 issued shares = $2.061856 assumed par.
- Multiply the assumed par by the number of authorized shares having a par value of less than the assumed par. Example: $2.061856 assumed par s 1,000,000 shares = $2,061,856.
- Multiply the number of authorized shares with a par value greater than the assumed par by their respective par value. Example: 250,000 shares $5.00 par value = $1,250,000
- Add the results of #2 and #3 above. The result is your assumed par value capital.
Example: $2,061,856 plus $1,250,000 = $3,311,856 assumed par value capital.
- Figure your tax by dividing the assumed par value capital, rounded up to the next million if it is over $1,000,000, by 1,000,000 and then multiply by $400.00.
Example: 4 x $400.00 = $1,600.00
- The minimum tax for the Assumed Par Value Capital Method of calculation is $400.00.
If you have questions about calculating your Delaware corporation’s tax franchise, don’t hesitate to contact Bolder Launch to learn more.
Personal income tax in Delaware
Keep in mind that LLCs and LLPs can benefit from pass-through taxation. This means that the entity is not subject to corporate income taxes (only franchise taxes), because the taxes are passed on to the members (LLC) and partners (LLP), who must declare their earnings through the entity on their personal income taxes.
| Taxable income | Tax rate | Base |
|---|---|---|
| $0-$2,000 | $0-$2,000 | $0 |
| $2,000-$5,000 | 2.20% | $0 |
| $5,000-$10,000 | 3.90% | $66 |
| $10,000-$20,000 | 4.80% | $261 |
| $20,000-$25,000 | 5.20% | $741 |
| $25,000-$60,000 | 5.55% | $1,001 |
| $60,000 or more | 6.60% | $2943.50 |
If you have any questions about tax policies in Delaware, reach out to our tax experts. We also provide seamless incorporation services in Delaware. Consult with our Launch Crew for free to get started.
This guide is part of Taxation & Accounting in our Launch Guide.
