What are Delaware’s new corporate Franchise Tax rules?
Over the summer, the Delaware General Assembly passed House Bill 175, which affects various taxes and fees imposed by Delaware’s Secretary of State. While all the amendments have been approved, some are already in effect while others will not be applicable until January 1, 2018.
What are the immediate changes will potentially affect your corporation? Most notably, the maximum amount of Franchise Tax that a regular corporation can owe has increased from $180,000 to $200,000 per year.
Also, the late penalty for not filing by the deadline will increase from $125 to $200. Therefore, if the annual report and full Franchise Tax amount due is not received by March 1, the state will impose an additional $200 late fee. We provide a Franchise Tax filing service and start sending reminder notices to all our clients several months in advance of the due date, which gives you plenty of time to make filing and payment arrangements as well as avoid having to pay the late fee.
Furthermore, the state has established a Tier 2 class of taxpayers. These “large corporate filers” will have a maximum Franchise Tax assessment of $250,000 per year. A company is considered a “large corporate filer” if it meets certain conditions. These conditions are:
The entity must have a class or series of stock listed on a national securities exchange.
Revenue and asset details from the entity’s financial statements must indicate the company had more than $750 million in gross revenue or consolidated assets and not less than $250 million in gross revenues or consolidated assets.
For example, a company with $800 million in revenue and $300 million in assets would classify as a “large corporate filer” and would thus owe $250,000 in annual Franchise Tax.
However, a company with $800 million in revenue and $100 million in assets would not fall into this category, since the assets are less than the $250 million threshold.
If you are familiar with the state of Delaware’s corporate Franchise Tax, you know there are two methods with which you can calculate the fees. The state determines how much Franchise Tax you owe via these two different methods, and then you pay the lessor amount due.
However, as of January 1, 2017, the ability to recalculate the Franchise Tax assessment will not be an option for entities that are now classified as “large corporate filers.” Those corporations will owe $250,000 in Franchise Tax, and this amount cannot be adjusted or reduced.
The state will research various public records to determine which entities will be placed into this Tier 2 category. These specific companies will receive an individual Franchise Tax notice, which will outline the details of the Franchise Tax assessment and options for making payment arrangements.
These notices will be sent to the new Tier 2 companies by their Registered Agents in December of each year, prior to the March 1 deadline for corporation Franchise Tax. Each entity will still need to complete an annual report as well as make a full payment by this due date.
Out of the over one million companies formed in the state of Delaware, it is estimated this new Tier 2 classification will only affect about 1,900 tax filers. While it may be just a small group of entities, the increased rate is expected to bring in (at least) an additional $100 million in annual revenue.
PLEASE NOTE: the following information pertains only to corporations, not LLCs.
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