Discussion:Delaware Corp. Income Tax

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Discussion Forum Index --> Tax Questions --> Delaware Corp. Income Tax


Brensan (talk|edits) said:

21 February 2008
I'm confused, and hope that someone out there can help! I have a client that set up a Delaware corporation, but his office is here in Houston, TX. The client had a $66,000 loss in 2006, and I filed a Federal tax return, and a no tax due Tx Franchise tax report, and a 0 due Delaware tax return.

My client is telling me that Delaware says he owes $675, based on shares issued alone. I use Lacerte to prepare my tax returns, and I cannot find where I list that information, nor can I find anywhere on Lacerte where it would calculate state tax due for this client.

Did the filing rules change for Delaware? If so, why doesn't Lacerte reflect this?

Pegoo (talk|edits) said:

21 February 2008
No income tax but there is a Franchise Tax / Authorized Shares Tax.

Oldeastsidr (talk|edits) said:

21 February 2008
Quite likely (as Pegoo said) this is the annual Delaware Franchise Tax, which is due on issued or authorized shares (there are two methods to calculating the tax). It is not income based, and the annual report was due on March 1. This page will give you more info about it

http://www.corp.delaware.gov/frtaxcalc.shtml

KatieJ (talk|edits) said:

21 February 2008
This is how Delaware exports its tax base <G>. It's a popular place to incorporate, especially for a company that expects/hopes to go public someday, because its corporate law gives management a lot of power or leeway vis-a-vis the stockholders. The downside is that the Delaware franchise tax is measured by 100% of a domestic corporation's authorized (not necessarily issued) stock. (Unlike most state franchise taxes measured by corporate stock or net worth, the Delaware Franchise Tax does not apply to foreign corporations doing business in Delaware.)

Many organizers of corporations fail to grasp the fact that AUTHORIZED, rather than ISSUED, shares are the basis for this tax, and when they organize, thinking ahead to that someday public offering, authorize way more shares than they need to. As a result they pay a hefty franchise tax. If you have less than 3,000 shares authorized, the minimum franchise tax of $30 applies.

If your client has no immediate need to have so many shares authorized, have them consider a recapitalization reducing the authorized shares to less than 3,000 and get the tax down to the $30 annual minimum.

Brensan (talk|edits) said:

21 February 2008
Thank you so much! You were a great help.

Gfisher (talk|edits) said:

13 January 2012
I wanted to bring this to the forefront because it's a great idea and just wowed a client of mine! He had a Delaware LLC (annual fee of $250) which he incorporated for various reasons, still under Delaware law. Had 1,100,000 shares authorized because he has a huge roster of investors, advisors who have been granted shares, etc. < 120,000 shares issued & outstanding. I did the calculation both ways - gross assets per issued share and then total authorized shares - and came out in the $7,000 range each year. He was incensed! How could this happen, why didn't anybody tell him, etc? We occasionally ask if a client wants us to file all of their annual reports for their various states, but he's with CSC and I didn't even bother looking into that (he does not blame us - there was a predecessor, who also I believe should not be blamed).

So I sprang this idea on him just now - check with an attorney right away in case the tax can still be reduced even now for the next filing that's due March 1. Just scale back by a factor of 10 even. He is thrilled! I guess it's one way to make your money but am surprised that isn't part of the lore surrounding incorporating in Delaware. Not something we typically recommend to clients because they're usually trying to avoid reporting eg in DC, but of course if you have nexus, you have to file no matter where you're incorporated.

Anyway, I want to keep this idea fresh in people's minds in case it will benefit others. I'm grateful that I found it.

Here's to a smooth tax season. --Gail 18:31, 13 January 2012 (UTC)

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