Delaware is a hub for businesses in the United States – from startups to multinational corporations – due in part to its favourable corporate tax structure. This tax structure includes various elements, such as corporate income tax, franchise tax and distinct regulations, for different business types, (such as limited liability companies or LLCs, and S corporations). Grasping these aspects can influence decisions about where to establish a business, the optimal structure to adopt and the best ways to handle tax liabilities.
Below is an introduction to Delaware corporate taxes. Understanding Delaware's corporate taxes is not just about compliance, but also about seizing strategic advantages that can strengthen a company's bottom line. From knowing about tax rates and filing requirements to understanding potential penalties, this knowledge is useful for anyone who wants to make informed decisions about running or planning a business in Delaware. Here's what you need to know.
What's in this article?
- Does Delaware have corporate income tax?
- What is Delaware's corporate tax rate?
- Does Delaware accept federal extensions on taxes?
- What is Delaware's corporate tax return due date?
- Does Delaware accept consolidated returns?
- Delaware S corp filing requirements
- What penalties are there for late filing or payment of Delaware corporate income tax?
Does Delaware have corporate income tax?
Yes, Delaware does have a corporate income tax. Corporations incorporated in Delaware and conducting business within the state are subject to state taxes, in addition to the federal corporate income tax. Notably, Delaware's corporate tax structure applies to income generated within the state. This means that a Delaware-incorporated company that doesn't conduct business in the state is not typically required to pay Delaware's corporate income tax. Furthermore, for companies that operate or have incorporated outside of Delaware, Delaware taxes only apply to income derived from sources within the state.
While the state is known for its favourable business climate, including having no state-level sales tax and a well-established body of corporate law, its tax framework does include other taxes that corporations should be aware of. For instance, Delaware levies a franchise tax on corporations, calculated based on the value of the corporation's authorised shares. However, this tax is not based on income, and it can vary significantly depending on the specific structure of the corporation.
For LLCs in Delaware, the state does not require them to pay income tax. LLCs are considered to be "pass-through" entities, where profits or losses are passed to the owners directly, who then report this information on their personal tax returns.
What is Delaware's corporate tax rate?
The corporate income tax rate in Delaware is a flat 8.7% levied on taxable income. This rate is applied to income generated from business activities within the state.
Does Delaware accept federal extensions on taxes?
Yes, Delaware generally accepts the federal extension for filing income taxes. If a federal extension is granted (IRS Form 7004), the Delaware return is due on the 15th day of the month following the federal extension deadline.
The federal extension does not extend the time for payment of Delaware tax. This might not make sense at first glance – how can you be required to pay taxes before filing a return? The tax payment is based on an estimate of what is owed for the year. Even if you haven't filed your tax return yet, you're still expected to estimate the amount of tax that you owe and pay it by the original due date (usually 15 April) to avoid interest and penalties.
What is Delaware's corporate tax return due date?
For most corporations, Delaware corporate income tax returns are due on or before the 15th day of the fourth month following the close of the taxable year. This means that for corporations operating based on a calendar year, the return is typically due on 15 April.
For corporations that have been granted a federal extension, the Delaware return is generally due on the 15th day of the month following the federal extension deadline.
Does Delaware accept consolidated returns?
No, Delaware does not conform to the federal consolidated return regulations. Each corporation in a group of affiliated corporations must file its own separate Delaware corporation income tax return, even if it's included in a federal consolidated return.
This means that in Delaware, each corporation that conducts business and earns income in the state is viewed as a separate entity for tax purposes. Its income tax is calculated on its own income, not the combined income of a group of affiliated corporations.
Delaware S corp filing requirements
S corporations, commonly known as S corps, represent a unique class of business entities with their own set of tax rules and obligations. Operating an S corp in Delaware comes with specific responsibilities that range from annual report filings to federal elections and non-resident withholding taxes. Existing or potential S corp owners in Delaware should have a clear understanding of these obligations. Here are the key Delaware filing requirements for S corporations:
Delaware annual report and franchise tax
Every domestic or foreign corporation that is authorised to transact business in Delaware is required to file an annual report and pay a franchise tax. The annual report and franchise tax are due by 1 March of each year.Federal S corporation election
S corporations are created through an IRS tax election. An eligible domestic corporation can avoid double taxation (taxing once to the corporation and then again to the shareholders) by electing to be treated as an S corporation.No state-level S corp tax
Unlike some states, Delaware does not impose a state-level tax on S corporations. Instead, the income, losses, deductions and credits of the S corp pass through to shareholders, who report these on their personal income tax returns. However, this does not exempt S corporations from the requirement to file a federal S corp tax return (Form 1120-S).Non-resident withholding tax
Delaware requires S corporations to withhold tax on behalf of non-resident shareholders on their portion of the company's income. This requirement is detailed in the state's withholding tax guidance.Employment taxes
If the S corp has employees, it must withhold and pay employment taxes. This includes US federal income tax, Social Security and Medicare taxes, as well as federal unemployment tax.
What penalties are there for late filing or payment of Delaware corporate income tax?
Delaware corporations need to comply with tax-filing requirements and adhere strictly to deadlines. Missing these can lead to penalties, which can add significant costs to a corporation's tax obligations. Understanding the implications of late filing or payment, the potential penalties and the associated interest rates is important for managing corporate finances in Delaware effectively. The state of Delaware's penalties on corporate income tax include:
Late filing: if a corporation does not file its tax return by the due date, including extensions, it will incur a penalty of 5% per month of the tax due, reaching up to a maximum of 50% of the tax due.
Late payment: if a corporation does not pay its tax liability by the due date, it will incur a penalty of 1% per month of the tax due, up to a maximum of 25% of the tax due.
Interest: in addition to penalties, interest is charged on any unpaid tax from the due date until the date of payment. The rate is 0.5% per month.
Delaware's status as a hub for corporations is due to its comprehensive and well-regarded body of corporate law, in addition to a tax structure that is beneficial for businesses. The state's corporate tax framework – encompassing corporate income tax, franchise tax and the specific regulations for different business entities – has unique implications for businesses operating within this US state. Understanding these tax considerations can help businesses to make informed decisions about whether to incorporate in Delaware, what business structure to adopt and how to manage tax liabilities effectively.