Delaware Business Tax Guide
The state of Delaware is considered to be a “tax haven” for both new businesses and existing corporations. The state has one of the best business environments and Delaware business taxes play a key role in making the environment business friendly. It has been attracting businesses from across the nation and abroad because of its tax shelter status, which means that startups and business owners can enjoy reduction in taxable income while enjoying greater Delaware business tax benefits. Hence, we have created this guide to cover various aspects of Delaware business tax including what a business tax is, the tax advantages, taxation for different forms of business entities etc.?
Delaware Business Tax
An entrepreneur wanting to form a new business in the state of Delaware needs to check their federal, state, and local or county business tax requirements. Although, the state is considered to be a tax shelter; you may be required to file Delaware business taxes. How do you determine what type of taxes your businesses are required to file? The type of Delaware business tax return to be filed is dependent on the type of entity you form as corporations have different tax filing requirements as compared to a limited-liability company.
The Internal Revenue Service (IRS) categorizes federal business taxes under the following:
- Self-Employment Tax
- Income Tax
- Employment Tax
- Excise Tax
- Estimated Tax
It is important to note that the type of state and local taxes will vary according to the state where you form or register your business.
What are Delaware business taxes?
Delaware, like most of the other states, taxes some form of business income that is derived within the state. The income derived from specific businesses is taxed mostly depending on the legal structure of the said business. Although, in some states, there are no corporate income taxes, Delaware has a corporate income tax. In this state, there is Delaware franchise tax and business entities like LLC, general partnerships, and limited partnerships also have to file Delaware business taxes. Depending on the legal form of your business, you may have to file one or more of the taxes like the LLC which you are not required to file with franchise tax as it is applicable to only traditional corporations.
Delaware business taxes comprises primarily of the following:
- Franchise tax
- Delaware corporate tax
- Annual tax
- Gross Receipts Taxes
- Withholding Tax
What are the tax advantages in Delaware?
Delaware is considered a business friendly state with a strong tax shelter. This makes the state extremely attractive to entrepreneurs and investors. Whether you are incorporating or forming a limited liability company, there are certain Delaware business tax benefits that you will enjoy including tax credit programs. Some of the tax advantages are:
- Business Friendly Tax Environment: One of the top Delaware business tax benefits is that the state does not levy the following taxes on new or existing entities:
- There is no Delaware corporate tax on interest or any other investment income, which a holding company based in the state may earn. If a holding company owns equity investments or fixed-income investments then it will not be taxed on the gains on a state level.
- There is no Delaware corporate tax on goods or services that is being provided by a Delaware corporation operating outside the state.
- The State of Delaware does not have any personal property tax and hence you will not be required to file any Delaware business tax return on the same, although local county real estate property taxes may be applicable but they are quite low.
- There are no Delaware business taxes on intangible income like that of trademark royalties
- Whether your company is situated in Delaware or it is out-of-state, any in-state purchases will not be subjected to sales tax.
- Delaware does not have any ad-valorem or value-added taxes (VATs)
- The state does not have any use tax, unitary, or inventory tax
- There are no stock transfer or capital shares taxes in Delaware
- Tax Credits: The average cost of doing business in the state of Delaware is almost 25 percent below the national average and the tax incentives play a key role in keeping the average low. The state offers a wide variety of tax credit programs as a part of the Delaware business tax benefits package and this refundable credit helps save money, which is important for startups and small businesses. Some of the most popular tax credit programs include:
- New Economy Jobs Tax Credit
- Additional credits for job creation in targeted growth zones
- New Business Facility Tax Credits
- Public Utility Tax Credit
- Brownfields Credit
- Gross Receipts Tax Credit
- Angel Investor Job Creation and Innovation Tax Credit
- Brownfields Credit
- Business Finder’s Fee Tax Credit
- Clean Energy Technology Device Manufacturers’ Credit
- Research and Development Tax Credits
- Individuals with Disabilities Tax Credit
- Neighborhood Assistance Tax Credit
- Land and Historic Resource Conservation Tax Credit
IncParadise can help you start a Delaware new business today!
How Delaware Businesses are taxed?
If you are planning to form a new business in Delaware then you may be required to file a Delaware business tax return and this will be applicable to the type of business entity and the activity like sale of goods or services. The tax rate will be determined by the type of Delaware business taxes applicable to your business and hence it is important to identify the taxes according to the business type. This will also ensure you are better prepared for the filing of tax returns and thus cut down on any unexpected fee or fines. The different Delaware businesses and the way they will be taxed are as follows:
Delaware Corporate Taxation
If you form a domestic or a foreign corporation in Delaware then you will have to file a Delaware business tax return unless exempt under Section § 1902 (b): Imposition of tax on corporations; exemptions; Title 30, Delaware Code. The applicable Delaware corporate tax is:
- Corporate income tax: The corporate income tax return has to be filed using Form 1100 or Form 1100EZ using their Employer Identification Number (EIN). The applicable Delaware corporate tax is 8.7% of the federal taxable income allocated as well as apportioned to the state of Delaware. The percentage tax applicable is based purely on an equally weighted 3-factor method of apportionment. The factors taken into consideration are wages, property, and sales in the state as a ratio of wages, property, and sales everywhere else.
A corporation formed in the state may be required to file a Delaware business tax return for gross receipts tax and withholding tax.
Delaware Franchise Tax
If you form a domestic or foreign company in Delaware then you will have to pay franchise tax. The Delaware franchise tax is a fee that has been imposed by the state for the privilege or the right to own a company or business in the state. This is one of the few Delaware business taxes that are not based on the income of the company or its activity. There are two methods for determining the amount of tax to be paid. If the Authorized Shares method is used then the minimum tax is $175.00 and if the Assumed Par Value Capital Method is used then the minimum tax is $400.00 for corporations. The maximum franchise tax using either method should not exceed $200,000. On the other hand, the franchise tax for a Delaware LLC is a maximum of $300.
The due date for the Delaware franchise tax is different for different types of businesses. The tax for corporations is due on March 1st of each year while the due date for an LLC is June 1 each year. If this Delaware corporate tax is not paid within the due date then the state may impose a penalty and a monthly interest fee of 1.5 percent.
Delaware personal income tax
If you form a company in Delaware, which is a pass-through tax entity, then you will be required to file Delaware business taxes in the form of personal income tax. A pass-through tax entity is a type of business where the earnings and losses of the company are passed onto the owners. The most common form of this type of business entity that files a Delaware business tax return is:
The personal income tax rate in Delaware has changed and the tax rate varies from 2.2% to 5.55% for income below $60,000, and if the income is $60,000 or more then the tax rate is 6.60%. The form for filing a Delaware business tax return will be different based on the type of entity for example, a single-member LLC classified as partnership has to file “form 300” while a single-member LLC classified as a sole proprietorship has to file “form 200”. You will also have to report all your profits and losses on Schedule C for efficient filing of Delaware business taxes.
Delaware withholding tax
If a company is conducting business in Delaware or maintaining an office in the state and is also paying wages or providing other forms of remuneration to resident or non-resident Delaware individuals then they will be required to pay Withholding Tax. This type of Delaware business taxes requires a business to withhold an estimated amount from the employees as tax.
The due date for filing Delaware business tax return for withholding taxes varies according to the payroll end date for example; if your payroll end date is 01-01-21 then the due date for return will be 01-06-21 for eight monthly filers. Similarly, for quarterly filers, if the quarter end is 03-31-21 then the filing due date would be 04-30-2021. The withholding tax forms are normally sent after a withholding application is filed with the Delaware Division of Revenue but you will have to open a withholding account using the One Stop Business Licensing and Registration system. Failure to file Delaware business taxes like the withholding tax may lead to a penalty of 5% per month along with an interest of 0.5% per month.
Gross receipts tax
If you form a business in Delaware then you may be required to file gross receipts tax. You will have to file a Delaware business tax return if you are a seller of goods (tangible or otherwise) or if your business provides any type of service in the state. It is one of the important Delaware business taxes where-in the term “gross receipts” refer to the total receipts received by a business from sale of goods or services rendered within the state. It is important to note that deductions for this type of Delaware business taxes are not applicable on labor costs, cost of goods, interest expense, property sold, discount paid, state or federal taxes, delivery costs, or any other expense allowed. The tax rate can vary from 0.0945% to 1.9914% depending on the type of business activity for example, the current tax rate for an advertising agency and General Services is 0.003983% while that of Automobile Manufacturers is 0.000945% and Retailer – General is 0.007468%. You can get more information on gross receipts tax from the Department of Revenue website.
Ready to Incorporate your Delaware company?
Each type of business has its own set of requirements, which is dependent on the business activity and the first step towards making it operational is by registering with the state. IncParadise, an expert incorporation service provider in Delaware can help you to register your LLC or corporation in the state.
At IncParadise we value our customers and recognize the need for businesses to remain compliant with annual requirements as specified by the state. Hence, we offer Delaware additional services for all types of businesses, so that they can choose what they need and thus fulfill their legal or state based requirements. Our additional services include Delaware domestication, foreign qualification, EIN or Tax ID, and Certificate of Good Standing among others.