When does a Delaware C Corporation need to file a tax return?

Pretty much all of our hundreds and hundreds of startup clients are Delaware C-Corporations. Delaware C Corps have specific tax filing requirements, which will vary by business based on their specific activities.

All DE C-Corps are required to file a federal income tax return, which is on Form 1120. Even startups that lose money need to do this filing! This is typically due on April 15th, and can be extended until October 15th. We have a list of all of the various deadlines for DE C-Corps here.

There are other specific filings that companies incorporated in DE will have to file. We’ll get into those in a moment. But first, the most common question we get asked by our clients: 

Do all Delaware C-corporations have to file Delaware state income taxes?

Nope! They all have to file state franchise taxes, but generally do not need to file DE income taxes unless they are present in the state, or meet one of several specific requirements. The following is a pretty exhaustive list, but always check with your tax CPA to make sure that your specific business situation doesn’t require something special.

Requirements to file a Delaware tax return for DE C-Corps

• One or more employees in the state (a good rule of thumb is payroll over $50K, but check with your CPA)
• Property or rent in the state (A good rule of thumb is property/rent over $50K but check with accountant)
• Sales over $150K

Delaware C-Corps also have to deal with a variety of other taxes, including:

• Income Tax: Based on the net income or profit of the corporation.
• Gross Receipts Tax: Delaware has a gross receipts tax, which comprises the total receipts of a business received from goods sold and services rendered in the state. Some cities, like San Francisco, tax the total gross revenue of the corporation - so DE C-Corps with operations in other locations should check with their accountants. 
• Franchise Tax: A tax for simply existing as a business, which in Delaware can exceed $400 annually. More on this further down the article.
• Payroll Tax: If the corporation has employees, payroll tax is mandatory.
• Sales Tax: For businesses that sell tangible goods, sales tax compliance is mandatory. Note that DE doesn’t have a sales tax, but if your business sells into other states you may owe those particular states money. 
• SaaS Tax: Some jurisdictions also tax Software as a Service (SaaS).
• Property Tax: If the corporation owns significant assets like computers or furniture, it may have to file for property taxes.
• Foreign Tax: For businesses with international dealings, withholding taxes and reporting requirements may apply.

Note that many of these taxes apply to companies that are registered as Delaware corporations but that do business in other states. This applies to most VC-backed startups, which are C-Corps registered in DE but that actually are headquartered, and have employees, elsewhere. 

Delaware Franchise 101

All companies that are registered in the state need to pay this. The company doesn’t have to have any operations in the state, it’s for any company registered in the state. So that means most VC backed startups need to pay. 

Many companies get surprisingly large bills. The amount for a typical, early stage startup should be between $400 to $4000. If it’s any higher than that, your accountant probably used the wrong method to calculate it. We’ve got a Delaware Franchise Tax calculator that you can use to estimate your payment - the high level summary is that there are 2 methods that can be used to calculate the payment, and inexperienced accountants often use the authorized share method, instead of the assumed par value method, resulting in a much, much, much higher payment.

Does Delaware have sales tax?

No, Delaware does not have a sales tax. However, it does have a gross receipts tax, which is pretty similar. It’s based on total sales receipts of a business received from goods sold and services rendered in the state. It’s different than an income tax, since the business doesn’t get to deduct expenses like cost of goods sold, R&D, sales and marketing (that typically push a startup into a money losing position). And it’s also different from a sales tax, since a sales tax is paid by the buyer, and a gross receipts tax is paid by the selling corporation.

Got questions? Reach out to us.