Most folks only think about the annual Form 1120 Tax return, but there’s actually a ton of taxes and tax deadlines for Delaware C-Corps. However, just because you are a Delaware C-Corporation doesn’t mean you actually have to file a Delaware corporate income tax return! It all depends on where your company is actually based, and where it has tax nexuses.
And Yes, even pre-revenue startups must file an annual tax return, both federal and state. You might not be subject to Income Taxes (which are based on profitability) but you will still be required to do an annual 1120 filing - and your startup is going to have to deal with a wide variety of other taxes which aren’t always connected to Revenue.
Understanding What Taxes Delaware C-Corporation Startups Have to Pay and File
Understanding your tax obligations is not just crucial for compliance but also for financial planning. For a more comprehensive understanding of deadlines, you can refer to our Tax Calendar for Delaware C-Corporation Startups.
Types of Taxes Your Delaware Corporation Could Face
Just because you are a Delaware C-Corp doesn’t mean you have to actually have your company based in Delaware. In fact, most DE corporations are based in different states and cities, and therefore don’t have to file a Delaware corporate tax return - of course, always consult with an experienced CPA to make sure before making any decisions!
Different cities have distinct tax deadlines and requirements. Whether your startup is based in New York, Palo Alto, Santa Monica, Seattle, Austin, or San Francisco, you’ll want to familiarize yourself with these deadlines. But first, let’s break down the types of taxes you might need to file or deal with as a DE C-Corp founder:
Income Tax
This tax is based on your net income or profit, the standard tax most people think of.
Gross Receipts Tax
Some cities like San Francisco tax you on your total gross revenue.
Franchise Tax
Simply for existing as a business, you could be liable for a Franchise Tax. In Delaware, the Franchise Tax can exceed $400 annually. Check out our Delaware Franchise Tax Calculator for an estimate. This is a tax that is very easy to mess up - if you see or get a huge bill from Delaware but you are only a startup, use our calculator.
Payroll Tax
If you have employees, payroll tax is a given. Consider using a payroll provider like Gusto or Rippling to streamline this complex process. Don’t mess up your payroll taxes. Fixing payroll tax problems is not fun - it’s expensive and takes way too much time.
Sales Tax
For businesses that sell tangible goods, sales tax compliance is mandatory. Tools like Avalara can help manage these obligations. We have a map on our startup sales tax page that shows many of the sales thresholds for various states. This is an annoyingly confusing and complex tax that money earning DE C-corps have to deal with.
SaaS Tax
Some jurisdictions also tax Software as a Service (SaaS). Learn more here.
Property Tax
If your startup owns significant assets like computers or furniture, you might have to file a “571-L” for property taxes.
Foreign Tax
For businesses with international dealings, withholding taxes and FBAR/5471/5472 reporting could apply. Penalties for non-compliance can exceed $10,000.
Whose Responsibility Is It?
A common myth is that once you’ve filed your annual Form 1120, all other taxes are automatically taken care of. This is not the case. The CEO is ultimately responsible for ensuring all tax obligations are met. It’s vital to consult a CPA to review all potential liabilities based on your company’s specific circumstances. For early-stage startups, we’ve compiled a helpful guide to tax returns.
Actionable Takeaways for Delaware C-Corps
Be Proactive: Don’t wait until tax season. Understand your obligations and plan ahead.
Consult Experts: Use tools and professional services to help navigate the complex tax landscape.
Keep Your Books Up To Date: Your books are going to be a key item - keep them up to date so it doesn’t delay your CPA getting your compliance work done!
CEO Responsibility: Make it a priority to consult with a CPA to review your startup’s unique tax needs.
Stay Updated: Tax laws change. Make it a habit to revisit and update your tax strategies accordingly.
By fully understanding your tax obligations, not only do you comply with the law, but you also make more informed decisions that can save your startup significant money in the long run.
A very common misconception is that the CPA or firm that filed your annual tax return (the 1120) will have taken care of all these types of taxes: that is never the case!! It is always the CEO’s responsibility to make sure that these taxes are addressed and paid on time. Granted, a CEO can only know so much… and the CPA can only guess as to which types of taxes a company might be subject to. Hence, it’s really important to sit down with a CPA to make sure that all bases are covered based on your company’s unique situation. We’ve published a guide to early-stage tax returns here that may be helpful.
