Delaware S Corp Tax: Everything You Need to Know
Delaware S corp tax does not include federal income taxes. 3 min read
2. Delaware Taxation
Delaware S Corp Tax
Delaware S corp tax does not include federal income taxes. A Delaware corporation attains S corporation status only when the corporation, with prior consent of all shareholders, files IRS Form 2553 IRS, per subchapter 5 of the Internal Revenue Code. Through S corporation status, the corporation has pass-through taxation.
The state of Delaware has two different forms for incorporation. The difference between the two forms is dependent on whether the corporation will issue stock. Both forms must have the incorporated entity’s information, the incorporator's information, and a statement outlining the corporation's reason for existence.
With respect corporations issuing stock, the form must reflect the amount of shares the corporation is able to issue. With respect to corporations not issuing stock, the form must reflect the conditions of membership.
In addition, the form can add additional terms to the certificate of incorporation on additional pages. For instance, a shareholder agreement that prevents the transferring shares to those entities would invalidate the S-corp election. Included with the incorporation forms should be a memorandum that states the corporation’s name, address, and contact information. This provides the Delaware Division of Corporations with contact information and business information.
Also note that in Delaware, for an added fee, you can request an expedited filing process.
When you finish your paperwork, send the certificate of incorporation and completed memo to the Division of Corporations, fax: (302)-739-3812, or mail: Division of Corporations, John G. Townsend Building, 401 Federal Street, Suite 4, Dover, DE 19901.
Note that to qualify, the corporation must contain no more than 99 shareholders with each shareholder a U.S. citizen or U.S. resident or a qualifying nonprofit, estate or trust. The rules can be draconian: if one shareholder does not meet the criteria, the company cannot elect to be an S-corp. However, you are a U.S. citizen or U.S. resident and are the only owner of the corporation, then you should have no issues qualifying.
Corporations must file tax Form 1100 or a Delaware S-Corporation Reconciliation and Shareholders Return 1100S form.
Note that the Delaware Division of Revenue provides various options for filing your business taxes and paying those taxes. Note the following tax issues:
• Tax Rate for Corporations: 8.7 percent rate for federal taxable income. This is allocated to Delaware, by using an equally weighted, three-factor avenue of apportionment. Determining factors are property, wages, and sales in the state of Delaware compared to property, wages, and sales in other locales.
• Consolidated Corporate Income Tax Returns: Disallowed. Each member of such a group must file a separate return.
• Estimated Liability for Taxes: Each corporation is to prepay this liability in installments:
– 50 percent (per a taxable year, due no later than the first day of the fourth month)
– 20 percent (per a taxable year, due no later than the 15th day of the sixth month)
– 20 percent (per a taxable year, due no later than the 15th day of the ninth month)
– 10 percent (per a taxable year, due no later than the 15th day of the 12th month)
– A failure to pay on time or underpay an estimated tax installment has a penalty of 1½ percent per month.
– A late return can be charged with a 5 percent penalty per month, capped at 50 percent of the overdue tax; in addition, there is a 1 percent per month charge, calculated from the initial due date, until the tax is paid. Moreover, an additional monthly penalty of ½ percent is assessed, capped at 25 percent, for failure to pay the tax liability due.
States generally treat S corporations as the federal government treats S corporations. There are, however, exceptions with individual states treating S corporations in different ways. For instance, some states do not recognize S corporations. It is possible to incorporate as an S corporation in the state and pay taxes under federal tax savings, but for state tax purposes, the corporation is treated as a regular C corporation.
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