Dover, Del. — Gov. Jack Markell signed the Delaware Competes Act (HB 235) into law Wednesday, changing the way corporate income tax is calculated to ensure companies don’t pay more for decisions to hire and expand in the state, and to modify filing requirements that were overly burdensome to small businesses.
Sponsored by the leadership of both the Democratic and Republican parties of the House and Senate, the legislation received near-unanimous approval from the General Assembly earlier this month.
“This reform to our tax code puts Delaware in a stronger position to retain jobs and to encourage employment growth in the years to come,” said Markell, who was a lead supporter of the bill when it was introduced.
The Delaware Competes Act changes the way Delaware apportions income tax for corporations to remove elements of the code that are disincentives for new investment and job creation.
Previously, three factors were used to determine what portion of a company’s total income is attributed to Delaware for tax purposes – payroll in Delaware, property holdings in Delaware, and total sales in Delaware. As a result of the new law, only sales will be factored into the calculation, meaning companies will not be penalized for adding payroll and property in the state. Delaware joins Pennsylvania, New Jersey, and New York, among the many states that have taken similar actions.
HB 235 also makes several changes to simplify the filing process for small businesses and reduces the likelihood of penalties for tax filing errors.
Currently, businesses must make payments totaling 70% of their estimate total tax for the year by June 1st. This can be difficult for small businesses, because their revenue is frequently more volatile than larger corporations, and their cash flow is often more challenging to manage. The bill allows small companies to file 25% estimates each quarter, smoothing out the payments throughout the course of the year.
The legislation also adjusts the threshold for the safe harbor from penalties for incorrect estimates – raising the threshold at which companies qualify for this safe harbor and indexing it to inflation so small companies will remain eligible as originally intended. The threshold for qualification to report gross receipts data quarterly instead of monthly is also adjusted, meaning smaller businesses will not have to go through the reporting process as often as they currently do.