The Delaware Competes Act (the "Act") was signed into law on January 27, 2016, changing the corporate income tax apportionment formula to a single sales factor apportionment formula by 2020 and making several changes to simplify the filing process for small businesses, thus providing protection against penalties for filing errors.
The change to the apportionment formula, as introduced by the Act, adjusts the apportionment formula starting in tax year 2017. This change will be phased in over four years, weighting sales at a 50% rate in 2017, a 60% rate in 2018, and a 75% rate in 2019. Beginning in 2017, telecommunication corporations and "worldwide headquarters corporations" can annually elect between the single sales factor, and equally weighted three-factor apportionment. A "worldwide headquarters corporation" is defined as a company that lists a Delaware address as its principal executive office on its most recent quarterly 10-Q filing with the SEC before the effective date of the Act; employs at least 400 employees in that office as of January 1, 2016; and makes a capital investment of not less than $25 million to improve that office between July 1, 2014, and June 30, 2018.
The Act makes some other adjustments targeted to assist small businesses by allowing 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 estimate by adjusting the qualification threshold and indexing it against 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. Finally, the Act clarifies that, for the purposes of income attribution, only US-based assets are part of the calculation.
While this new law takes effect for tax years beginning in 2017 and later, this information should be used by companies in 2016 to calculate estimates and deferred tax assets.
Should you have any questions about how this provision will affect your company, please contact your Marcum tax professional.