Is Delaware franchise tax deductible? Federal and California answers
Where the Delaware franchise tax and the $50 annual report fee go on a C corporation's federal return, and how California treats a tax that is not measured by income.
Summary
Our answer: yes for federal purposes. A C corporation deducts the Delaware franchise tax it pays in the tax year on Form 1120 line 17, taxes and licenses; the IRS exclusions list covers federal income tax and a few other items, not state franchise taxes. For California, the Franchise Tax Board's test in Legal Ruling 2017-01 is whether another state's tax is on or measured by income: Delaware's tax is computed from shares or assumed capital, so by that test it is deductible, not creditable. We found no FTB document naming Delaware specifically.
Delaware franchise tax is computed on shares or assumed par value capital, not income; a C corporation deducts it as a tax on Form 1120 line 17.
| Federal (C corporation) | Deductible, Form 1120 line 17Taxes paid or accrued during the tax year; exclusions do not list state franchise taxes. |
|---|---|
| Year of deduction | Year paid or accruedThe 2026 report paid in February 2027 belongs to the 2027 return for a cash-basis filer; accrual filers follow their accrual rules. |
| Annual report fee | $50, same treatmentA state fee for keeping the corporation in good standing. |
| California | Deductible, not creditable (our reading)FTB Legal Ruling 2017-01 test: not on or measured by income. |
| Startup with losses | Deduction adds to the lossNo immediate cash saving when there is no taxable income. |
Federal: line 17, taxes and licenses
The Form 1120 instructions tell a corporation to enter on line 17 taxes paid or accrued during the tax year, then list what not to include: federal income taxes, foreign or U.S. territory income taxes when a foreign tax credit is claimed, taxes not imposed on the corporation, sales taxes on property, local benefit assessments, and taxes deducted elsewhere. Delaware's franchise tax is imposed on the corporation and is none of those, so it belongs on line 17.
California: the measured-by-income test
California does not let a corporation deduct taxes on or measured by income paid to other states. FTB Legal Ruling 2017-01 sets the test: first ask whether the other state's tax is on or measured by income; if not, it is deductible but not creditable. Delaware's tax is computed from authorized shares or assumed par value capital, with a $175 or $400 minimum, so it fails the income test. That is our inference from the ruling's test, not an FTB statement about Delaware.
What we would do
Pay the right amount first, using the lower of the two methods; then record the tax and the $50 fee as taxes and licenses in the year paid. Do not let a deduction justify overpaying: at a 21% federal rate, $85,165 overpaid saves at most about $17,900 of federal tax, and only with taxable income.
Common questions
Can I deduct the $85,000 bill if I paid it by mistake?
Recover it instead. A deduction is worth at most the corporate tax rate on that amount, and only if you have taxable income; an amended report and refund request can bring back almost all of it. See our refund guide.
Is the Delaware LLC annual tax ($400 from tax year 2026) deductible?
A single-member LLC that is disregarded reports its business expenses on the owner's return, and the LLC tax is a business expense of the LLC's activity. The rules differ by owner type; this site only covers corporations, so check with your preparer.
Does Delaware Franchise Desk give tax advice on deductions?
No. This page reports what the IRS instructions and the FTB ruling say, with our reading marked as such. Your preparer decides the return.
Related guides
When is Delaware Franchise Tax due?
The March 1 annual report and franchise tax deadline for active domestic Delaware corporations.
Delaware franchise tax minimum and annual report fee
The minimum tax and filing fee numbers founders should separate before comparing methods.
Does a zero-revenue Delaware corporation still owe franchise tax?
A direct answer for founders whose Delaware corporation has no revenue but still received a franchise tax or annual report notice.
Official sources for this guide
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