A June 2017 update to the Kansas tax code could have significant ramifications for many of the state's business owners.
By overriding Governor Sam Brownback's veto, the Kansas state legislature approved a tax increase on more than 300,000 of the state's S-Corporations, partnerships, farms, rental properties, and sole proprietorships. The move is intended to close a projected $900 million budget gap for the next two fiscal years.
The new law eliminates the income tax exemption created in 2012, making all income earned by these businesses subject to taxation. Such a change will significantly affect the profitability of many businesses and force virtually all to reassess their tax strategy. It could even put some out of business.
Further, the change is retroactive to the beginning of the year. All business income earned on or after January 1, 2017, is now taxable.
The law affects Kansas business owners immediately. They will need to assess their cash position and decide whether to pay estimated taxes on a quarterly basis, or wait until April 2018 and swallow a potentially hefty tax bill all at once. Small business owners at risk of a debilitating cash crunch should talk to a Certified Public Accountant for help with their particular situations.
Some companies may want to consider alternative answers for their cash constraints. Those that sell to other businesses—and thus produce invoices paid over time—might consider invoice factoring (also called receivables factoring) as a way to ease temporary cash shortfalls.
Factoring shortens the time between when a company sends an invoice to a customer and when it gets paid. For example, it's common for a company to send an invoice to a customer and not expect payment for 30, 45, or 60 days, and occasionally longer. By factoring the invoice, the company can receive cash in 1–2 business days instead. The quicker payment allows the company to meet time-sensitive demands on cash, such as meeting payroll or paying bills.
In light of the changes to the tax code, factoring could also help businesses manage through the big tax bill in 2018.
For the last five years, the income tax exemption has left more money in the pockets of business owners. Unfortunately, the tax holiday is over. It's now up to the state's business owners to meet the new tax demands, either by absorbing the hit to cash flow or through other methods. Invoice factoring could be one feasible option.
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