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Edit: Originally published March 25, 2025. Updated to reflect the latest in U.S. tariff policy.‍

Tariffs are driving up costs, but are they also quietly inflating your tax bill?

Trade policy changes continue to create new cost considerations for manufacturers and distributors. In addition to the direct impact on margins, businesses should also evaluate the potential tax consequences associated with how tariff-related costs are accounted for in financial reporting and tax filings.

If your company is importing goods from outside the U.S., now is the time to revisit your accounting treatment before an unexpected tax bill emerges.

Why Tariffs Increase Tax Exposure

Recent trade policy changes have increased costs for many importers. While the effect on profitability and pricing often receives the most attention, higher import costs can also create tax implications that may not be immediately apparent.

Import-related charges may need to be capitalized into inventory under IRS Section 263A (UNICAP). As those amounts grow, businesses may face larger inventory adjustments, higher taxable income, and increased tax liability.

How UNICAP Rules Affect Tariff Accounting

Under UNICAP, these costs generally must be capitalized into inventory for tax purposes, not immediately expensed.

That means:

• If your company capitalizes tariffs into inventory, you're likely in the clear.

• If you expense tariffs immediately, you could end up underreporting inventory values and overstating your cost of goods sold (COGS), leading to an unexpected tax adjustment.

Real-World Example: The $1.5 Million Surprise

Let’s say a corporation, ABC Company, imports $100 million in goods and incurs $10 million in tariffs throughout the year. For internal reporting, the company expenses these tariffs as incurred. But at year-end, $1.5 million of the tariffs relate to inventory still sitting in their warehouse.

The company doesn't capitalize the $1.5 million in its GAAP financials, assuming the amount is immaterial. But during tax prep, their advisor applies UNICAP rules, which require the $1.5 million to be added to tax inventory.

The result:

• ABC’s COGS is reduced by $1.5 million for tax purposes.
• Their taxable income increases by the same amount.
• ABC owes significantly more in taxes than expected.

Had the company capitalized the tariffs from the beginning, no tax adjustment would have been necessary.

Tax Treatment of Tariff Refunds 

Just as paying tariffs can raise your tax bill, getting them back can too. When a company receives a refund of tariff duties that were paid and either deducted or capitalized in a prior period, that recovery carries its own income tax consequences. 

The key principle is the tax benefit rule. If you deducted or capitalized tariff duties in an earlier year and later recover that amount, the refund is generally includible in gross income in the year received, but only to the extent the original deduction reduced your tax in the prior year. 

• No retroactive adjustments. You do not amend prior year returns or restate prior year inventory or COGS, and the refund is not netted against current inventory or COGS. 
• No prior benefit, no income. If the original deduction fell in a loss year and produced no tax benefit, the refund is excluded from income to that extent. 
• Report refunds as income in the year received and confirm whether a tax benefit was previously realized.

What Manufacturers and Distributors Should Do

This is a technical issue, but the action plan is simple:

• Review how your business is treating tariffs in your financials ─ Work with your accounting team or auditors to confirm whether tariff costs are being capitalized into inventory or expensed as incurred.
• Evaluate exposure under UNICAP ─ If you’re expensing tariffs, assess whether a UNICAP adjustment is likely to be triggered—and how it could affect your year-end tax liability.
• Plan proactively ─ Increased scrutiny, expanded tariffs, and rising trade costs make proactive planning more necessary than ever. Proper accounting can reduce surprises and preserve cash flow.

We Can Help

At Elliott Davis, we work with manufacturing and distribution companies across the U.S. to respond to trade policy changes, improve cost accounting practices, and prepare for tax implications. If your business imports inventory from countries affected by tariffs, our team can help you review your financial treatment and avoid costly surprises down the road.

Have questions about UNICAP or tariff-related tax exposure? Contact us today.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

Once you have achieved organizational readiness, it is imperative to properly structure the entity profile required to execute your business plan. In future articles, we will discuss potential investment sleeves available to maximize specific investor returns.

Before considering tailored alternatives to facilitate investor objections, a Sponsor must first determine whether they are raising capital for a diversified real estate fund (Fund) or a single property syndication (Syndication). At their base level, both a Fund and Syndication are typically taxable as partnerships to optimize pass-through taxation, minimize entity level taxes, and provide flexibility in allocations. However, there are a number of differences to consider when evaluating the alternatives.

Legal Structure

Funds are typically structured as a single Limited Partnership (LP) or Limited Liability Company (LLC) taxed as a partnership, with the fund sponsor acting as either the General Partner or Managing Member. To provide limited liability protection, single-member limited liability companies (SMLLC) are established underneath the Fund to acquire the target assets.

Syndication may similarly be structured as an LP or LLC but may hold the project asset directly instead of in a separate SMLLC, allowing simplified registration and filing requirements with Secretaries of State. Additionally, holding assets directly through an LP may provide tax benefits in states with nuanced tax rules that treat LPs and LLCs differently.

Sponsors targeting significant amounts of tax-exempt capital may consider a Real Estate Investment Trust (REIT) structure to eliminate Unrelated Business Taxable Income (UBTI) exposure. To acquire the tax benefits of an REIT, specific asset and income tests are required (beyond the scope of this article). Future articles in our investment sleeve series will explore this option in more detail for investors seeking UBTI-free alternatives.

As an alternative structure, some projects may make sense to legally hold title via a Tenancy in Common (TIC) agreement, which allows multiple individuals or entities to co-own a property without establishing a separate business entity. The main benefit of a TIC agreement is to preserve the opportunity for a §1031 like-kind exchange or facilitate the replacement of an exchange for co-owners.

When pursuing a TIC arrangement, careful consideration should be given to maintain simple co-ownership status and not rise to the level of a business entity. The IRS has provided a safe harbor for TICs under Revenue Procedure 2002-22, which includes a limited number of co-owners, unanimous approval requirements on certain items, proportionate sharing of profits and losses, and restrictions on business activities.

Capital Raise

Funds have larger capital needs due to the acquisition of multiple projects. As a result, there may be a longer fundraising period to achieve the capital required to launch. Target investors may be limited to institutional investors, family offices, and high-net-worth individuals, who may require more due diligence on the Fund’s investment strategy and Sponsor history. Capital commitments are typically agreed upon during fundraising, but capital calls are less likely to occur until specific investments are identified and funding is needed for acquisition or ongoing project costs.

Syndications only require capital for a single project, so the fundraising period can be compressed. As the total capital requirement is significantly less than that of a Fund, the target investor pool may be opened to other accredited investors, such as friends and family. Capital is typically contributed upfront, providing greater certainty in total commitments.

Investment and Exit Strategy

Funds aim to acquire multiple properties to reduce portfolio risk through diversification. To provide a consistent investor return, Funds typically target core assets across multiple states, providing a steady annual return with predictable cash flows. Funds may also incorporate a number of value-add or development opportunities to supplement returns on core assets with higher deferred potential, though the overall purpose generally remains a consistent annual return.

Due to the volume of assets and consistent returns on core assets, closed-end Funds typically target a longer-term horizon for liquidation than a single Syndication. Some Funds, however, are open-ended with no definitive timeline for liquidation.

As Syndications target a single asset, they typically focus on value-add or development projects that may not provide a steady annual return but allow for the opportunity of a higher return on exit. Since the goal of a Syndication is often the disposition of the asset for a large multiple on invested capital, the project timeline is generally shorter than that of a Fund but may provide less cash flow to investors throughout the project. Depending on investor appetite, Syndications may also provide more flexibility to defer gains via a §1031 exchange, as a smaller investor group may make it easier to receive approval for the entity to continue the investment.

We Can Help

Selecting the correct investment vehicle may have significant implications in a Sponsor’s ability to raise capital, as investors seek opportunities that are in sync with their ultimate risk profile and investment timeline. While upper tier investment vehicles play a part in achieving investors’ desired results, the asset level structuring is perhaps the most important choice a Sponsor will make, as it ultimately drives the economics of the deal.

Elliott Davis is here to help you evaluate the alternatives and develop a plan to achieve your ultimate objectives. Contact us today.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.

Manufacturing is at a pivotal moment. In 2024 alone, the industry invested over $10 billion in artificial intelligence (AI). While industry adoption of agentic AI is expected to surge in the coming years, it is only supportable with accurate data inputs, real-time benchmarking, and continuous improvement.

With the increase in AI data mining capabilities, technology is no longer siloed, and insights can be captured across disparate sources. For manufacturers, this means unprecedented opportunities to boost productivity, reduce downtime, and stay competitive in a volatile environment marked by labor shortages, margin compression, and tariffs.

Why should manufacturers be talking about AI?

Industry analysts predict that 20% of most manufacturing budgets will be allocated to smart initiatives, such as automation, AI analytics, cloud platforms, and digital supply chain tools. These investments are becoming expectations in industry.

The Art of the Possible

‍Technology is the ultimate multiplier, amplifying the effect of having either clean or scattered data. When paired with strong data structures and organizational visibility, AI tools can turn small, incremental steps into scalable growth.

While AI can feel overwhelming, progress starts with practical steps. Ask:

• Where are your inefficiencies? Identifying bottlenecks and manual data entry points is the first step toward finding processes that can be streamlined.
• What processes can you digitize? Many existing, paper-based systems, such as purchase orders and accounts payable, are ripe for automation and offer quick wins.

Even 1% efficiency gains per week add up. Begin by revisiting existing systems, rightsizing, and refreshing every six months. Digital transformation doesn’t require reinventing the wheel. It starts with small wins like automating purchase orders or accounts payable.

Equally important is building organizational visibility. When sales, HR, IT, finance, operations, and supply chain management work together, they gain stronger alignment and eliminate data silos. By mapping and consolidating data into a business intelligence tool, firms establish a shared, reliable source of truth. Layering AI on top of that foundation then delivers predictive insights and positions the organization for scalable, AI driven growth.

Practical Applications of AI

AI is revolutionizing manufacturing by boosting efficiency, productivity, and decision-making. These practical applications clearly demonstrate how technology can deliver measurable gains:

• Quality Control: AI-powered machine vision systems analyze production images in real time to detect defects, reduce human error, reduce waste, and maintain consistent product standards.
• Predictive Maintenance: Advanced analytics continuously monitor equipment performance and predict potential failures before they occur, reducing downtime and extending overall asset lifecycle.
• Production Process Optimization: AI analyzes vast amounts of production data to identify inefficiencies, bottlenecks, and optimal operating parameters in real time.
• Digital Twins: Virtual replicas of physical assets and processes allow manufacturers to simulate scenarios, optimize workflows, and accurately forecast potential supply chain disruptions.
• Financial Integration: Combining Enterprise Resource Planning (ERP) software with detailed ledger data provides real-time visibility into operational and financial performance for faster decisions.

Start small. Often, the biggest initial return on investment comes from enhancing features you already own with simple process improvements. Over time, these incremental steps create a foundation for scalable, AI-driven transformation.

Policy, Privacy, and Risk

Establishing clear guidelines for AI usage is critical to protecting your organization and mitigating risk. Only around a third of companies have an AI usage policy, but insurers increasingly require one for underwriting and operations.

Key questions to ask:

• Who owns the data—your company, customers, or vendors?
• Do you have policies and processes in place to avoid risky behaviors like entering confidential data into public AI tools?
• How is data accessed and shared across departments?

Beware of free AI tools because if you’re not paying for it with your dollars, you’re paying for it with your data. Free platforms often monetize by collecting sensitive information, exposing your organization to compliance risks. A strong policy combined with employee education and robust security measures creates a foundation for safe, scalable AI adoption.

Explore additional AI-readiness strategies in our related article.

We Can Help

AI is the wave of the future, and if you’re not investing now, it will be harder to compete against those who do. Starting small today can pay off in droves later.

Here are four steps manufacturers can take in 2026:

1. Map current applications and identify automation opportunities.
2. Develop an AI policy which includes cybersecurity measures and employee training.
3. Focus on high-impact areas like predictive maintenance or quality control.
4. Follow industry thought leadership and benchmarking best practices.

Ready to explore what’s possible? Reach out to our team today to start building your roadmap for success.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.