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.
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