How tariffs can trigger surprise tax bills for manufacturers and distributors

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

Despite common misconceptions, tariffs are paid by domestic importers—not foreign producers. With the recent 10% tariff on Chinese imports and a 25% tariff on goods from Canada and Mexico set to go into effect April 2, manufacturers and distributors may soon feel the pressure on their bottom lines. But there’s another layer many companies haven’t accounted for: the potential for higher taxes due to how tariffs are reported in financial statements and tax filings.

If your company is importing goods from countries affected by U.S. tariffs, now is the time to revisit how you treat those costs—before they trigger a costly tax surprise.

Why Accounting Treatment of Tariffs Matters

How your company accounts for costs like tariffs, freight, and duties can significantly impact your taxable income. These are considered direct costs and, according to IRS Section 263A (also known as UNICAP), 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.

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.