When most people think about tariffs, they think about higher prices. However, tariffs are much more than a trade policy headline. Tariffs can reshape industries, transform supply chains and fundamentally change how companies operate.
Recent tariff developments have motivated many companies to revisit supply chains, pricing strategies, and procurement practices. Tariffs have also raised important accounting questions specifically about whether tariff costs should be capitalized or expensed under U.S. GAAP.
A well-known historical example comes from the late nineteenth and early twentieth centuries, when U.S. tariffs on imported fruit influenced how businesses structured their supply chains. Bananas were often lightly taxed or exempt, which made them especially attractive. Companies like United Fruit expanded significantly in Central America and developed sophisticated logistics and product classification strategies to minimize duties. These policies helped shape global agricultural markets and contributed to the origin of the term “banana republic.”
Accounting for Tariffs Under U.S. GAAP
While tariffs can drive strategic decisions, their accounting treatment under U.S. GAAP is more defined. Businesses must determine if tariff costs are directly related to acquiring long lived assets or inventory, or if tariff costs represent abnormal or period costs that should be expensed and recognized immediately in earnings.
Capital Assets (PP&E)
Tariffs and import duties are generally not recorded as standalone expenses. Instead, they are included as part of the cost of the related asset when they are directly attributable. For property, plant, and equipment, ASC 360-10-30-1 requires companies to capitalize costs incurred to acquire the asset and place it into service. Import duties and tariffs that meet this criterion are included in the asset’s cost.
In practice:
- Tariffs are recorded as part of the asset’s total cost
- The capitalized amount is depreciated over the asset’s useful life
Inventory
Similar to a capital asset, costs that are tied to bringing the goods to the company for use should be capitalized into inventory. When tariffs relate to inventory purchases, they are included in inventory cost, typically on a per-unit basis. These costs are then recognized through cost of goods sold as the inventory is sold.
When Tariffs Should Be Expensed
Immediate expensing of tariff costs may be required when the costs are abnormal, unrelated to the acquisition of a specific asset, or otherwise do not meet capitalization criteria.
Examples include:
- Tariff related costs arising from inefficiencies or disruptions rather than normal acquisition activity
- Costs associated with abnormal freight, handling or sourcing conditions
- Penalties or fines related to customs compliance
- Costs that are not directly tied to bringing goods to their intended condition or location or that cannot be attached to a specific asset or inventory item
These amounts are typically recorded as current period expense, often within other expense, while standard tariffs remain capitalized.
Handling Tariff Refunds
If a company receives a tariff refund, the accounting depends on whether the related goods have been sold.
- For inventory still on hand, the refund reduces the inventory balance
- For inventory already sold, the refund reduces cost of goods sold
- A typical entry includes a debit to cash and a credit to inventory and or cost of goods sold
For capital assets, tariff refunds reduce the carrying value of the asset. Depreciation is then recalculated on a prospective basis using the revised asset balance.
Planning Considerations: Net Realizable Value
Tariffs can affect the valuation of inventory by significantly increasing its cost basis. If costs rise above expected selling prices, companies should evaluate whether net realizable value is below cost.
If net realizable value is lower than the selling price, a write-down is required and the adjustment is recorded through cost of sales
Final Thoughts
Tariffs may begin as policy decisions, but their effects extend across operations, strategy, and financial reporting. Understanding both the economic impact and the accounting treatment can help businesses respond effectively and avoid unexpected financial statement impacts.
Boyum Barenscheer’s team can help you evaluate how tariffs affect your reporting and identify practical steps to manage the reporting implications. Check out our blog post for information on how your company may benefit from the recent Tariff Refunds.