By Patrick Brown, CPA, Director of Manufacturing Services at Blue & Co.

Industries around the world, particularly those that rely on imported products, continue to face challenges related to tariffs. As geopolitical conflicts evolve, trade policies shift, and supply chains reorganize, tariffs and their related costs have become a significant concern for manufacturers, distributors, and retailers. Careful consideration is needed to ensure tariffs are properly accounted for, as this directly impacts both financial accuracy and strategic decision-making.

At Blue & Co., we understand the challenges tariffs pose, especially when it comes to inventory accounting and margin preservation. While tariffs are not classified as taxes or surcharges, their accounting treatment under U.S. GAAP is more complex and requires thoughtful evaluation to ensure compliance and accuracy.

So, What Are Tariffs? 

Tariffs are duties imposed on goods imported from foreign countries, typically calculated as a percentage of the product’s total value and paid at the point of entry. Unlike other forms of government revenue, tariffs are not considered sales or excise taxes. Instead, they represent a component of the cost of acquiring inventory or other assets, rather than a direct revenue-generating mechanism for the government.

Inventory Costing Under GAAP

All costs necessary to bring inventory to its present location and condition should be capitalized according to the Accounting Standards Codification (ASC) 330 – Inventory.

This includes:

• Purchase price of goods
• Freight-in and handling charges
• Import duties and tariffs
• Other directly attributable costs

Tariffs fit into this framework as part of the total cost to acquire goods. Instead of being recorded as an immediate expense, they should be added to the cost of inventory. This helps ensure your inventory value reflects the full amount your business invested to bring those goods in.

Why Are Tariffs Not Expensed as Incurred?

Other than not having your books and records in accordance with U.S. GAAP, expensing tariffs as incurred will artificially depress margins in the current period, distort future profitability when the inventory is sold, understate inventory on the balance sheet, and allow for inaccurate financial metrics and ratios.

Capitalizing tariffs into inventory and having them flow through the income statement as part of cost of goods sold (COGS), aligns with the matching principle, and provides a clear picture of product-level profitability.

Capital Assets and Tariffs

In accordance with ASC 360 – Property, Plant, and Equipment, if imported goods are used in the construction or acquisition of property, plant and equipment (PP&E), then the associated tariff cost should be included in the capitalized cost of the asset. This will ensure that the asset’s book value reflect all costs incurred to bring it to operational readiness.

Strategic Considerations

Customer relations, sourcing alternatives, and pricing tactics are all heavily influenced by tariffs. Some companies opt to recoup tariff expenses by either increasing the price of a product or adding a surcharge. These recoveries should be treated as revenue, not offsets to inventory costs.

In addition, companies should monitor tariff changes closely and adjust standard cost models, budgeting assumptions, and inventory valuation accordingly. Failure to do so will lead to misstatement and potential compliance risks.

Example

Let’s assume a company is importing electronic parts with a base cost of $100 per unit. A 15 percent tariff is imposed on the electronic part and adds $15 to the cost, along with $5 per unit of freight-in charges. The total inventory costs per unit should be recorded at $120 per unit. When the product is sold, the full $120 flows through COGS, ensuring accurate margin reporting.

Blue & Co. Is Here to Help

Navigating the complexities of tariff accounting requires both technical expertise and strategic foresight. Need help navigating tariff accounting and its impact on inventory and margins? At Blue & Co., we help clients assess the impact of tariffs on inventory, pricing, and financial reporting. Whether you’re updating your costing models or preparing for an audit, our team is here to support you with practical, GAAP-compliant solutions. Contact your local Blue & Co. advisor for expert guidance.