How Tariffs Are Quietly Changing Your Tax Position
A manufacturing client of ours called last month with a straightforward question: his cost of goods had jumped 14% in six months, but his revenue hadn’t moved. Where was the money going?
The answer was tariffs. Not directly, as he doesn’t import anything himself. But his domestic supplier does. And the tariff costs were being passed through in every invoice, buried in line-item price increases that looked like normal inflation.
This is the tariff story most business owners aren’t hearing… the headlines are about trade policy and geopolitics. The reality for growth-stage business owners is quieter and more immediate: your costs have changed, your margins have changed, and your tax position has changed -whether you import anything or not.
The Numbers Are Substantial
The baseline 10% tariff on all imports has been in effect since April 2025. China-origin goods carry rates as high as 145%. Country-specific reciprocal tariffs ranging from 11% to 50% are now in effect across dozens of trading partners. According to the American Action Forum, direct tariff costs for U.S. small businesses are estimated at approximately $85 billion annually.
A Netstock survey found that 82% of small and mid-sized businesses are now raising prices to pass tariff costs through to customers – up dramatically from 44% a year ago. And the Federal Reserve Bank of Atlanta reports that small businesses are less able to absorb these costs than large firms, with small firms expecting sales to be nearly 9% lower compared to normal levels.
You don’t have to be an importer for this to matter. If your suppliers import, your costs have already been affected.
How Tariffs Hit Your Tax Position
Here’s the part most business owners miss: tariffs aren’t a separate tax deduction. When you pay tariffs on imported goods (or absorb tariff-driven price increases from suppliers), those costs must be capitalized into your inventory under IRS Section 263A – the Uniform Capitalization rules. They flow through your cost of goods sold when the inventory is sold, not when the tariff is paid.
This creates a timing mismatch that can quietly distort your tax projections:
- If you’re building inventory ahead of anticipated tariff increases, you’re spending cash now but won’t see the deduction until the inventory sells
- If your COGS is rising but your pricing hasn’t caught up, your margins are compressing – which means your taxable income may be lower, but your cash position is worse
- If you’re switching suppliers to avoid tariffs, the transition costs (research, qualification, testing, new logistics) are often deductible as ordinary business expenses – but only if properly documented
- Equipment purchases to bring production domestic or reduce import dependence qualify for 100% bonus depreciation under the OBBBA
What to Do Right Now
Three conversations every business owner should have with their CPA before Q3 ends:
- Run a tariff impact analysis on your COGS.
Compare your cost of goods sold year-over-year, line by line. Identify which cost increases are tariff-driven versus inflationary. This data changes your tax projection and your pricing strategy simultaneously.
- Review your inventory capitalization method.
If you’re subject to Section 263A (most manufacturers and wholesalers are), make sure tariff costs are being properly capitalized. Incorrect treatment can trigger penalties in an audit.
- Evaluate domestic sourcing investments.
If you’re investing in domestic production capacity, equipment, or supply chain diversification to reduce import dependence, those investments may qualify for bonus depreciation, the R&D credit, or both. The tax incentives for domestic investment have never been stronger.
Tariffs aren’t going away, and the businesses that treat them as a tax planning variable – not just a cost to absorb – will come through this environment in a stronger position.
Ready to take a look at your supply chain? The first call is always on us – contact us here.