Tax treatment for tariffs: How U.S. manufacturing companies should treat tariff costs and IEEPA refund uncertainty under U.S. tax rules

Tariffs are now a seemingly permanent cost consideration for U.S. manufacturing companies sourcing capital equipment and raw materials globally. This means business leaders need to better understand the rules, especially as certain tariff refunds have created additional complications.

Misclassification when accounting for tariffs can affect taxable income, timing of deductions and missed opportunities. Keep reading to learn more about how tariffs affect your business from a tax perspective.

Tariff costs depend on the nature of the goods

From a federal income tax perspective, the proper treatment for tariff costs largely depends upon the nature of the goods on which the tariffs are being charged. That is, in most cases, the treatment of the tariff will follow the tax treatment of the underlying asset or good that is being imported into the United States.

Tariffs on capital equipment, raw materials and R&D supplies all have different tax treatments.

How tariffs affect capital equipment

When a tariff is incurred related to the import of machinery and equipment, the tariff is generally treated as part of the asset’s acquisition costs. The tariff is capitalized into the tax basis of the asset, along with purchase price, freight and installation costs.

Once capitalized, the tariff cost would be recovered through the same depreciation methodology as the underlying asset. Most machinery and equipment is depreciated via MACRS over five or seven years.

In addition, taxpayers can accelerate the depreciation and cost recovery with tools like 100% bonus depreciation and Section 179 expensing, subject to current law limitations and phase-down schedules.

How tariffs affect raw materials and inventory

Tariffs assessed on imported raw materials are generally treated as inventoriable costs. That is, the tariff is capitalized into the cost of inventory, along with the purchase price of the raw materials and related inbound freight.

The tariff is part of the cost of goods sold and is deducted when the underlying inventory is sold. Some manufacturers expecting tariffs to be levied on their raw materials for the foreseeable future may want to consider the last-in-first-out (LIFO) method of accounting for their inventories:

• LIFO accounting can be advantageous when costs are rising.
• But other requirements exist with LIFO, such as book-tax conformity and a requirement to stay on LIFO for at least five tax years.
• Companies considering LIFO should examine their internal cost accounting systems, for both book and tax purposes, to make sure that the system appropriately captures tariffs.
• If not, a change in accounting method should be considered prior to adopting LIFO.

How tariffs affect R&D supplies

Like capital equipment and raw materials, the cost of tariffs on R&D supplies follows the treatment of the cost of the underlying asset or good. As such, if the underlying supplies are materials used in the conduct of research, the tariffs would follow the same treatment.

The Tax Cuts and Jobs Act of 2017 (TCJA) differentiated the treatment of domestic and foreign research expenditures for tax years beginning after December 31, 2017. Effective for tax years 2018 and thereafter, the TCJA required research costs to be capitalized and recovered over the applicable period. The recovery period for domestic research expenses was set at five years, with foreign research expenses to be amortized over 15 years.

The One Big Beautiful Bill Act (OBBB) gave manufacturers relief for the tax treatment of their domestic research expenditures:

• For tax years beginning after December 31, 2024, domestic research expenditures are once again deductible as they are paid or incurred.
• Moreover, a transition rule exists whereby taxpayers can ‘catch up’ their unamortized research expenditures from tax years 2022 through 2024; and small taxpayers are allowed to amend prior years’ returns to deduct the research expenditures otherwise capitalized on the originally filed tax return.
• For manufacturers using imported supplies in the conduct of research, such as prototype materials, molds or dies and automation supplies, the tariffs will follow the treatment of research supplies or materials.
• For tax years 2025 and beyond, most manufacturers will choose to deduct their research expenditures, and thereby the related tariff levied on those supplies and materials, as they are paid or incurred.

Tariffs may offer a hidden tax benefit for R&D activities

Given that the tariff amount follows the treatment of the underlying property, a manufacturer’s inquiry might turn to whether those costs can also qualify for the R&D tax credit. If a manufacturer imports chemicals, prototype materials, or other non-depreciable property that qualify as supplies under Section 41, the tariff embedded in their acquisition cost should generally be included in the amount paid or incurred for those supplies.

The tax code focuses on the “amount paid or incurred” for supplies used in the conduct of research. Because the tariff is part of the acquisition cost of the imported supply, the tariff should generally be included in that “amount paid or incurred,” assuming the underlying item is a qualifying research credit supply and is used in the conduct of qualified research.

For expensive prototype materials or molds/dies used in the conduct of domestic research, the tariffs levied on those supplies can significantly increase the amount of qualified research expenditures and thereby the tax credit. This rewards companies more when they are increasing their R&D costs.

Supreme Court ruling creates ambiguity on accounting for tariff refunds

On February 20, 2026, the U.S. Supreme Court ruled in a 6-3 decision that the International Emergency Economic Powers Act (IEEPA) does not give authority to the President to impose tariffs. The majority opinion did not address tariff refunds and the dissenting opinion noted the process is likely to be a “mess.”

Significant uncertainty exists, independent of the proper tax treatment of any potential refunds. Only the importer of record is eligible for the refund, but many suppliers passed those costs onto their customers. As a result, many manufacturers will need to look into whether the ruling affects their rights and obligations under contracts with vendors and customers. That is, even if a manufacturer isn’t the importer of record, they may still seek or be legally obligated to a refund from their vendor.

It is also important to note that the Supreme Court ruling was limited to tariffs assessed under IEEPA, not section 232 or 301 tariffs.

Established tax principles provide a framework for tariff refund scenarios

Although some uncertainty remains regarding refund administration and timing, established tax principles provide a framework for addressing several common tariff-refund scenarios. The appropriate treatment generally depends on how the original tariff was treated, whether the related property remains on hand, and when the taxpayer’s right to the refund becomes fixed under its accounting method.

• Raw materials already sold: A refunded tariff is generally included in taxable income under the tax benefit rule to the extent the earlier inventory or cost-of-goods-sold treatment reduced tax. The inclusion generally occurs when the right to the refund becomes fixed under the taxpayer’s accounting method.
• Self-employment tax: Some tariff refunds may be taxable for federal income tax purposes without being included in net earnings from self-employment.
• Raw materials still in inventory: If the goods that generated the refund remain on hand when the refund right becomes fixed, the refund generally reduces the cost or value of inventory rather than creating current taxable income, provided the adjustment is properly treated as an inventory cost adjustment.
• Capital equipment: A tariff refund tied to capital equipment is generally treated as a basis adjustment under IRC Section 1016 and Treasury Regulation Section 1.1016-3, rather than as a simple tax-benefit-rule recovery. If the asset remains owned and has a remaining adjusted basis, the taxpayer generally reduces the basis and adjusts depreciation prospectively over the remaining recovery period. If bonus depreciation or Section 179 expensing was claimed, the basis decrease may reduce otherwise allowable depreciation in the year the decrease is taken into account. If the asset is fully recovered or was disposed of before the refund right became fixed, the recovery generally is reflected through basis and gain-or-loss mechanics. Taxpayers should coordinate the implementation with their fixed asset specialists.
• R&D tax credit supplies: If a refunded tariff was included in the cost of supplies used in qualified research, the taxpayer may need to revisit its Section 41 qualified research expense calculation. If the original credit year remains open, the taxpayer generally should recompute the credit by reducing qualified research expenses for the refunded tariff. If the year is closed, the issue is better analyzed under the general credit-recovery rule of IRC Section 111(b), which may increase tax in the refund year to the extent the earlier research credit reduced tax. This approach is similar to the treatment the IRS has applied to Employee Retention Tax Credit recoveries.

How Wipfli can help

We advise manufacturers on tariff impact, tax planning, R&D tax credits and supply chain strategy. Let’s talk about how we can help your manufacturing business navigate tariffs to reduce risk, improve cash flow, and make more informed sourcing and investment decisions. Start a conversation.

Let’s talk about overcoming tariffs

Read more

• Tariff refunds for manufacturers: What to do next
• R&D tax credits can lower your tax bill. Do you qualify?
• Tariff update: New Section 301 tariffs, Section 232 and more