2026 Tariff Tax Planning: Inventory, COGS, Refunds and Cash Flow for Small Businesses
Published Sep 23, 2026
By GOMEZ CPA
Tariffs have become much more than a trade-policy issue for American businesses.
For companies that import products, purchase foreign-manufactured inventory, rely on overseas components, or buy from domestic suppliers affected by tariffs, higher duties can directly affect product costs, gross margins, inventory values, taxable income, working capital and cash flow.
For businesses planning for their 2026 tax returns, tariffs can also create questions that go well beyond how much duty was paid at the border.
Business owners should be asking:
- How are tariffs being treated for tax purposes?
- Are tariff costs properly reflected in inventory and cost of goods sold?
- Does the business qualify for the special small-business inventory rules?
- Could previously paid duties qualify for a refund or duty drawback?
- Are previously paid IEEPA duties potentially recoverable under the 2026 refund procedures?
- If a refund is received, how should it be reported for accounting and tax purposes?
- How are tariffs affecting the company's cash flow and profitability?
Are Tariffs Tax Deductible?
One of the most common questions business owners ask is whether tariffs can simply be deducted as a business expense.
The answer is more complicated than a simple yes or no.
Internal Revenue Code Section 162 generally permits a deduction for ordinary and necessary expenses incurred in carrying on a trade or business. However, the general business-expense deduction does not override tax rules requiring certain expenditures to be capitalized or otherwise accounted for as part of inventory cost.
Federal tariff duties also have a specific rule. Treasury Regulation §1.164-2(f) generally provides that federal import or tariff duties are not deductible as taxes under IRC §164, but this does not prevent an otherwise allowable deduction under §162 or the treatment of those duties as part of the cost of acquiring or producing property.
For businesses importing merchandise for resale or using imported components in production, IRC §§263A and 471 can therefore become particularly important.
Section 471 establishes federal tax principles for inventory accounting. Section 263A contains the Uniform Capitalization, or UNICAP, rules that may require applicable direct costs and properly allocable indirect costs to be capitalized into inventory.
Treasury Regulation §1.471-3 also provides rules for determining the cost of purchased merchandise under the traditional inventory rules.
Consequently, tariffs, customs duties and qualifying acquisition costs associated with imported inventory may become part of the cost of that inventory rather than generating an immediate standalone tax deduction.
The business generally recovers capitalized inventory costs through cost of goods sold (COGS) as the related merchandise is sold, subject to the taxpayer's accounting method and applicable tax rules.
Special Rules for Small Businesses in 2026
Small businesses should not automatically assume that the traditional inventory and UNICAP rules apply to them in the same manner as they apply to larger taxpayers.
IRC §263A(i) provides an exemption from the UNICAP rules for certain taxpayers that satisfy the gross-receipts test under IRC §448(c), provided the taxpayer is not a tax shelter as defined for these purposes.
For taxable years beginning in 2026, the inflation-adjusted gross-receipts threshold is $32 million. Generally, the test is based on average annual gross receipts for the three preceding taxable years. Special rules can apply to newer businesses, short taxable years, predecessors and related businesses whose receipts must be aggregated.
IRC §471(c) Is Also Important
The §263A exemption is only part of the analysis.
IRC §471(c) and Treasury Regulation §1.471-1(b) provide special inventory-accounting rules for qualifying small-business taxpayers. Subject to the applicable requirements, a qualifying taxpayer may use a method that:
- Treats inventory as nonincidental materials and supplies;
- Conforms to the method used in the taxpayer's applicable financial statement (AFS); or
- If the taxpayer does not have an AFS, conforms to the method reflected in its books and records prepared in accordance with its accounting procedures.
Importantly, treating inventory as nonincidental materials and supplies under §471(c) does not ordinarily permit an immediate deduction merely because the inventory was purchased. Under Reg. §1.471-1(b)(4), the cost generally is recovered when the inventory is used or consumed in the business, or when the cost is paid or incurred, whichever is later.
For example, a qualifying small-business taxpayer using a permissible §471(c) book method may not necessarily be required to capitalize a particular cost merely because that cost would have been capitalized under the traditional §471 inventory rules. Conversely, if the taxpayer's applicable §471(c) method capitalizes the tariff into inventory, the cost generally will remain associated with inventory until recognized under that method.
Accordingly, determining that a business qualifies for the §263A small-business exception does not, by itself, answer whether a tariff is immediately deductible.
The analysis should consider:
- Whether the taxpayer qualifies as a small-business taxpayer;
- Whether §263A applies;
- Which inventory method the taxpayer is using under §471;
- How that method treats tariff and acquisition costs; and
- Whether the taxpayer is consistently applying its established tax accounting method.
Example: A $20,000 Tariff Does Not Necessarily Produce a $20,000 Immediate Deduction
Assume a business purchases:
Imported merchandise: $100,000 | Tariffs and qualifying import costs: $20,000 | Total economic inventory cost: $120,000
For a taxpayer using the traditional inventory rules, or another applicable method under which these tariff costs are capitalized, the business generally should not assume that the entire $20,000 produces an immediate current-year deduction if some of the merchandise remains unsold at year-end.
A portion of the cost may remain associated with ending inventory and become deductible through COGS as the corresponding inventory is sold.
A qualifying small-business taxpayer using a permissible method under §471(c), however, may have a different timing result depending on the taxpayer's established inventory method and books and records.
That distinction becomes increasingly important when tariff costs are significant.
Tariffs Can Reduce Gross Margins Even When Sales Remain Strong
The income-tax treatment is only part of the issue.
Consider a product that historically costs a business $60 and sells for $100.
Gross profit before other expenses is $40.
If tariffs and related import costs increase the product's cost to $75 while the selling price remains $100, gross profit falls to $25.
The company has not experienced a decline in sales, but its gross margin has deteriorated substantially.
Businesses exposed to tariffs should therefore review:
- Gross margin by product or product category;
- Pricing and customer contracts;
- Supplier alternatives;
- Inventory purchasing schedules;
- Purchase commitments;
- Working-capital requirements;
- Accounts payable timing;
- Bank and credit-line availability; and
- Estimated tax payments.
A Major 2026 Development: IEEPA Tariffs and Refunds
Businesses evaluating tariff costs in 2026 should understand an important legal development affecting certain tariffs imposed under the International Emergency Economic Powers Act, or IEEPA.
On February 20, 2026, the U.S. Supreme Court decided Learning Resources, Inc. v. Trump, 607 U.S. 229 (2026), concluding that IEEPA did not authorize the President to impose the tariffs challenged in those cases.
The decision does not mean that every federal tariff or customs duty imposed during the period became invalid or refundable. Tariffs imposed under other statutory authorities must be analyzed separately.
Following the decision and subsequent court proceedings, U.S. Customs and Border Protection implemented procedures for processing affected IEEPA-duty refunds.
In April 2026, CBP launched the first phase of its Consolidated Administration and Processing of Entries (CAPE) tool within the Automated Commercial Environment (ACE). CAPE provides an electronic process through which eligible importers and authorized customs brokers can submit requests involving affected IEEPA duties. CBP has continued to issue procedural guidance concerning eligible entries and CAPE processing.
Businesses that paid IEEPA duties should therefore determine, with their customs broker or customs counsel where appropriate:
- Which duties were imposed under IEEPA;
- Which duties were imposed under other statutory authorities;
- Whether the business was the importer of record;
- Whether affected entries qualify under current CBP procedures;
- Whether a CAPE declaration or another customs procedure is appropriate;
- Whether entries have been liquidated;
- What procedural deadlines apply; and
- Whether refunds and related interest have already been received or remain outstanding.
Tariff Refunds Create Another Layer of Complexity
Businesses should not assume that every tariff-related price increase creates a right to a government refund.
An important first question is whether the company was the importer of record and actually paid the customs duties.
For example, a small business may purchase imported merchandise from a U.S. wholesaler. The wholesaler may have imported the merchandise, paid the tariff and passed the additional cost to the customer through a higher selling price.
The small business experienced the economic effect of the tariff, but it did not necessarily pay the customs duty directly to the federal government.
That distinction can be important when determining who may be entitled to pursue a refund.
A Customs Refund Is Not the Same as an IRS Tax Refund
Business owners should understand another important distinction.
A customs-duty refund generally involves U.S. Customs and Border Protection and federal customs law.
A federal income-tax refund generally involves the Internal Revenue Service and federal tax law.
They are separate processes.
For example, 19 U.S.C. §1520 provides authority for certain customs refunds, while other refund and reliquidation procedures may apply depending on the particular entry, tariff authority and procedural posture.
For affected IEEPA duties in 2026, the Supreme Court decision, subsequent court orders and CBP's CAPE procedures are particularly important.
A customs refund can subsequently affect a company's accounting records, inventory costs, COGS and income-tax reporting, but recovering duties from CBP and receiving an income-tax refund from the IRS should not be treated as the same transaction.
Could Your Business Qualify for Duty Drawback?
Businesses involved in international trade should also consider whether they have potential duty drawback opportunities.
Duty drawback is governed principally by 19 U.S.C. §1313 and 19 CFR Part 190.
Under qualifying circumstances, businesses may be able to recover certain duties, taxes and fees associated with imported merchandise when statutory requirements are satisfied, including certain situations involving subsequent exportation or destruction.
For companies that both import and export merchandise, this creates an important planning question:
Are tariffs simply becoming part of our inventory cost, or does our import/export activity potentially create an opportunity to recover some of those duties?
Duty drawback is a specialized area of customs law. Businesses that believe they may qualify should consult an appropriate customs professional.
Customs Liquidation and Protest Deadlines Matter
Potential recovery rights can also depend upon timing.
Under customs law, liquidation generally represents CBP's final calculation of duties associated with an entry, subject to applicable statutory and administrative procedures.
19 U.S.C. §1504 contains important rules governing liquidation.
In addition, 19 U.S.C. §1514 and 19 CFR Part 174 establish procedures for protesting certain CBP decisions involving matters such as:
- Merchandise classification;
- Appraised value;
- Rate and amount of duties;
- Certain charges and exactions;
- Liquidation or reliquidation; and
- Certain drawback determinations.
Businesses that believe customs duties were incorrectly assessed or are now refundable should therefore avoid waiting until income-tax preparation to investigate the issue. Customs deadlines may apply independently of tax-return filing deadlines.
What Happens for Tax Purposes When a Tariff Is Refunded?
Receiving a tariff refund may solve one cash-flow problem while creating another accounting and tax question.
The appropriate tax treatment depends in part on how the original tariff was accounted for and whether the associated merchandise remains in inventory.
Inventory Still on Hand
If the tariff was incorporated into merchandise that remains in ending inventory, a subsequent refund may require an adjustment to the cost or tax basis of that inventory, depending on the taxpayer's applicable inventory method and the facts surrounding the refund.
Inventory Already Sold
If the associated merchandise was already sold and the tariff cost previously flowed through COGS, a later refund may result in taxable income under applicable recovery and tax-benefit principles.
IRC §111 generally addresses recoveries of amounts that previously produced a tax benefit. To the extent a tariff cost previously reduced taxable income through COGS and the business later recovers that cost, the tax-benefit rule may require recognition of income in the year of recovery. IRC §111 may limit the amount included in income when the original tariff cost did not produce a tax benefit. The precise treatment depends upon the facts, the taxpayer's accounting method and the extent of any prior tax benefit.
This does not necessarily mean that a business should amend the prior year's income-tax return whenever a tariff refund is received. In many recovery situations, the relevant tax consequence occurs in the year the recovery is received or otherwise properly recognized.
Revenue Ruling 2001-8 addresses a specific inventory-related recovery situation involving floor-stock payments. Because subsequent Treasury guidance has cautioned against applying that ruling beyond its particular facts, businesses should not treat it as establishing a universal rule for tariff refunds.
The broader analysis should instead focus on the taxpayer's inventory method, the status of the affected inventory, applicable recovery principles and the tax-benefit rule.
Businesses receiving substantial tariff refunds should therefore avoid automatically depositing the money and recording it as ordinary sales revenue without analyzing the underlying transaction.
Management and its CPA should determine:
- When was the tariff originally paid?
- Under what statutory tariff authority was it imposed?
- Which inventory was associated with the tariff?
- Is that inventory still on hand?
- Has the inventory already been sold?
- Was the tariff previously reflected in COGS?
- Which tax year was affected?
- Did the original cost reduce taxable income?
- Is any portion still included in ending inventory?
- Does the refund include interest?
- Who issued the refund?
- Is the taxpayer applying a traditional §471 method or a small-business method under §471(c)?
Tax Accounting and Financial Reporting Are Separate Analyses
Businesses should also avoid assuming that the federal income-tax treatment of a tariff refund automatically determines its financial-statement treatment.
Tax accounting and financial reporting operate under different rules and may produce different recognition or presentation results.
In September 2026, the AICPA issued Technical Questions and Answers TQA §§7700.01-.05, Accounting Considerations for Mandated Refunds of IEEPA Tariffs.
The TQA provides nonauthoritative accounting guidance concerning mandated IEEPA tariff refunds, including recognition, financial-statement presentation, effects on contracts with customers and disclosure considerations.
Accordingly, a business receiving a material IEEPA tariff refund should consider separately:
- Federal income-tax treatment;
- Inventory and COGS consequences;
- Financial-statement recognition and presentation;
- Customer-contract implications, where applicable;
- Disclosure considerations; and
- The timing of recognition under the applicable financial-reporting framework.
Don't Forget Interest on Refunds
Businesses should distinguish between the principal amount of a tariff refund and any interest received with the recovery.
Interest received on a tariff refund generally should be analyzed separately from the underlying duty recovery and ordinarily constitutes taxable interest income under IRC §61 and the applicable Treasury Regulations.
This is particularly relevant to affected IEEPA refunds because CBP's CAPE process is designed to process qualifying refunds together with applicable interest.
Companies should therefore maintain documentation clearly separating:
- Refunded tariff principal;
- Refund interest; and
- Any other adjustments or payments included in the recovery.
The Bigger Issue May Be Cash Flow
For many small and mid-sized businesses, tariffs create a financial problem long before the related cost affects taxable income.
A company may need to pay the supplier, freight charges, customs duties, brokerage costs and other acquisition expenses before the inventory is available for sale.
The merchandise might then remain in inventory for weeks or months.
Cash has left the company, but the inventory has not yet generated revenue.
For example, a business that historically required $250,000 to finance inventory purchases might suddenly require $300,000 or more to maintain approximately the same purchasing volume after tariffs and other import costs are considered.
That additional working-capital requirement can affect:
- Bank borrowing;
- Revolving credit facilities;
- Owner distributions;
- Estimated tax payments;
- Capital expenditures;
- Hiring decisions; and
- Expansion plans.
That is why tariff planning should be integrated into the company's cash-flow forecast.
From Tariff Payment to Cash Recovery
Consider another example:
Imported inventory: $500,000 | Tariffs and qualifying import costs: $75,000 | Initial inventory/acquisition cash requirement: $575,000
Assume $40,000 of the duties ultimately becomes recoverable through an applicable customs process.
Management needs to understand more than whether it will eventually receive $40,000.
The company needs to evaluate:
- When the cash may be received;
- How the refund should be recorded;
- Whether inventory must be adjusted;
- Whether COGS is affected;
- Whether taxable income changes;
- Whether the recovery includes taxable interest;
- Whether estimated tax payments should be revised; and
- How the expected recovery affects working-capital needs.
How GOMEZ CPA Can Help
At GOMEZ CPA, we believe effective tax planning begins with understanding how business decisions affect both the financial statements and the tax return.
For businesses exposed to tariffs, our role can extend beyond determining where an amount belongs on a tax return.
Inventory and COGS Analysis
We can review how tariffs and qualifying acquisition costs are being recorded, which inventory method the taxpayer is using, and how those costs move from inventory into cost of goods sold. For qualifying small-business taxpayers, this analysis can include consideration of the §263A exemption and applicable §471(c) inventory methods.
General Ledger Reconciliation
We can help reconcile customs documentation, broker statements, supplier invoices and inventory records to the company's general ledger.
Tariff Refund Accounting
When a refund is received, we can analyze how the recovery relates to inventory still on hand, inventory already sold and the company's previous tax treatment. For material IEEPA refunds, we can also assist management in evaluating the accounting implications under the applicable financial-reporting framework.
Tax Planning and Estimated Taxes
Significant tariff refunds, inventory adjustments or COGS changes can affect projected taxable income. These changes should be incorporated into year-end tax projections and estimated-tax planning.
Gross-Margin and Pricing Analysis
We can help management identify how tariff costs affect profitability by product or category and provide financial information for evaluating pricing decisions.
Cash-Flow Forecasting
Tariff payments and potential refunds can create significant working-capital swings. These amounts can be incorporated into cash-flow forecasts and financing projections.
Outsourced Controller and Advisory
For companies needing broader financial support, GOMEZ CPA can integrate tariff exposure into budgeting, forecasting, profitability analysis, working-capital management and financial reporting.
Where customs classification, CAPE submissions, protests, drawback claims or other customs-law matters are involved, GOMEZ CPA can coordinate the accounting and tax aspects with the client's licensed customs broker or qualified customs attorney.
2026 Tariff Tax-Planning Checklist
- Identify tariffs paid during 2025 and 2026 and separate actual customs duties from freight, brokerage fees, supplier price increases and other import costs.
- Determine whether your business was the importer of record.
- Identify which tariffs were imposed under IEEPA and which arose under other statutory authorities.
- For affected IEEPA duties, determine whether entries are eligible for recovery under current CBP procedures, including CAPE where applicable.
- Reconcile customs entries, broker statements and supplier invoices to the general ledger.
- Review whether tariffs were properly reflected in inventory and COGS under the taxpayer's applicable accounting method.
- Determine whether the business qualifies for the 2026 small-business exceptions under §§263A(i), 448(c) and 471(c), including applicable aggregation and tax-shelter rules.
- Confirm which §471 inventory method the business is actually using and whether a change in treatment could constitute a change in accounting method.
- Identify tariff costs associated with merchandise remaining in ending inventory.
- Determine how much tariff cost associated with merchandise already sold has flowed through COGS.
- Identify potentially recoverable customs duties.
- Evaluate whether import/export activity warrants a duty drawback review.
- Review customs-entry liquidation status and applicable procedural deadlines with an appropriate customs professional.
- Track tariff refunds separately rather than automatically recording them as sales revenue.
- Analyze whether recovered costs previously produced a federal income-tax benefit.
- Separate refund principal from interest.
- Evaluate financial-statement accounting separately from federal income-tax treatment for material refunds.
- Recalculate estimated tax payments when significant refunds, inventory changes or COGS adjustments occur.
- Reforecast cash flow using expected tariff payments, inventory purchases, potential refunds and financing requirements.
- Reevaluate product pricing and gross margins.
- Preserve customs records, entry summaries, broker statements, supplier invoices, CAPE documentation, refund documentation and supporting accounting and tax calculations.
Planning Ahead
Tariffs demonstrate why tax planning should not begin when a business tax return is ready to be filed.
For businesses carrying significant inventory or purchasing imported products, decisions made today can affect tomorrow's cash flow, gross margins and taxable income.
The 2026 IEEPA refund developments add another consideration. A tariff refund can improve liquidity, but it may also create inventory, COGS, financial-reporting and income-tax consequences that need to be properly analyzed.
Businesses should therefore connect their customs information with their bookkeeping, inventory accounting, financial forecasting and tax planning.
At GOMEZ CPA, our goal is to help business owners understand not only what happened financially, but what those numbers mean for the decisions ahead.
If your business imports products, has experienced significant tariff-related cost increases, paid IEEPA duties, or may be eligible for tariff recoveries, now may be an appropriate time to review your inventory accounting, tax position and cash-flow strategy with GOMEZ CPA.
A proactive review can help identify potential issues before the tax return is filed—and turn a tariff cost increase or unexpected recovery into a planned financial event rather than a year-end surprise.
Sources and Authorities
Federal Income Tax Authorities
-Internal Revenue Code §§61, 111, 162, 164, 263A, 263A(i), 446(e), 448(c), 471 and 481. Treasury Regulations §§1.61-7, 1.164-2(f), 1.263A-1 through 1.263A-3, 1.448-2(c), 1.471-1(b) and 1.471-3. Rev. Proc. 2025-32, §4.30, 2025-45 I.R.B. 695. IRS Revenue Ruling 2001-8, considered within the limits of its specific facts.
Customs and Tariff Authorities
- Learning Resources, Inc. v. Trump, 607 U.S. 229 (2026).
- 19 U.S.C. §1313 — Drawback.
- 19 U.S.C. §1504 — Limitation on Liquidation.
- 19 U.S.C. §1514 — Protest Against Decisions of U.S. Customs and Border Protection.
- 19 U.S.C. §1520 — Refunds and Errors.
- 19 CFR Part 190 — Modernized Drawback.
- 19 CFR Part 174 — Protests.
Financial Reporting Guidance
- AICPA Technical Questions and Answers §§7700.01-.05, Accounting Considerations for Mandated Refunds of IEEPA Tariffs (September 2, 2026) (nonauthoritative guidance).
- ASC 330, Inventory
Important Disclaimer
This article is provided by GOMEZ CPA for general informational and educational purposes only. It is not intended and should not be construed as tax, accounting, legal, customs, investment or financial advice. Tax laws, tariff rules, customs procedures, refund requirements, accounting standards and administrative guidance are complex, subject to change and dependent upon each taxpayer's particular facts and circumstances.
GOMEZ CPA provides tax, accounting, financial reporting and advisory services. Customs classification, CAPE filings, tariff protests, duty drawback claims and other customs-law matters may require assistance from a licensed customs broker or qualified customs attorney. Where appropriate, GOMEZ CPA can coordinate with a client's customs professionals regarding the accounting and tax consequences of tariff payments, refunds and related inventory adjustments.
The discussion of the 2026 IEEPA tariff litigation and refund process applies to the affected IEEPA duties and should not be interpreted to mean that all tariffs imposed during the relevant period were invalidated, terminated or refundable. Tariffs imposed under other statutory authorities may remain subject to different rules.
Businesses should consult their CPA, tax adviser, customs professional and/or legal counsel before taking action based on the matters discussed in this article.
Information and references are current through September 2026.
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