Key insights
- One way to help reduce the impact of tariffs is using accounting methods to help improve your company’s tax position.
- Review accounting methods to identify opportunities to help increase cash flow and reduce taxable income, including deferring income recognition and accelerating deductions.
- Other strategies to explore include using the last-in, first-out method to value inventory to deduct the cost impact of tariffs on the price of inventory.
Use accounting methods to mitigate your company’s tariffs impact.
In today’s global economy, tariffs play a significant role in international trade, impacting businesses of all sizes.
One way to potentially reduce the impact of tariffs is using accounting methods to help improve your company’s tax position. Explore some of the accounting methods strategies available and learn how your company could benefit.
Accounting methods to help mitigate tariffs
Increase cash flow to help pay for tariffs
Use tax accounting methods opportunities to increase cash flow to pay for tariffs.
- Defer income recognition
- Accelerate deductions
- Help protect against tax exposure
- Simplify tax compliance
Increase deductions with the last-in, first-out (LIFO) method to value inventory
Companies in inflationary industries can deduct more cost of goods sold (COGS) by switching to the LIFO accounting method. LIFO allows businesses to deduct the most recent higher costs of purchased inventory in the current year.
While adopting LIFO during any period of rising costs can offer tax advantages, 2025 stands out as a particularly strategic year for making this switch due to the impact tariffs have made on external indexes serving as the basis for annual LIFO calculations. Higher costs from tariffs have driven up certain indexes used in LIFO computations.
Higher indexes cause the most recent inventory to be valued higher and lead to more cost of goods sold deductions in the current year when applying LIFO. As a result, companies anticipating higher tariff-driven costs should seriously consider the timing and method of their LIFO election, leveraging the particularly strong inflationary environment expected in 2025.
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Identifying immediately deductible costs to offset tariffs
Assess whether costs historically recorded as inventory or other capitalized costs could be immediately deducted, allowing a faster deduction of the associated tariffs.
For example, costs that could be treated as deductible repairs and maintenance expenses rather than capitalizable property cost would allow you to deduct the tariffs related to incurring such costs.
Using historical absorption ratio elections to lock in lower ratios resulting from tariffs
Consider timing any historical absorption ratio (HAR) elections with reductions in absorption ratios. If you anticipate ratios could drop in the future because the increasing costs of tariffs would inflate Section 471 inventorial costs (thereby inflating the denominator of the absorption ratios), consider electing HAR to lock in lower ratios during years with high tariffs.
Changing legislative environment
The legislative environment is constantly evolving, and businesses need to stay informed about changes impacting their accounting strategies. With the return of 100% bonus depreciation, properly allocating tariffs to bonus-eligible property is key.
How CLA can help with accounting methods to help mitigate tariffs
Reducing the impact of tariffs requires a strategic approach including assessing your company’s tax accounting methods. Mitigating tariffs can help maintain financial stability and provide long-term success in the face of global trade challenges.