Navigating the complex world of tariffs: accounting implications and business impact

Right now, tariffs is the most talked-about word in business. But what could recent changes in U.S. tariff policy mean for you? Understanding the tariff definition and its implications is crucial for businesses in today's economic landscape.

Starting in April, the Trump administration has imposed a shifting series of new tariffs on virtually all American imports. Goods now subject to tariffs come from not just countries with which the U.S. has had periodically tense relationships, like China, but also longtime allies such as Canada, Mexico and members of the European Union.

While tariffs on individual shipments vary widely depending on country of origin, the overall average tariff rate now sits at just under 18%, according to a recent analysis by the Yale Budget Lab. This increase in import taxes has significant financial implications for businesses and consumers alike.

Until this year, the last time the average tariff rate broke 3% was 1993. Even after the White House and China agreed on May 12 to reduce 125% reciprocal tariffs to 10% for 90 days, American businesses and consumers still face the highest average tariffs since 1934.

Tariffs are already affecting how businesses operate. Traffic to major ports has reportedly fallen by as much as a third, and leading CEOs have warned that they will be forced to raise prices to account for significantly higher import costs. These import tariffs effects are rippling through supply chains and impacting various aspects of business operations.

But if you're struggling to keep it all straight, you're not alone. With 2025 tariff rates changing by the month or even week,  for business owners to deal with here.

Let's consider the essentials you need to navigate this fast-moving policy environment, along with some of the big questions you should consider from an accounting perspective.

What is a tariff?

In principle, a tariff is just a tax on imported goods. To clarify the tariff definition, tariffs are taxes imposed on goods entering a country, collected by the federal government at the port of entry when a shipment arrives in the United States. Understanding the distinction between tariffs vs taxes is important for businesses engaged in international trade.

Who pays tariffs?

Tariffs are paid by the business or individual who is importing any goods subject to a tariff. That likely means that if you import products or materials, your business is on the hook for these import taxes.

For example, let's say you own a retailer based in Minneapolis that buys clothing from a garment manufacturer in Ho Chi Minh City. The price you pay to your manufacturing partner in Vietnam should remain roughly the same as it was pre-tariffs.

However, you will also now be required to pay whatever the current tariff on Vietnamese exports once your order of goods reaches American shores. This additional cost directly impacts your product cost accounting and may affect your pricing strategies.

How do tariffs work?

Tariffs are collected by Customs and Border Protection (CBP) agents at ports of entry. This means that your business needs to be prepared to pay tariffs upfront, although you may be able to pass some of your costs on to consumers down the road.

Think of tariffs as a sales tax you pay to CBP rather than the income tax you're used to paying quarterly to the IRS. This distinction is crucial for tax accounting purposes and understanding the financial implications of tariffs on your business.

What should I know about tariffs from an accounting perspective?

Your business and supply chain have likely already been impacted by tariffs if you import materials from other markets. Ditto if you have operations in another country whose exports are now subject to US tariffs.

But how do you start to assess the effect of tariffs on your bottom line? As the price of the imported materials goes up, you'll need to determine how tariffs will impact your gross margins — and how those changes should be accounted for in your financial reporting.

When accounting for tariffs, the initial answer may seem simple. The cost of inventory should include all direct and indirect costs incurred to prepare the item for sale. This would include the purchase price, plus any overhead, freight and taxes — including tariffs.

However, how you record the tariffs in your general ledger software is more of an art than a science. As we've seen, the White House can add or adjust tariffs overnight, so your accounting process should be flexible enough to quickly adapt to changing rates.

Here are some additional accounting considerations to keep in mind:

Should you record the tariff as a separate account or build into the cost?

There are advantages and disadvantages to both options. Think about what's practical here: What makes sense for your business?

An advantage to recording separately is that it allows your company to separate the cost of the materials from other costs (e.g., freight, overhead, etc.) to provide more visibility, which may be helpful in determining if these costs need to be passed on to customers.

This is a good way to keep an eye on tariff costs, which can change quickly and be unpredictable.

Companies that use standard costs will need to reevaluate and update their standard costs as tariffs are implemented. If you choose to go this route, remember to regularly update these numbers to keep your books accurate and reflect the true cost of goods sold.

How could tariffs affect your operations?

It is important to determine just how material tariffs are to your business. Even if you may not be directly impacted by tariffs, the indirect effects could be significant.

For example, consider that tariffs don't typically only raise prices on imported goods. A higher price on imports often drives more demand for domestic products, which in turn may make those more expensive as well. These price changes can have a cascading effect on your inventory costing and overall financial performance.

The tariff impact on consumers is also noteworthy. In a heavy-tariff environment, consumers may be forced to limit discretionary spending as the price of everyday essentials goes up.

Entire supply chains can also get rerouted or changed. Overseas manufacturers may begin seeking to do more business with countries that don't tariff their exports, which could make it harder for U.S. importers to close deals or find new partners in other countries.

Businesses that don't directly import could still find that essential supplies are more expensive or simply harder to get than in the pre-tariff environment. This can affect contracts with customers and potentially lead to contract modifications.

Therefore, it's important to evaluate how tariff changes could impact your business to avoid any big surprises.

Do you have impairment issues?

Most inventory is valued at the lower of cost or net realizable value (NRV). The net realizable value method is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

If inventory costs increase due to tariffs, you should decide if you can recover these costs or pass them on to your customers. If not, you may need to do an immediate write-down. This is where the lower-of-cost-and-net-realizable-value principle comes into play, which is a key concept in inventory accounting under both GAAP and IFRS.

You should also note that NRV is assessed as of the balance sheet date. This means that any tariffs imposed after the balance sheet will not affect the cost aspect of an NRV assessment but can increase costs of completion, disposal, and transportation.

When determining NRV, specific events that increase costs, such as tariffs, which were not reasonably predictable as of the balance sheet date should not be considered. This aligns with the principles of ASC 606, which governs revenue recognition and contracts with customers.

As you think through how to deal with tariffs, don't leave your accounting department out of the conversation. The clearer your books are, the more confidently you'll be able to move forward.

How Wipfli can help

You don't have to navigate the complex, uncertain world of tariffs on your own. Wipfli's team of advisors is constantly tracking changes in tariff policy and developing strategies to help businesses adapt or even thrive in this new world. Discover what we can do for you in managing the accounting considerations and financial implications of tariffs on your business. Keep up to date with all 2025 regulatory, policy and tax changes.