Tariffs may be a new challenge for many companies. However, market disruptions like supply chain delays and COVID-era loan forgiveness have become more common. Normalizing accounting functions in an ever-evolving business environment is important to avoid distorted operations and loss of cash flow.
To support your finance team as they navigate accounting for tariffs, we’ve outlined a step-by-step guide designed to minimize costly errors and ensure compliance from the start. Additionally, you can download our coding sheet for a sample chart of accounts.
Understanding Tariff Accounting Implications
A tariff is defined as a duty or tax on imported goods. Businesses importing goods are responsible for paying tariffs to Customs and Border Protection (CBP) agents. Tariff accounting involves recording and tracking the costs imposed on imported goods.
Tariffs and customs duties can significantly impact margins across a variety of industries, from manufacturing and consumer goods to real estate and construction, and more. Establishing the proper financial reporting to accurately track tariff costs is vital to avoiding distorted financials, underreported costs or incorrect sales tax calculations.
How To Set Up Your Tariff Accounting System: 6 Steps
The following six steps outline tariff accounting best practices for setting up your financial systems.
1. Create a Dedicated Tariff Expense Account
This first step is to add a new general ledger (GL) account titled “Tariffs and Customs Duties” in your chart of accounts. If the expense is tied directly to inventory or resold goods, place the tariff GL account under cost of goods sold (COGS). Place the account under operating expenses if it is tied to non-inventory or internal-use items.
Having a dedicated tariff expense account enables you to isolate the cost of tariffs for analysis and reporting. This provides increased visibility and clarity, which can help leadership better determine any tariff costs that may need to be passed on to consumers.
2. Determine Sales Tax Implications
Next, review your state sales tax rule to determine whether tariffs should be included in the taxable base. In most states, if tariffs are part of the cost to acquire inventory, they are taxable when you resell the item. If tariffs apply to materials that are not resold, they may not be subject to sales tax.
Additionally, businesses are more likely to experience the impact of tariffs on sales and use when there is direct payment of the tariff at the point of import or there are itemized pass-through charges on invoices. Learn more about the potential impact of tariffs on U.S. sales and use tax obligations, read our article, Are Tariffs Subject to Sales and Use Tax? Understanding The Obligations.
3. Incorporate Tariffs Into Landed Cost Calculations
If you’re importing goods, it is critical to include tariffs in the landed cost, or the total cost of transporting a product to your warehouse or point of sale. This ensures you are capturing the true cost of inventory, which has downstream impacts on several key business functions, including:
- Accurate Pricing: If tariffs and other import-related expenses are excluded, your pricing may be based on incomplete cost data.
- Margin Analysis: Gross margin calculations depend on accurate cost inputs and margins may appear healthier than they are.
- Job Costing by Project or Client: For businesses that allocate costs to specific jobs, clients or campaigns (like in-agency or project-based work).
Landed costs go beyond the purchase price and usually account for the price of labor, shipping and freight, tax, insurance, handling fees and other expenses, like tariffs, rather than just the original purchase price.
4. Classify and Tag Transactions
Use classes, locations or tracking codes to identify which projects or products incur tariffs. This helps:
- Allocate costs to the right jobs
- Identify trends in cost increases due to policy changes
- Justify price adjustments to customers
If goods or transactions are misclassified, businesses may incur higher duties. Additionally, certain borderline items could potentially fall into a classification with lower duty rates. Companies could encounter back payments or penalties if transactions are not correctly classified and tagged.
5. Review Vendor Invoices and Set Automation Rules
For streamlined tracking, ensure your accounts payable (AP) team is reviewing invoices for line items related to tariffs or duties. Additionally, they should be coding them to the correct GL account.
Clarifying automation rules is another critical step in setting up your accounting system to track tariffs. AP automation software can help finance teams:
- Access real-time data and analytics
- Gain enhanced visibility into price changes
- Track cost variations with precision
- Document historical information for tax and audits
With fluctuating tariff rates, landed costs and compliance requirements, utilizing automation tools to help track these variables will enable your accounting team to achieve greater accuracy and clarity.
6. Update Monthly Reporting and Oversight
Include tariff cost reporting in your monthly financial review to help stakeholders see the true impact of global trade on your business. This also allows stakeholders to adjust forecasts and pricing models accordingly.
For additional guidance on tariff cost reporting, reach out to our experienced outsourced accounting team.
Accounting For Tariff Costs FAQs
Still looking for more information on how tariffs will impact accounting standards going forward? Check out our answers to some commonly asked questions about tariff accounting.
Tariffs can impact revenue recognition as they increase costs. With higher costs, businesses will likely need to reconsider their pricing strategies and contract terms. This may be especially important for businesses who can’t pass these costs to their customers.
Tariffs are generally capitalized as part of the inventory. This is because inventory costs should reflect all costs involved in transporting goods to their operational state and location. For example, manufacturers usually include tariff costs as part of raw materials on their balance sheets.
Tariffs are typically a business expense. If your business incurs tariffs, you may be able to deduct them from your taxable income.
Outsourced Accounting To Guide You Forward
Cherry Bekaert’s Outsourced Accounting team is well-versed in navigating business disrupters and helping clients track and record financial statements amid a changing landscape. Our experienced outsourced bookkeeping and controller team can help you configure your accounting system to accurately track tariffs so you can avoid costly financial disruptions.
Benefits of Cherry Bekaert’s Outsourced Accounting Services include cost savings, improved accuracy and compliance, enhanced scalability, and our clients’ ability to focus on their core business needs.
Contact us today to schedule a consultation — our knowledgeable professionals will work with you to prevent tariffs from chipping away at your margins.
Related Insights
- Alert: Navigating Continued Trade Policy Uncertainty
- Article: Understanding Tariffs and Their Impact on U.S. Sales and Use Tax Obligations
- Article: Storytelling With Sage Intacct: Using Personalized and Real-Time Data to Empower Stakeholders
- Case study: Transforming Financial Management With Sage Intacct and Outsourced Controller Services
