Imported Parts, Higher Costs: A Small-Business Guide to Managing Tariffs, COGS and Deductions

Imported Parts, Higher Costs: A Small-Business Guide to Managing Tariffs, COGS and Deductions

Hook: If a surprise tariff spike is eating your margins, you’re not alone — many small importers and manufacturers faced volatile duties in late 2024–2025 and are still adjusting pricing, accounting and recordkeeping in 2026. This guide gives you a practical checklist and step-by-step accounting moves to include new tariffs in cost of goods sold (COGS), set prices that protect margins, claim allowable tax treatment, and maintain customs-ready records.

Why this matters in 2026

Trade policy remains a fast-moving risk for small businesses. In early 2026, for example, Canada sharply cut tariffs on Chinese EVs — a policy reversal that shows how quickly duty landscapes can change. At the same time, many U.S. trade measures and surtaxes remain in place or continue to be debated by policymakers.

Trade policy volatility in 2024–2026 means businesses must move from reactive bookkeeping to proactive landed-cost accounting and customs recordkeeping.

Quick overview: How tariffs affect COGS and taxes

For most small importers and manufacturers, import duties and related costs are capitalized into inventory and become part of COGS when the goods are sold. That means tariffs don’t disappear — they flow through to gross margin when you sell the product. There are a few important distinctions and exceptions you need to know:

• Import duties on goods for resale are normally capitalized to inventory under U.S. tax rules and recognized in COGS when sold (IRC 263A / UNICAP principles).
• Duties on equipment imported for use (not resale) are capitalized into the depreciable basis of the asset and recovered through depreciation.
• Duty drawback and FTZ (Foreign-Trade Zone) benefits can reduce net duties but require strict tracking and timeliness.
• Recordkeeping for customs is separate from IRS retention rules — you must retain customs records to support entries, classification, and drawback claims.

Practical checklist: Immediately after a tariff change

1. Recompute landed cost per SKU. Include product price, freight, insurance, customs broker fees, port charges, tariffs, and estimated inventory carrying costs. Use this number as the new baseline for pricing and inventory valuation.
2. Review Incoterms on supplier contracts. Who bears the duty? If you are unexpectedly paying duties, renegotiate INCO terms (e.g., move from DDP to DAP, or ask suppliers to quote DDP) or share costs temporarily to avoid losing sales.
3. Update pricing and contract pass-through clauses. Add explicit tariff pass-through or escalation clauses where possible — both for B2B and distribution agreements.
4. Talk to your customs broker and CPA. Confirm HTS codes, tariff rates, and the correct accounting treatment. If you need to change your capitalization policy, discuss whether a Form 3115 (change in accounting method) is required.
5. Document your decision. Save the landed-cost calculations, emails with suppliers, and the reason for any pricing changes — auditors want to see a business rationale.

Step-by-step: How to calculate and record tariff-inclusive COGS

Follow this 6-step approach to make sure duties are in inventory and show up correctly on your financials and tax returns.

Step 1 — Compute landed unit cost

• Unit purchase price: $10.00
• Freight & insurance per unit: $1.20
• Brokerage & fees per unit: $0.40
• Import duty (tariff) per unit: $3.00
• Other port charges per unit: $0.20
• Landed unit cost = $10 + 1.20 + 0.40 + 3.00 + 0.20 = $14.80

Step 2 — Capitalize into inventory

Record the inventory asset at the landed cost:

Journal entry when goods are received:

• Dr Inventory $14.80 per unit
• Cr Accounts Payable / Cash $14.80 per unit

Step 3 — When goods are sold, flow to COGS

Assuming FIFO and sale of one unit:

• Dr Cost of Goods Sold $14.80
• Cr Inventory $14.80

Step 4 — Duties on capital equipment

If you import machinery, capitalize the duties into the equipment’s basis:

• Dr Machinery (capitalized with duty) $X
• Cr Cash/Payable $X

Recover via depreciation using the appropriate MACRS life.

Step 5 — Tracking refunds and drawback

If you receive a duty refund or drawback after selling goods, record the refund against inventory or as other income depending on timing and accounting policy. Keep supporting documents.

Step 6 — Check accounting method implications

If you historically excluded certain costs from inventory and now decide to capitalize tariffs, consult your CPA. Material changes to inventory accounting may require a Form 3115 and adjustments to tax returns.

Tariff-management tools and tax strategies for small businesses

Don’t treat tariffs as a one-off cost — use these tools and strategies to manage cash flow and taxes:

• Duty drawback: File for drawback if you re-export imported components. This can materially reduce net duties but requires meticulous recordkeeping and timely filings.
• Foreign-Trade Zones (FTZs) or bonded warehouses: Defer duties until goods are removed for consumption or avoid duties on re-exports. Great for seasonal inventory planning.
• Tariff engineering: Re-examine product composition and HTS classification to identify legitimate lower-duty classifications — always document rationale and consult a trade attorney to avoid misclassification penalties.
• Use of free trade agreements: Check eligibility for preferential tariff treatment (e.g., USMCA, other FTAs) if components qualify — requires certificates of origin and supplier cooperation.
• Inventory costing method: Evaluate FIFO vs weighted average vs LIFO (if available and beneficial). Tariff spikes can create LIFO layers that reduce taxable income during high-cost layers, but LIFO has strict requirements and conformity rules.

Customs and tax recordkeeping checklist (actionable)

Maintain a central, indexed file (digital + backup) with the following items — auditors and customs will ask for these:

1. Commercial invoices and purchase orders showing material costs and supplier terms.
2. Bill of lading / airway bill and packing lists.
3. Customs entry documentation (in the U.S., CBP Form 7501) and entry summary numbers.
4. Broker invoices and evidence of duty payments (bank records, receipts).
5. HTS classification and ruling documents, including prior binding rulings.
6. Certificates of origin and any FTA documentation used.
7. Records supporting landed-cost calculations per SKU (spreadsheet or ERP report).
8. Documentation for FTZ/ bonded warehouse or drawback claims, if used.
9. Insurance and freight contracts showing terms and costs.
10. Currency-conversion support for foreign invoices (exchange rates and dates).
11. Correspondence with suppliers about Incoterms and tariff pass-through clauses.
12. Tax return workpapers showing how inventory and COGS were computed (retain with returns).

Retention recommendation: Keep customs records at least five years (CBP guideline), and tax records at least three to seven years depending on circumstances. When in doubt, keep seven years.

Pricing playbook: three pragmatic responses

When tariffs hit your inputs, choose a strategy (or mix) based on demand elasticity and customer relationships.

1. Full pass-through — add tariff per unit to selling price. Best when customers are inflexible or B2B buyers accept higher costs.
2. Partial absorption — split costs with suppliers or absorb a percentage to retain market share.
3. Product redesign or source diversification — replace tariffed components, move sourcing to lower-duty countries, or re-engineer for lower HTS duty brackets.

Always run margin scenarios: how much can you raise price without losing volume? Consider temporary promotions to move old higher-duty inventory before new costing layers kick in.

2026 trends every small importer should watch

• Policy divergence across borders: Canada’s surprise move in January 2026 to cut EV tariffs highlights the risk that supply chains and pricing may be affected differently in neighboring markets. Watch for regional responses to U.S. tariffs and look for arbitrage opportunities.
• Automated landed-cost tools: Many ERP and shipping platforms now integrate broker fees, duty rates, and HTS validation via APIs. Adopt automation to reduce errors and speed pricing decisions.
• Increased scrutiny on classification: Customs authorities are investing in AI-driven review of trade data. Maintain clean supporting documents and conservative classifications.
• Greater use of FTZs and drawback: Policymakers and port authorities are promoting FTZ use to stimulate manufacturing; small businesses should evaluate whether FTZ admission costs are justified by duty savings.

Common audit red flags and how to avoid them

• Inconsistent landed-costs: Keep a clear methodology and apply it consistently across periods.
• Lack of broker paperwork: The absence of Form 7501 or broker invoices invites penalties. Centralize intake and validation of customs docs.
• Misclassified HTS codes: If a product switches classification often, secure a binding ruling or legal opinion to justify your classification.
• Missing origin documentation for FTAs: Without proper certificates of origin you can’t claim preferences; keep supplier attestations and audit trails.

Case study: Small manufacturer adapts to a 50% tariff on a key component

Background: A U.S. small manufacturer sources a stamped steel part for $2.50 each. In 2025 a new 50% tariff applies, raising duty to $1.25 per part. Freight and fees add $0.45, so landed cost jumps from $3.20 to $4.45.

Actions taken:

1. Recomputed SKU landed costs and adjusted retail price by $0.90 (partial pass-through) while trimming packaging costs by $0.15 to preserve competitiveness.
2. Negotiated with the supplier to shift production to a third country with lower duties; transition took 6 months and required MOQ adjustments.
3. Moved high-turnover inventory into an FTZ to defer duties and improved cash flow while they tested alternate sourcing.
4. Documented all ledgers and consulted the CPA about changing capitalization policy — no Form 3115 was needed because capitalization practice was consistent.

Result: Gross margin pressure eased within 9 months and the business avoided passing all cost increases to customers.

When to call a specialist

• If you’re claiming duty drawback or FTZ benefits for the first time.
• If HTS classification carries ambiguous descriptions that could materially change duty rates.
• If you must change your inventory capitalization policy or want to adopt LIFO (tax filing & Form 3115 considerations).
• If you import large volumes and want to evaluate FTZ admission, bonded warehousing, or advanced ruling requests.

Actionable takeaways — your 7-step readiness checklist

1. Build a landed-cost template (unit basis) and update it within 48 hours of a tariff change.
2. Confirm Incoterms and shift supplier contracts where feasible to share or shift duty burden.
3. Centralize customs documents and run monthly reconciliations between broker records and your inventory ledger.
4. Consult your CPA on capitalization policy and potential Form 3115 needs before the year-end close.
5. Evaluate FTZs, drawback, or bonded warehousing if duties materially impact cash flow.
6. Automate HTS checks and landed-cost feeds into your accounting or ERP system.
7. Keep a running contingency plan (30/60/90 days) for sourcing switches or price changes if tariffs remain or intensify.

Final note — plan for volatility, not perfection

Tariff policy will likely remain a tool of trade and industrial policy in 2026. The best small-business response is operational and accounting resilience: automated landed-cost systems, clean customs records, and documented pricing strategies. These steps protect margins and make audits or customs reviews manageable.

Call to action

Download our two-page Tariff & COGS Readiness Checklist and a sample landed-cost spreadsheet to run your scenario analysis (click to request). If you’re unsure about HTS classification, drawback eligibility, or whether a change in inventory accounting requires Form 3115, schedule a 30-minute consultation with a trade-aware CPA and licensed customs broker. Act now — small changes today protect your margins tomorrow.

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