Tariffs are not a new policy tool, but their accounting and financial reporting implications can create unexpected complexity, even for seasoned business owners. In a recent “3 PM DIY” workshop, Community CPA’s CEO & Managing Partner, Ying Sa, outlined how tariff-driven cost increases permeate financial statements, reshape margins, influence valuation considerations, and potentially affect discussions with lenders and investors.
The following overview provides a practical, year-end-oriented framework for assessing these impacts, particularly for businesses that purchase inventory, import materials, rely on international suppliers, or manage pricing volatility.
Why Tariff Accounting & Reporting Matters (especially in a volatile year)
Tariff increases, and the frequent policy shifts that often accompany them, affect far more than the cost of goods. They introduce uncertainty across multiple operational and financial areas, including supply chain stability, vendor performance, inventory availability and carrying costs, customer pricing strategies, gross margin management, long-term asset planning, and even compliance with debt covenants and bank reporting requirements.
In 2025, U.S. trade policy experienced heightened volatility. A 10 percent baseline tariff on most imports was introduced in April 2025, alongside additional “reciprocal” tariffs applied to certain trading partners based on trade imbalances. These reciprocal rates varied by country and product and were subject to subsequent modifications, exemptions, and adjustments throughout the year. Collectively, these actions contributed to significant pricing volatility across many industries. For reference:
- White House action on reciprocal tariffs (April 2025, July 2025, and beyond)
- KPMG summary of the 10 percent baseline tariff and timing
Importantly, tariff exposure is not limited to businesses bringing in containers of inventory. Upstream pressure from suppliers, freight providers, extended lead times, and updated contract pricing can still affect your cost structure and margins, even if your organization does not import directly.
1) Inventory: the “quiet” tax lever many owners overlook
For product-based businesses, inventory is often the largest asset on the balance sheet. When tariffs increase, they can prompt a reassessment of whether the inventory value recorded in your financial statements continues to reflect economic reality.
What changes with tariffs?
When imported goods become more expensive, your cost basis increases accordingly. If market conditions prevent you from raising selling prices to match those increases, margins compress. This dynamic can lead to slow-moving or obsolete stock, excess quantities that cannot be sold at expected prices, product expirations and write-downs, and distorted profitability reporting.
The key accounting principle:
Under U.S. GAAP, inventory is measured at the lower of cost or net realizable value (NRV) for many entities. If NRV declines due to price pressure or diminished demand, a write-down may be required, reducing reported earnings and, depending on your tax accounting method and facts and circumstances, potentially lowering taxable income.
Year-end action idea: don’t wait until your tax preparer asks. Review inventory aging, pricing trends, and any SKUs that are now harder to move due to cost spikes.
2) Long-lived Assets & Goodwill: impairment risk increases when supply chains shift
Tariffs can also influence the economic usefulness of certain equipment, software, and acquired intangibles, particularly when those assets were designed around supply chains or vendor relationships that are no longer viable. For example, if machinery is configured to use components that have become cost-prohibitive to import, or if a business segment’s economics have materially shifted, an impairment assessment may be necessary.
Under ASC 360, entities are required to evaluate long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Tariff-related disruptions may represent one such indicator, though tariffs alone do not automatically trigger impairment. Helpful technical resources include:
Year-end action idea: if you’ve changed sourcing countries, discontinued product lines, or lost major import channels, ask whether related assets still provide the same economic benefit reflected on your balance sheet.
3) Revenue Contracts: tariffs can turn “profitable” deals into loss contracts
If you locked in customer pricing before tariff-related cost spikes, you may now be delivering goods or services at a thinner margin or at a loss.
Under ASC 606, revenue recognition is principle-based, and contract changes (or expected losses) can require careful accounting treatment and disclosure, particularly for larger or audited entities. Start here for an ASC 606 overview:
- FASB ASC 606 landing page
- Grant Thornton guide to ASC 606 application
Year-end action idea: pull any fixed-price contracts signed before major tariff changes and run a quick margin re-check. If you are underwater, you may need renegotiation or stronger forecasting and disclosure.
4) Banks, Debt Covenants, and the “EBITDA Reality Check”
When tariffs compress margins or trigger inventory write-downs, lenders often increase their scrutiny, particularly when loan covenants are tied to working capital, leverage ratios, or EBITDA performance. Beyond reviewing the balance sheet, financial institutions typically expect a clear narrative that explains period-to-period changes, especially during volatile policy environments.
Public companies address these requirements through MD&A (Management’s Discussion & Analysis), where they are required to discuss trends, uncertainties, and the factors influencing financial results. Although small businesses are not filing Form 10-Ks, adopting elements of the MD&A discipline can strengthen communications with lenders and investors.
Year-end action idea: if you anticipate banking conversations (renewals, new credit lines, equipment loans), prepare a short internal memo: “Tariff impacts, mitigation steps, and updated forecasts.”
5) Practical Year-End Checklist: What To Do Now
Below is a streamlined, year-end action list based on the key takeaways from the workshop:
- Review inventory valuation and aging.
Identify slow-moving items, potential obsolescence, and areas where customers are resisting higher prices. - Reassess supply chain and vendor concentration.
If your business is heavily dependent on a single country or supplier, model alternative sourcing scenarios. - Reevaluate fixed-price contracts.
Identify agreements where tariff-driven cost increases have eroded expected margins. - Evaluate impairment triggers.
Pay particular attention to equipment, software, and intangibles that rely on overseas sourcing. - Update forecasts and cash-flow scenarios.
Avoid assuming that upcoming periods will mirror recent performance; incorporate pricing volatility and potential policy changes into your planning.
Need help translating “tariff chaos” into clean financials?
Tariff fluctuations can quickly turn an otherwise accurate set of financials into statements that misrepresent economic performance, particularly at year end. If you need support evaluating inventory valuation, contract profitability, or the associated tax implications, Community CPA is ready to assist.
To discuss year-end reporting, planning, or cleanup before you file, contact us at 515-288-3188 or schedule an appointment at communitycpa.com, or by filling out the form below.
