Are Tariffs Deductible? Inventory Cost for US Server Importers

Are tariffs tax deductible for a US company?

Yes, but usually not in the year they are paid. Tariffs and customs duties follow the goods they were paid on. On servers, parts or other goods bought for resale, they become part of inventory cost and reach the return through cost of goods sold as the goods sell. On servers, switchgear or cooling units the company keeps and uses, they become part of the equipment's cost and come back through depreciation.

One extra rule applies when the seller is a parent or sister company: the tax cost of the goods can't exceed their customs value (see below). What makes a case harder: buying from a related company, a small business inventory method, and refunds. Gather each entry summary (CBP Form 7501), the matching invoice and the broker statement.

Are tariffs part of cost of goods sold?

Yes. The inventory cost of purchased goods is the net invoice price plus "transportation or other necessary charges incurred in acquiring possession of the goods" (26 CFR 1.471-3(b)). The IRS repeats this in plain words in Publication 538. The regulation does not list each fee by name, but these generally count as part of what the goods cost:

• Duties and tariffs on the entry
• Customs user fees, such as the merchandise processing fee
• Customs broker fees for clearing the entry
• Inbound ocean, air and truck freight, and cargo insurance

Freight out to customers is different: it is a selling and distribution cost, not part of inventory (26 CFR 1.263A-1(e)(3)(iii)(A)).

A company subject to the uniform capitalization rules (section 263A) also puts a share of its purchasing, handling and storage costs into inventory, such as warehouse rent and staff (26 CFR 1.263A-1(e)(3)(ii)(F)-(H)). Handling includes assembling, so labor to integrate imported servers into racks before sale goes into inventory too.

How do we record tariffs and customs broker invoices in our books?

Unless a small business method below applies, record duties, fees and inbound freight on the items they relate to, not in a separate expense account. A workable pattern in any bookkeeping system:

1. Post each broker statement, duty payment and freight bill to an inbound-costs clearing account.
2. Allocate each entry's duties, fees and freight to the items received on it, by value or by quantity, so each item's cost carries them (often called landed cost).
3. Let cost of goods sold pick them up as items sell. At the year-end count, the unsold items carry their share in ending inventory.
4. Keep the clearing account at zero after each allocation.

Unless the company uses a small business method that follows its books (below), a "Tariffs" expense account deducts duties on goods still in the warehouse, which overstates the deduction. Keep the entry summary, invoice and broker statement together for each import; they support both the inventory cost and the customs value comparison below.

What happens to duty on servers still in the warehouse at year-end?

It stays in inventory. Duty on unsold goods is part of their cost in ending inventory and is deducted in the year those goods sell. The year-end count decides the split: goods counted on hand carry their duties, fees and freight into the next year. If those goods later lose value, the write-down rules apply; see writing off unsold or obsolete inventory.

Can a small business expense tariffs when paid?

Sometimes. A company whose average annual gross receipts for the three prior tax years are at most $32,000,000 (Rev. Proc. 2025-32, section 4.30) is exempt from section 263A (26 CFR 1.263A-1(j)) and may choose a simpler inventory method (26 CFR 1.471-1(b)):

Under any of these methods, a cost is not deductible before it is paid or incurred under the company's overall accounting method.

The trap that flips the answer: the gross receipts test counts the whole group of related companies, which generally includes a foreign parent. A US subsidiary of a large overseas maker usually fails it from its first year. How the test aggregates, and how to change methods, is covered in switching from cash to accrual accounting.

Who records the tariff when the parent ships duty-paid or is the importer of record?

The importer of record deposits the duty (19 U.S.C. 1505(a)), and customs pays any refund to it or to a party it names on CBP Form 4811 (CBP).

• The US company is importer of record: it records the duties, fees and freight as part of its inventory or equipment cost, as above.
• The parent or supplier imports and delivers duty-paid: the US company's cost is the price it pays. It books no separate duty, because none is billed to it.
• The parent bills the duty separately but the US company is not the importer: the charge is part of the purchase price and goes into cost the same way.

Are tariffs on equipment we keep added to its cost basis?

Asset cost. Amounts paid to acquire equipment include the invoice price and transaction costs, and transporting the property is listed among those costs (26 CFR 1.263(a)-2(d)(1) and (f)(2)(ii)(A)). Duty and customs broker fees paid to bring the equipment in are generally treated the same way. Add duty, broker fees and inbound freight to the price of the servers, switchgear or cooling units the company keeps for its own site or cloud service. The equipment's cost is then recovered through depreciation. Bonus depreciation, Section 179 and their limits on equipment bought from a related company are covered in writing off GPU servers. The customs value cap below applies to equipment cost as well as to inventory.

Why can't our tax cost exceed the customs value on goods bought from our parent?

Because section 1059A stops a group from declaring a low value at the border to cut duty and then claiming a higher cost on the US return to cut income tax. When property is imported, directly or indirectly, from a related company, any cost counted in both the inventory or asset cost and the customs value can't be higher for tax than it was for customs (26 U.S.C. 1059A; 26 CFR 1.1059A-1).

How the cap works:

• Only shared costs are capped. The company may add freight, insurance, and assembly or installation after import that it paid and that are not in the customs value (26 CFR 1.1059A-1(c)(2)). The price used for customs leaves out international freight and insurance (19 U.S.C. 1401a(b)(4)(A)).
• The final customs value counts. Liquidation is customs' final calculation of the duty on an entry. The company is bound by the customs value once liquidation is final and no protest can change it. The regulation, written in 1989, says 90 days after notice of liquidation; customs law now allows a protest within 180 days of liquidation (19 U.S.C. 1514(c)(3)). Certain later reliquidations that correct errors take its place (26 CFR 1.1059A-1(d)).
• The cap is not a floor. A lower arm's-length cost stays lower, and the IRS can still adjust the price under section 482 (26 CFR 1.1059A-1(c)(7)).
• Middlemen don't avoid it. Goods routed through an agent or a sister trading company count as imported indirectly (26 CFR 1.1059A-1(b)(2)).
• Unrelated sellers are outside it. Buying from an unrelated contract manufacturer or supplier does not trigger the cap.

The cap does not apply to duty-free or free-rate items, items paying only the merchandise processing fee or harbor maintenance tax, or items with only a per-unit or volume duty (26 CFR 1.1059A-1(c)(1)). A line that carries any value-based duty, including an extra duty on top of a free general rate, appears to be within it, so read the entry summary line by line.

What if a year-end transfer pricing adjustment or a rebate changes the price after import?

The direction matters.

• Price goes up after import: a year-end invoice from the parent does not raise the tax cost of imported goods above the customs value unless the customs value rises too. Talk to the customs broker about the customs side before booking the true-up.
• Price goes down after import: a rebate or other decrease after import is ignored for customs (19 U.S.C. 1401a(b)(4)(B)), but it still lowers the tax cost (26 CFR 1.1059A-1(c)(3) and Examples 2 and 5).

Arm's-length pricing between the companies is a separate question; see US subsidiary of a foreign company, or for a Canadian parent, pricing between your Canadian and US companies.

Is a tariff refund taxable income, and how do we book it?

Partly, depending on where the refunded duty sits. CBP is refunding duties imposed under the International Emergency Economic Powers Act (IEEPA), with interest, through a filing called a CAPE Declaration that only the importer of record or its customs broker may submit. Entries are liquidated or reliquidated and refunds go to the importer of record or the party it named on CBP Form 4811 (CBP). By law, refunds of excess duty are paid within 30 days of liquidation or reliquidation (19 U.S.C. 1505(b)). The refund is what liquidation or reliquidation shows after netting every over- and underpayment on the entry, and CBP may offset debts the importer owes; book that amount, not the duty first paid. CAPE currently covers only the entry types CBP lists by phase (CBP).

The IRS has not published guidance on tariff refunds. An older technical advice memorandum on refunded anti-dumping duties, and the revenue rulings it relies on, point to this treatment (TAM 200543051; written for one taxpayer and not binding on others):

In the books: when the right to the refund is fixed, record a receivable from CBP. Credit inventory for the part relating to goods still on hand, other income for the part relating to goods already sold, and interest income for the interest. When the money arrives, clear the receivable.

Timing: an accrual-method company includes the refund when its right to it is fixed and the amount can be determined with reasonable accuracy (26 CFR 1.451-1(a)). A filed CAPE Declaration on its own probably does not fix that right; acceptance, liquidation and payment are later steps. A recovery of a cost that gave no tax benefit when deducted can be excluded under section 111.

Open point: no IRS source addresses a refund of duty that was added to equipment already written off with bonus depreciation. A refund the parent receives and passes on is a price change, handled under the rebate rules above.

Where do duties show on Form 1120 and Form 5472?

Inside cost of goods sold and asset cost, not as a separate line.

Sources: Form 1125-A, Form 5472. The rest of Form 5472 is covered in US subsidiary of a foreign company.

Customs questions, such as tariff classification, customs valuation, country of origin, trade-agreement claims, drawback, CAPE filings and protests, belong with a licensed customs broker or trade counsel. Our CPAs keep the books, cost inventory and prepare Forms 1120 and 5472; they do not file customs entries, CAPE Declarations or protests. Export controls on servers are outside this page.

How does Canada compare?

Example

Figures are in US dollars and illustrative only.

A $20,000,000 first count in a Texas warehouse

A first-year Delaware subsidiary of a Taiwanese server maker buys $20,000,000 of servers and parts from its parent group, as importer of record, at prices equal to their customs value. Broker invoices add $1,500,000: $1,200,000 of duties and customs fees, $50,000 of broker fees and $250,000 of inbound freight. At the December count, a quarter of the goods remain. The group's sales are far above the small business limit, so full inventory costing applies.

Spreading landed costs by value, cost of goods sold is $16,125,000 and ending inventory is $5,375,000. Ending inventory includes $375,000 of duties, fees and freight, deducted next year as those goods sell. Booking the $1,500,000 to a "Tariffs" expense account would overstate this year's deductions by $375,000.

A $500,000 year-end true-up from the parent

The parent invoiced parts that carry a value-based duty at $8,000,000, and the entries liquidated at an $8,000,000 customs value. The subsidiary also paid $200,000 of ocean freight and insurance, which is not in the customs value. In December, the group's pricing policy adds a $500,000 invoice; the customs entries are unchanged. The price part of the cost can't exceed the $8,000,000 customs value. The $200,000 of freight and insurance, and any duties and broker fees paid on the entries, are added on top, but the $500,000 can't be.

Had the parent instead granted a $400,000 rebate after import, the customs value would stay $8,000,000, but the price part of the tax cost would fall to $7,600,000. Servers that entered with no value-based duty sit outside the cap.

A $300,000 tariff refund

CBP refunds $300,000 of last year's duties plus $15,000 of interest to the subsidiary as importer of record. Of the refund, $60,000 relates to parts still in inventory: it reduces their cost. On the reasoning of the IRS memorandum above, the other $240,000, which relates to goods sold and deducted last year in a year the deduction reduced tax, is other income once the right to the refund is fixed. The $15,000 is interest income. None of it is netted against this year's new duties. Had the parent been importer on duty-paid terms, the refund would go to the parent, and anything it passed on would be a price change.

Different for you?

• The company imports from its parent or a sister company: the customs value cap, Form 5472 and arm's-length pricing all apply. See US subsidiary of a foreign company and our data center and server industry service.
• The company is still deciding between a branch and a subsidiary, or the parent will contribute equipment for shares: see foreign company entering the US.
• The imported items are prototypes, test boards or tooling: see deducting hardware research and prototypes.
• The question is use tax on imported servers: see sales tax on GPU servers you buy.
• The company pays Texas franchise tax: see Texas franchise tax deductions.
• A tariff refund is coming, or a year-end price adjustment is planned: the timing and split above depend on the entries and the pricing terms; see our data center and server industry service.