The tariff actions of 2025 have introduced a new variable into tax and business planning that many business owners had not previously needed to consider. New and increased tariffs on imports from China, Canada, and Mexico are raising input costs for manufacturers, retailers, and service providers who rely on imported goods, components, or materials. While tariffs are not themselves income taxes, they interact with the tax code in ways that create both planning challenges and opportunities.

How Tariffs Work in the Tax Context

A tariff is a duty imposed on imported goods, collected by U.S. Customs and Border Protection at the point of entry. The tariff is paid by the importer of record—typically the U.S. business purchasing the goods—not by the foreign exporter. This is a fundamental point that is often misunderstood: tariffs are a cost borne by domestic businesses and, ultimately, by consumers.^[1]

For tax purposes, tariffs paid on imported goods are treated as part of the cost of the goods. Under IRC § 263A (the uniform capitalization rules), tariffs on goods held for resale or used in manufacturing must be capitalized into inventory cost and are not deductible until the goods are sold or used. This means that the tariff cost reduces taxable income only when the inventory is disposed of—not when the tariff is paid. For businesses with significant inventory, this timing difference can create cash flow pressure.^[2]

Planning Strategies

Supply Chain Restructuring

The most direct response to increased tariffs is to restructure the supply chain to reduce exposure. This may involve sourcing from countries not subject to the tariff, shifting to domestic suppliers, or renegotiating terms with existing suppliers to share the tariff cost. Each of these decisions has tax implications—for example, shifting manufacturing to a domestic facility may qualify for additional tax incentives such as the § 199A deduction or state-level tax credits.

Inventory Accounting Methods

Businesses that use the LIFO (last-in, first-out) inventory method may see a benefit from rising costs due to tariffs, as the higher-cost inventory is matched against current revenue first, reducing taxable income. Businesses on FIFO (first-in, first-out) will see the opposite effect—older, lower-cost inventory is matched against revenue while the higher tariff costs remain in ending inventory. For some businesses, a change in accounting method may be appropriate, though this requires filing Form 3115 and managing the § 481(a) adjustment.^[3]

Foreign Tax Credits and Transfer Pricing

For businesses with foreign operations, tariffs can interact with foreign tax credit planning and transfer pricing in complex ways. Increased tariffs on imports from a related foreign entity may require adjustments to intercompany pricing to ensure arm's-length compliance. Additionally, if the tariff reduces the profitability of the U.S. entity, the allocation of foreign tax credits under IRC § 904 may be affected.^[4]

Tariff Exclusions and Drawbacks

Businesses should investigate whether their products qualify for tariff exclusions, which are periodically granted by the Office of the U.S. Trade Representative. Additionally, the duty drawback program allows businesses that import goods and subsequently export them (or use them in the manufacture of exported goods) to recover up to 99 percent of the tariffs paid. These programs are underutilized, particularly by small and mid-sized businesses that may not be aware of their availability.

Mississippi-Specific Considerations

Mississippi businesses that import agricultural equipment, building materials, auto parts, or manufactured components are directly affected by the current tariff regime. The state's manufacturing sector, which includes automotive, furniture, and food processing, relies heavily on imported inputs. Business owners should evaluate both the direct cost impact and the second-order effects on customer demand and pricing power.

From a state tax perspective, Mississippi does not impose a separate tariff or customs duty, but increased costs that flow through to higher prices may affect sales tax collections and business profitability. Business owners should work with their tax advisors to model the full impact of tariff costs on their operations and identify available planning strategies.^[5]