Capitalizing Tariffs Under ASC 330: Navigating Inventory Costing in a Global Trade Environment

Navigating the intricacies of inventory valuation and understanding the rules surrounding capitalization of tariff costs under US GAAP is crucial for manufacturers aiming to maintain accurate financial records and optimize their cost management strategies.

In today’s globalized economy, tariffs and import duties are increasingly relevant to companies managing inventory across borders. For U.S. businesses, understanding how to treat these costs under ASC 330 – Inventory is essential for accurate financial reporting and compliance with Generally Accepted Accounting Principles (GAAP).

What Is ASC 330?

ASC 330 – Inventory governs the accounting for inventory, including its measurement, valuation, and presentation. It requires that inventory be stated at the lower of cost or net realizable value, and it outlines what constitutes “cost” in inventory valuation.

Are Tariffs Capitalizable Under ASC 330?

Yes—tariffs and import duties should be capitalized as part of inventory cost under ASC 330, provided they meet certain criteria. According to the guidance, inventory cost includes:

• Direct costs: Material purchase price, freight-in, handling, and other costs directly attributable to acquiring inventory.
• Indirect costs: Allocable overheads, which include certain taxes and duties.

Tariffs fall under the category of costs necessary to bring inventory to its present location and condition, which adds to the cost basis of inventory.

Intersection with IRC Section 263A (UNICAP Rules)

While ASC 330 governs financial reporting, Section 263A (Uniform Capitalization Rules or UNICAP) governs tax reporting. Under Section 263A, businesses must capitalize both direct and indirect costs associated with inventory production or resale, including tariffs, if they are allocable to inventory

This alignment between ASC 330 and IRC 263A helps ensure consistency between financial and tax reporting (although differences in scope and exceptions may apply).

One such exception is the Small Business Taxpayer Exemption. To qualify for this exemption, taxpayers must meet a gross receipts test that is based on average annual gross receipts for the prior three tax years. For a tax year beginning in 2025, the gross receipts test is met if average annual gross receipts are $31 million or less.

Best Practices for Capitalizing Tariffs

To ensure compliance and accuracy, businesses should:

1. Track Tariff Costs Separately: Use accounting systems to isolate tariff expenses from other costs (e.g. separate general ledger account coding).  Code these correctly upfront to track costs properly and avoid manual journal entries later.
2. Document Allocation Methodologies: Clearly define how tariffs are allocated to inventory items, especially when dealing with mixed shipments with various products.
3. Consult Accounting Advisors: Don't be afraid to ask for help!

Challenges and Considerations

• Volatility in Tariff Rates: Frequent changes in trade policy can affect inventory valuation and require updates to costing models.  Stay informed!
• Complex Supply Chains: Allocating tariffs across multiple products or shipments can be complex and may require advanced costing systems. Alternatively, as tariffs are not consistently incurred and are fluid, a more cost-efficient approach may be to use manual journal entries to reclass the capitalizable portion into inventory at period-end. 
• Small Business Exceptions: As mentioned above, certain small businesses may be exempt from UNICAP rules under IRC Section 263A, but ASC 330 still applies for GAAP reporting 
• Lower of Cost or Net Realizable Value:  If a business faces increased material acquisition costs due to newly imposed or higher tariffs, this will raise the overall cost of inventory. Under ASC 330, companies must assess whether these higher costs impact the lower of cost or net realizable value (NRV) evaluation. If the NRV falls below the adjusted cost, an inventory impairment may be necessary. A key factor in this assessment is whether the company expects to offset the tariff-related cost increases through price adjustments to their customers - which is often a very difficult decision.

Conclusion

Capitalizing tariffs under ASC 330 is generally required for appropriate inventory valuation. As global trade dynamics evolve, businesses must stay vigilant in tracking and allocating these costs. By thoughtfully aligning financial reporting practices, companies not only uphold compliance and transparency but also create a foundation for more confident, informed decision-making—helping both their people and stakeholders feel secure in a rapidly changing global landscape.