by Mike Devereaux, Partner, Wipfli Advisory, LLC

Key takeaways

• Manufacturing businesses need to properly account for tariffs on their taxes, or face problems around taxable income, timing of deductions and missed opportunities.
• Tariff costs depend on the type of good being tariffed, with capital equipment, raw materials and R&D supplies all treated differently from a tax perspective.
• Additional wrinkles like R&D tax credits and IEEPA tariff refunds could also change your tariff tax exposure.

Tariffs are now  for U.S. manufacturing companies sourcing capital equipment and raw materials globally. This means business leaders need to better understand the rules, especially as  have created additional complications.

Misclassification when accounting for tariffs can affect taxable income, timing of deductions and missed opportunities. Keep reading to learn more about how tariffs affect your business from a tax perspective.

Tariff costs depend on the nature of the goods

From a federal income tax perspective, the proper treatment for tariff costs largely depends upon the nature of the goods on which the tariffs are being charged. That is, in most cases, the treatment of the tariff will follow the tax treatment of the underlying asset or good that is being imported into the United States.

Tariffs on capital equipment, raw materials and R&D supplies all have different tax treatments.

How tariffs affect capital equipment

When a tariff is incurred related to the import of machinery and equipment, the tariff is generally treated as part of the asset鈥檚 acquisition costs. The tariff is capitalized into the tax basis of the asset, along with purchase price, freight and installation costs.

Once capitalized, the tariff cost would be recovered through the same depreciation methodology as the underlying asset. Most machinery and equipment is depreciated via MACRS over five or seven years.

In addition, taxpayers can accelerate the depreciation and cost recovery with tools like 100% bonus depreciation and Section 179 expensing, subject to current law limitations and phase-down schedules.

How tariffs affect raw materials and inventory

Tariffs assessed on imported raw materials are generally treated as inventoriable costs. That is, the tariff is capitalized into the cost of inventory, along with the purchase price of the raw materials and related inbound freight.

The tariff is part of the cost of goods sold and is deducted when the underlying inventory is sold. Some manufacturers expecting tariffs to be levied on their raw materials for the foreseeable future may want to consider the last-in-first-out (LIFO) method of accounting for their inventories:

• LIFO accounting can be advantageous when costs are rising.
• But other requirements exist with LIFO, such as book-tax conformity and a requirement to stay on LIFO for at least five tax years.
• Companies considering LIFO should examine their internal cost accounting systems, for both book and tax purposes, to make sure that the system appropriately captures tariffs.
• If not, a change in accounting method should be considered prior to adopting LIFO.

How tariffs affect R&D supplies

Like capital equipment and raw materials, the cost of tariffs on R&D supplies follows the treatment of the cost of the underlying asset or good. As such, if the underlying supplies are materials used in the conduct of research, the tariffs would follow the same treatment.

The Tax Cuts and Jobs Act of 2017 (TCJA) differentiated the treatment of domestic and foreign research expenditures for tax years beginning after December 31, 2017. Effective for tax years 2018 and thereafter, the TCJA required research costs to be capitalized and recovered over the applicable period. The recovery period for domestic research expenses was set at five years, with foreign research expenses to be amortized over 15 years.

The One Big Beautiful Bill Act (OBBB) gave manufacturers relief for :

• For tax years beginning after December 31, 2024, domestic research expenditures are once again deductible as they are paid or incurred.
• Moreover, a transition rule exists whereby taxpayers can 鈥榗atch up鈥� their unamortized research expenditures from tax years 2022 through 2024; and small taxpayers are allowed to amend prior years鈥� returns to deduct the research expenditures otherwise capitalized on the originally filed tax return.
• For manufacturers using imported supplies in the conduct of research, such as prototype materials, molds or dies and automation supplies, the tariffs will follow the treatment of research supplies or materials.
• For tax years 2025 and beyond, most manufacturers will choose to deduct their research expenditures, and thereby the related tariff levied on those supplies and materials, as they are paid or incurred.

Tariffs may offer a hidden tax benefit for R&D activities

Given that the tariff amount follows the treatment of the underlying property, a manufacturer鈥檚 inquiry might turn to whether those costs can also . If a manufacturer imports chemicals, prototype materials, or other non-depreciable property that qualify as supplies under Section 41, the tariff embedded in their acquisition cost should generally be included in the amount paid or incurred for those supplies.

The tax code focuses on the 鈥渁mount paid or incurred鈥� for supplies used in the conduct of research. Because the tariff is part of the acquisition cost of the imported supply, the tariff should generally be included in that 鈥渁mount paid or incurred,鈥� assuming the underlying item is a qualifying research credit supply and is used in the conduct of qualified research.

For expensive prototype materials or molds/dies used in the conduct of domestic research, the tariffs levied on those supplies can significantly increase the amount of qualified research expenditures and thereby the tax credit. This rewards companies more when they are increasing their R&D costs.

Supreme Court ruling creates ambiguity on accounting for tariff refunds

On February 20, 2026, the U.S. Supreme Court ruled in a 6-3 decision that the International Emergency Economic Powers Act (IEEPA) . The majority opinion did not address tariff refunds and the dissenting opinion noted the process is likely to be a 鈥渕ess.鈥�

Significant uncertainty exists, independent of the proper tax treatment of any potential refunds. Only the importer of record is eligible for the refund, but many suppliers passed those costs onto their customers. As a result, many manufacturers will need to look into whether the ruling affects their rights and obligations under contracts with vendors and customers. That is, even if a manufacturer isn鈥檛 the importer of record, they may still seek or be legally obligated to a refund from their vendor.

It is also important to note that the Supreme Court ruling was limited to tariffs assessed under IEEPA, .

Established tax principles provide a framework for tariff refund scenarios

Although some uncertainty remains regarding refund administration and timing, established tax principles provide a framework for addressing several common tariff-refund scenarios. The appropriate treatment generally depends on how the original tariff was treated, whether the related property remains on hand, and when the taxpayer鈥檚 right to the refund becomes fixed under its accounting method.

• Raw materials already sold: A refunded tariff is generally included in taxable income under the tax benefit rule to the extent the earlier inventory or cost-of-goods-sold treatment reduced tax. The inclusion generally occurs when the right to the refund becomes fixed under the taxpayer鈥檚 accounting method.
• Self-employment tax: Some tariff refunds may be taxable for federal income tax purposes without being included in net earnings from self-employment.
• Raw materials still in inventory: If the goods that generated the refund remain on hand when the refund right becomes fixed, the refund generally reduces the cost or value of inventory rather than creating current taxable income, provided the adjustment is properly treated as an inventory cost adjustment.
• Capital equipment: A tariff refund tied to capital equipment is generally treated as a basis adjustment under IRC Section 1016 and Treasury Regulation Section 1.1016-3, rather than as a simple tax-benefit-rule recovery. If the asset remains owned and has a remaining adjusted basis, the taxpayer generally reduces the basis and adjusts depreciation prospectively over the remaining recovery period. If  or  was claimed, the basis decrease may reduce otherwise allowable depreciation in the year the decrease is taken into account. If the asset is fully recovered or was disposed of before the refund right became fixed, the recovery generally is reflected through basis and gain-or-loss mechanics. Taxpayers should coordinate the implementation with their fixed asset specialists.
• R&D tax credit supplies: If a refunded tariff was included in the cost of supplies used in qualified research, the taxpayer may need to revisit its Section 41 qualified research expense calculation. If the original credit year remains open, the taxpayer generally should recompute the credit by reducing qualified research expenses for the refunded tariff. If the year is closed, the issue is better analyzed under the general credit-recovery rule of IRC Section 111(b), which may increase tax in the refund year to the extent the earlier research credit reduced tax. This approach is similar to the treatment the IRS has applied to Employee Retention Tax Credit recoveries.

How Wipfli can help

We advise manufacturers on tariff impact, tax planning, R&D tax credits and supply chain strategy. Let鈥檚 talk about how we can help your manufacturing business navigate tariffs to reduce risk, improve cash flow, and make more informed sourcing and investment decisions.聽

| FEMA Member since 2021

by Cara Walton, Director of Manufacturing Marketing Intelligence at Wipfli

Key takeaways

• Wipfli鈥檚 Q1 manufacturing trends survey of more than 300 industry leaders found both optimism in the market and concern over rising costs.
• Manufacturing leaders report frustrations over tariffs, labor costs, inflation and price pass-throughs, but also expect revenues to rise and EBIT to go up or stay flat.
• As you assess your own Q1 performance, you should reevaluate your strategic plan, track your tariff exposure and do a deep dive into your sales process to look for opportunities to win more profitable jobs.

How are manufacturers tackling 2026 so far? Wipfli鈥檚 Q1 survey of more than 300 manufacturing leaders to identify key trends reveals a nuanced picture of an industry that鈥檚 optimistic but still navigating a period of intense change.

After enduring a rough 2025, manufacturers now express more confidence in the direction of their businesses. However, costs have also continued to rise, making cost containment a top priority over the next three quarters.

Keep reading to learn more about what manufacturers are saying and doing heading into Q2.

Who participated in Wipfli鈥檚 Q1 manufacturing trends survey?

Every quarter, Wipfli surveys hundreds of manufacturing leaders to learn more about the challenges and opportunities facing their businesses. For Q1 2026, we surveyed more than 300 leaders across a range of manufacturing process types, including:

• Metalforming
• Molding
• Die builder
• Gears
• Mold builder
• Fastener
• Machinery

The survey included manufacturers from industries like automotive, heavy truck, agriculture, defense, aerospace, medical and appliance. Participating firms varied in revenue from under $5 million to over $75 million.

The full results are only available to survey participants, but this article offers a high-level overview.

What key challenges are manufacturing industry leaders reporting after Q1 2026?

As we head towards the second quarter of 2026, manufacturers report that the cost of doing business remains a top concern. Tariffs, labor costs, pricing pressures and talent development are all straining margins, although some sectors are experiencing greater challenges than others.

Here鈥檚 more details on key challenges identified by the 300+ manufacturing leaders we surveyed:

• Higher cost of doing business: This was the top concern of manufacturers who participated in the survey. Contributing factors here include materials, wages and operating costs.
• Raw metal tariffs: Manufacturers specifically identified tariffs on raw materials as a major frustration factor. Uncertainty remains a huge factor here, with the recent Supreme Court ruling  imposed by the White House adding a new wrinkle to an already complicated situation.
• Continued inflation: Inflation has slowed from its pandemic-era peak, but continues to create challenges for manufacturing, with end consumers cutting back or even .
• Talent development: Labor challenges are nothing new, but this year, manufacturers face new pressures to adapt and upskill in response to an AI revolution that continues to ripple through the business world.
• Price pass-throughs: Businesses have been reluctant to pass the full cost of tariffs onto their customers to avoid spooking demand. But manufacturers are still eating those costs, with consumer-facing manufacturers often pushing their suppliers to take on some of the damage.

Other areas manufacturers report feeling concern include overseas competition, a potential recession and supply chain challenges.

Overall, manufacturers are more optimistic than they were a year ago

Despite a litany of challenges, most manufacturing leaders are optimistic. Fifty-four percent of executives who participated in the survey said they are optimistic, up from 40% a year ago. Most of the rest were ambivalent, with only 12% describing themselves as pessimistic.

Performance differs across industries

However, some industries have it easier than others. Leaders in marine, infrastructure, medical, commercial aerospace and defense largely reported that their firms are beating expectations, while automotive, appliance and packaging companies were more likely to share that they are missing performance targets.

Quote levels are up

Even some of the industries currently underperforming have reason for optimism. Quote levels are generally up from a year ago, including in automotive and packaging, as well as aerospace, defense, medical and infrastructure.

More manufacturers are hiring

Hiring rates have risen since last year. Less than 10% of manufacturers are planning to decrease hiring in 2026, either through no longer filling open positions or a reduction in force, which is less than 2025, which reflected 16% of manufacturers planning a decrease in hiring. Thirty-eight percent more firms report hiring for growth than did at this time last year.

Most leaders expect revenue to rise

Most manufacturing executives expect revenue to rise this year, with 38% projecting growth of 5-10% and 19% expecting to grow by 10% or more. Only 9% say their revenue will likely fall compared to 2025.

EBIT will largely stay flat or grow

Finally, EBIT will likely either stay flat or increase. Fifty-eight percent of leaders think their EBIT will remain the same, and another 32% are expecting improvement in EBIT.

What should you do next?

Visibility and adaptability are the keys to success. Your cost challenges won鈥檛 go away overnight and tariffs remain anyone鈥檚 guess, but if you have a clear understanding of what鈥檚 happening inside your business and are willing to adjust to meet the moment, you have a pathway to success.

Consider:

1. Assessing your strategic plan

You probably prepared one heading into 2026, but is it holding up? Review your existing strategic plan in light of your own Q1 results and make adjustments where needed.

2. Evaluate your tariff exposure

Tariffs will remain a factor for the next several years, as the White House has moved to impose new tariffs under different statutes after the Supreme Court struck down tariffs that relied on IEEPA. If your own materials costs are suffering, evaluate your supply chain to understand what countries you鈥檙e importing from so you can forecast your tariff exposure more accurately and consider possible alternatives.

3. Take another look at your sales process

Your sales process can offer a path to greater profitability. Do a deep dive into your existing process: study your top customers, consider whether you鈥檙e diversified enough and see which types of jobs earn you the most profit. Think about pricing too 鈥� if you have an idle press, for example, could you lower prices a little to create work for that machine?

How Wipfli can help

We advise manufacturers on improving performance, navigating change and growth. Let鈥檚 talk about the specific challenges you face and how we can help your business thrive. 

|Member since 2021