Tariffs & Capitalization
Breakdown of how to treat tariffs in your financial reports
Tariffs hit COGS but can distort the reality.
Tariffs rarely enter the conversation through the front door. They arrive through headlines, campaign promises, or diplomatic disputes. But their presence is felt much more viscerally for import-heavy businesses through margin compression, cash strain, and strategic dilemmas.
In theory, tariffs are straightforward. Under GAAP, they’re part of “landed cost.” One of many inputs capitalized into inventory and recognized in COGS only when the product is sold.
But in practice? I’ve seen operators treating tariffs like an expense. They’re booked immediately to the P&L, bypassing the balance sheet entirely. For some, it’s the fastest path to keeping up with the chaos.
This isn’t just an accounting nuance. It reflects how reactive companies can become when navigating chaos. In an environment defined by volatility, such as interest rates, credit markets, and geopolitical friction, tariff treatment becomes a small but powerful indicator of a broader theme: whether your finance function is built to absorb complexity or collapse under it.
If tariff exposure is material to your business, it deserves modeling, planning, and strategy. Because how you handle tariffs isn’t about compliance, it’s about control. And control is the ultimate form of optionality.
As tariff policy evolves, two tactical strategies are emerging that founders must understand and navigate carefully.
First, decoupling services. It’s common for manufacturers to bundle product design, prototyping, etc, into a single PO alongside the finished goods. But services are often not subject to tariffs, while the physical goods are. That creates an opportunity to restructure contracts. Push your supplier to itemize service work separately, and ensure you’re only being taxed on the tangible items. This isn’t about cutting corners; it’s about reflecting the true cost breakdown. If decoupling services becomes a meaningful lever in your margin stack, get your trade attorney involved early.
Second, avoid rerouting schemes. Many Chinese manufacturers set up entities in Vietnam, and other countries to appear compliant. But tariffs are based on country of origin, not shipment origin. Rerouting Chinese-made goods through Southeast Asia doesn’t eliminate the tariff. Mislabeling the country of origin is a customs violation with legal consequences. The legal strategy? Encourage your manufacturing partners to relocate production legitimately if needed, and make sure your documentation backs it up.
Let’s get into the mechanics (from the lens of a CFO).
Tariffs Are a Cost of Doing Business, But They Belong on the Balance Sheet
Let’s start with the technical foundation.
Per GAAP rules, tariffs are part of what’s known as the landed cost. That includes everything it takes to get your product into an “inventory account:” product cost, freight, insurance, customs fees, tariffs. That means tariffs should be capitalized into inventory and expensed through COGS only as that inventory is sold.
But here’s what most brands and SMBs actually do: they expense the tariff immediately.
Why? Because the invoice shows up like any other bill — and their accounting system isn’t built for nuance. They treat a $150K tariff the same way they’d treat a Meta ad bill or a legal retainer.
This isn’t optimal.
Capitalizing vs Expensing: Why It Matters
Capitalizing tariffs smooths out margin over time. Expensing them immediately spikes your cost structure today. It changes how healthy your gross margin looks in any given month.
Let’s play this out:
You buy $500K of product and pay $50K in tariffs (assume 10% tariff for simple math)
If you capitalize, the $550K sits in inventory and flows through COGS as you sell
If you expense the $50K right away, you’re artificially compressing your gross margin this month — and distorting next month when the inventory sells tariff-free
This creates “margin whiplash.”
You can’t lead a business with financial data that behaves erratically. Especially not one with seasonal rhythms, cash flow sensitivities, or investor reporting requirements. Discipline isn’t about being perfect… it’s about being predictable.
Tariff Treatment
If tariffs are a meaningful part of your cost structure, treat them like a variable, not an accounting nuisance.
That means:
Forecasting their impact across inventory turns. You should be modeling how tariffs affect landed cost per unit, contribution margin by SKU, and working capital drag across reorder cycles.
Deciding on your posture. Are you passing them through via price increases? Are you absorbing them to preserve growth velocity? Are you reengineering products or renegotiating supplier terms?
Communicating clearly. Boards, buyers, and bankers want to know: “What’s your plan?” You can’t just shrug and say tariffs hit margins. Show them how you’re modeling the impact and managing the response.
This is a moment to turn noise into signal.
The Real Cost of Short-Term Thinking
Let’s say you’re running a $25M omnichannel brand. You’ve got a hero SKU that accounts for 40% of your revenue and is subject to a new 15% tariff.
You can expense the hit today and take the margin loss, or you can model it over time:
Forecast your run-rate inventory purchases
Model tariff-adjusted landed cost and its impact on unit economics
Determine your breakeven point for price increases or COGS optimizations
Communicate your strategy to your board, banker, etc.
Short-term thinking says: “Just book it.”
Strategic thinking says: “Let’s model it, manage it, and explain it.”
The difference? One builds management and commercial trust, the other doesn’t.
How to Build a Tariff-Ready Finance Stack
Most brands don’t need a complete overhaul. They need to get the basics right.
Here’s a checklist to level up your readiness:
Inventory Capitalization: Set up your ERP or accounting software to treat tariffs as part of landed cost. If you’re using QuickBooks, work with your accountant to book inventory correctly and recognize COGS as it sells.
SKU-Level Forecasting: Don’t bury tariff impact in your total COGS line. Build a simple SKU model to isolate the incremental cost and forecast how it changes your margins by product.
Price Sensitivity Testing: Run scenarios on 10-15% price increases and map impact on revenue, margin, and contribution per channel. If you sell via wholesale channels, test those economics separately; your retailers may resist pricing changes more than DTC.
Supplier Conversations: Some suppliers are willing to absorb or share tariff costs, especially if you’re growing. Don’t assume the cost is fixed. Negotiate.
Cash Flow Forecasting: If you’re expensing tariffs and reordering inventory at higher costs, your working capital needs are increasing. You’ll need more cash, earlier or faster receivables. Model this.
Board & Lender Comms: Show your stakeholders you’re managing proactively. A well-articulated plan builds trust, and that trust becomes leverage. For better terms, more funding, and longer runway.
Tariffs and Trade-Offs
This is where authentic financial leadership kicks in.
If tariffs increase your COGS by $0.75 per unit, what’s your play?
Raise price by $1.00 and risk slowing sell-through?
Absorb the cost and eat 300bps of margin?
Cut your marketing CAC to preserve contribution?
Switch manufacturers and rebuild your QA process?
There’s no “right” answer, but there’s a wrong approach: flying blind.
Model every lever. Know your breakpoints. Understand your customer price elasticity, your CAC payback threshold, and your cash conversion cycle.
Tariffs are just the catalyst. The strategic question is: What trade-offs are you willing to make to preserve momentum without compromising financial quality?
What I See Great Operators Do Differently
Here’s what I am seeing separating top-tier operators from everyone else when it comes to tariffs:
They don’t treat tariffs as an accounting problem. They treat them as a strategic variable.
They capitalize where appropriate, not because it’s convenient, but because it’s accurate.
They educate their teams (from sourcing to sales) on how tariffs impact margin, pricing, and P&L dynamics.
They turn narrative into leverage, using modeling to drive better conversations with their board, investors, and lenders.
And most importantly, they keep the numbers clean, the story clear, and the business fundable.
Discipline Buys You Options
Tariffs are a headwind. But they’re not an excuse.
You and I can’t control global trade policy. But we can control our posture. We can choose to react or to plan. To panic or to prepare. To guess or to model.
Financial discipline isn’t about being right on every line item. It’s about creating options. When we handle our accounting (something as nuanced as capitalization) with clarity and precision, we earn the right to have better strategic conversations.
And when the winds change (as they always do), we’ll be ready to adjust our sails, not just hold the wheel.