How Do Tariffs Work? What Businesses Need to Know

The current administration has recently introduced a series of tariffs targeting key imports from 90 countries, sparking widespread discussion about the effects of tariffs on the U.S. economy. These new measures are aimed at bolstering domestic production and reducing trade imbalances.

Supporters argue the changes will protect American jobs and industries, while critics question what tariffs will do to the economy long-term, especially for small and mid-sized businesses that rely heavily on imported goods. For many, the more pressing question is how to adapt financially—particularly when it comes to tax planning.

Table of Contents

• Understanding Tariffs and Their Function
  
  
• Tariff Tax Implications for Businesses
  
  
• Strategic Tax Planning in Response to Tariffs
  
  
• Bookkeeping and Tax Reporting Considerations
  
  
• Tax Professionals Can Help with the Effects of Tariffs 
  
  
• Final Thoughts
  
  
• FAQ

Understanding Tariffs and Their Function

To grasp the effects of tariffs, it's important to understand their purpose. Tariffs are government-imposed duties on imported goods. They function as a tax and are paid by the importer—not the foreign seller. This is where confusion around tariffs vs taxes often arises. 

So, how do tariffs work in practice?

That added cost may be passed on to customers in the form of higher prices, or it may be absorbed by the company—shrinking profit margins. If margins are too thin, the business might look for new suppliers, raise prices, or cut expenses elsewhere.

Over time, these decisions ripple through operations, affecting everything from pricing strategies to long-term sourcing and investment plans. In this way, tariffs don’t just influence trade, they shape how businesses function and compete.

Tariff Tax Implications for Businesses

Tariffs can reshape how businesses report income, claim deductions, and plan for future tax obligations. While the operational impact may be immediate, the tax effects often show up gradually.

Recognizing these implications early allows businesses to adjust their financial planning and avoid unexpected tax exposure: 

Changes in Taxable Income

As tariffs raise the cost of imported goods, net income often declines—directly affecting your business’s tax obligations. While this might result in a smaller tax bill, it comes with important trade-offs that need close attention.

Key Impacts to Watch:

• Estimated Tax Payments May Be Off
  If your quarterly tax estimates are based on older projections made before tariff-related cost increases, they may no longer reflect your current financial reality. Overpaying can limit cash flow for day-to-day operations, while underpaying can result in IRS penalties or interest charges.
  
  
• Losses Could Create Future Tax Opportunities
  If tariff-driven expenses push your business into a loss position, you may be eligible to carry those losses forward under Net Operating Loss (NOL) rules. These can offset future taxable income, but require proper tracking, documentation, and application to be used effectively.

Effect on Tax Deductions and Credits

Tariff-driven shifts in your supply chain, spending habits, and operational strategy can significantly affect your eligibility for various tax deductions and credits. These changes often happen gradually, making them easy to overlook—but they can have a real impact at tax time.

For example:

• Reduced Research and Development activity due to tighter budgets may shrink your qualification for federal or state research and development tax credits, especially if innovation or product development slows.
  
  
• Moving away from international suppliers could reduce access to deductions tied to foreign taxes paid, international shipping costs, or certain foreign tax credits.
  
  
• Transitioning to U.S.-based production might open up opportunities for domestic manufacturing deductions or state-level incentives tied to capital investment, job creation, or facility upgrades.
  
  

If these changes aren’t identified and addressed during your tax planning process, you risk underclaiming valuable credits, or misreporting your expenses entirely. While some shifts may unlock new opportunities, losing access to previously available deductions or credits can increase your overall tax burden. Regularly reviewing your eligibility, especially after operational changes, helps keep your filings accurate and your strategy aligned with your current business reality.

Strategic Tax Planning in Response to Tariffs

As tariffs start to impact your bottom line, the solution isn’t just to trim costs—it’s to plan smarter. A thoughtful tax strategy can help soften the financial hit, improve year-end predictability, and even surface new ways to preserve cash. Below are a few practical strategies worth exploring:

Tax-Loss Harvesting
If tariff-related costs have led to losses in certain areas of your business, you may be able to use those losses to offset gains elsewhere—such as from investments, asset sales, or passive income streams. This can significantly lower your total taxable income for the year, helping you retain more cash when margins are already tight. It’s a strategy worth considering if your financials look uneven across departments or business lines.

Deferring Income or Accelerating Expenses
When your earnings are trending lower than usual, the timing of income and deductions becomes especially important.

• Delaying income into the next tax year (when possible) can prevent you from being taxed on it during a year with already compressed profits.
  
  
• Accelerating deductible expenses—such as equipment purchases, maintenance costs, or prepaying certain services—can reduce your taxable income now and provide some breathing room.

These approaches can help level out unpredictable swings caused by tariff impacts and put you in a stronger position when planning ahead.

Being proactive in how you manage income and deductions can reduce tax pressure during challenging periods—and make your financial strategy more resilient if tariffs shift again down the road.

Bookkeeping and Tax Reporting Considerations

All of this planning only works if your records are clean. Tariffs introduce new cost layers that can complicate your books—and if those costs aren’t properly tracked, they’ll impact your tax filings.

Here’s what to keep in mind:

• Update your inventory and COGS reporting
  Tariffs should be included in landed costs when calculating COGS. Missing that detail can throw off your profit margins and lead to inaccurate filings.
  
  
• Expect increased scrutiny during audits if margins shift dramatically
  If your net income drops year-over-year, the IRS may look closer. Clear documentation of tariff-related changes can help you explain the shift and support your return.

Tax Professionals Can Help with the Effects of Tariffs 

Tariffs aren’t a one-and-done cost—they evolve with trade policy, product categories, and global markets. That’s why looping in a CPA early can save time and money in the long run.

A trusted partner can help you:

• Understand the full tax impact of the tariffs affecting your goods
  
  
• Adjust your accounting and cash flow plans to better absorb these costs
  
  
• Uncover state and federal incentives tied to reshoring, investment, or hiring

If your operations are changing, your tax strategy should evolve right alongside them. A strategic partner will help ensure that your approach stays aligned with both your financial goals and regulatory requirements.

Final Thoughts

Understanding how tariffs work isn’t just a trade policy issue—it’s a business survival issue. Whether you're reassessing your supply chain, your pricing model, or your taxable income, being proactive is key.

Tariffs may be beyond your control—but how you respond to them isn’t.

If you have questions about your business tax strategy or want help adjusting to recent tariff changes, reach out to the MB Group team today.

FAQ

How do tariffs work for small businesses?
Small businesses pay higher prices for imported goods and may have to increase their prices or change suppliers. These shifts can lead to lower profits and new tax considerations.

What’s the difference between tariffs vs taxes?
Taxes are imposed on income or sales, while tariffs are applied to imports. Both generate government revenue, but tariffs specifically target foreign trade.

What will Trump’s tariffs do to the economy?
While they may protect some domestic industries, they can also increase prices, disrupt supply chains, and strain small businesses—leading to mixed results.

How do tariffs affect businesses differently by size?
Larger firms may absorb costs or negotiate better terms, while small firms often feel the pressure more acutely and have fewer options for mitigation.

Where can I learn more about financial planning in 2025?
Check out our 2025 Financial Planning Outlook for more insights on how to prepare your business for economic shifts, including tax policy and market volatility.