As an eventful year concludes, it is crucial for businesses involved in producing or purchasing inventory for resale to consider the impact tariffs have on tax inventory methodologies. The 2025 tariff landscape has undoubtedly influenced operations, and now is the time for taxpayers to consider some actions they might want to take before year end.

LIFO method

Foreign owned taxpayers and taxpayers that use the "last-in, first-out" (LIFO) method for financial reporting purposes, but not for tax purposes, should consider adopting LIFO for tax purposes for the 2025 tax year.

Tax accounting method changes within LIFO

For tax purposes, many taxpayers use the Inventory Price Index Computation (IPIC) LIFO method that is based on external inflation indexes published by the Bureau of Labor Statistics (BLS). Those published indexes may not yet reflect all the inflation from the tariffs that taxpayers are actually experiencing, potentially resulting in a significant unfavorable book to tax LIFO adjustment.

With the new tariffs and increasing internal costs, taxpayers should consider how the tariffs may affect taxable income and consider whether a tax accounting method change should be filed to more accurately capture the actual inflation they experienced during the tax year. Certain changes may need to use the non-automatic accounting method change procedures, with the request to change their accounting method filed by the last day of the year.

The BLS indexes will likely catch up over time, but 2025 could have a very large unfavorable book to tax difference.

Unbundling costs

Taxpayers may be considering unbundling costs that are embedded in the purchase price of imported goods to reduce the landed cost subjected to tariffs. For instance, separating royalties or other fees from the invoice value may lower the customs value. Taxpayers should be aware that unbundled costs between related parties, like royalties, may require further analysis as they may be considered base erosion payments for taxpayers subject to the base erosion anti-abuse tax.

IRC Section 263A impacts

In light of the tariffs, and considering other business and/or market factors, taxpayers might consider reconfiguring their supply chains, including evaluating new vendors, renegotiating contracts, exploring alternative sourcing locations or establishing new facilities. Taxpayers also might consider importing parts or components and assembling them in the United States.

As a result, taxpayers could have significant IRC Section 263A impacts for both inventory and self-constructed assets, including the requirement to capitalize interest under IRC Section 263A(f).

Conclusion

The evolving tariff landscape requires a proactive approach to tax planning. Key actions taxpayers should consider include:

• Reviewing cost structures for compliance with IRC Sections 471 and 263A
• Modeling the impact of supply chain changes and other tariff related costs on UNICAP methodologies
• Determining the impact on taxable income of existing LIFO methodologies and considering potential accounting method changes