The U.S. Federal Income Tax Treatment of Tariff Refunds

Earlier this year, the Supreme Court ruled that many of President Trump’s “emergency” import tariffs were improperly collected as he had no congressional authority to impose them. Since then, persons who paid the tariffs that have been declared invalid (unsanctioned tariffs) on their imports have been waiting for guidance from U.S. Customs and Border Protection (CBP) on how to obtain refunds of tariffs that they paid.

On April 20, 2026, the CBP began processing tariff refund claims through an online portal and, presumably, tariff refunds will be forthcoming to those who paid them and can substantiate and perfect their claim.

Questions are now arising as to the U.S. income tax consequences of the claims and associated refunds. Businesses and individuals who receive tariff refunds will likely ask their tax advisors “Do I have to pay income tax on this?” and, as is typically the case, the answer is “It depends.”

Refunds of Tariffs Paid on Deducted Items

Where tariffs were paid on imported items that the taxpayer deducted for income tax purposes, the refund of those tariffs constitutes a recovery of a previous year’s deduction that gave rise to a tax benefit.  Under the “tax benefit rule,” a recovery of a previously deductible item is only taxable if and to the extent it provided the taxpayer with a tax benefit (e.g., reduction in liability or increase in a loss carryover) in a previous year.

Although the tax benefit rule technically consists of two separate principles – an inclusionary rule and an exclusionary rule – we will only address the results of these rules instead of which element of the tax benefit rule governs the result.

The tax benefit rule applies equally to previous deductions as well as previous gross income exclusions that are obtained through costs of goods sold. For example, a refund of customs duties previously included in cost of goods sold (COGS) is taxable.

The year in which recoveries must be included in income under the tax benefit rule depends on the taxpayer’s overall method of accounting. A taxpayer using the cash method must include a recovery (to the extent of any earlier tax benefit) in the year in which such taxpayer receives or constructively receives the recovery. A taxpayer using the accrual method must include the recovery (to the extent of any earlier tax benefit) in the year in which all events have occurred to give the taxpayer a fixed right to the recovery and the amount can be determined with reasonable accuracy. Because approval of the recovery by relevant government authorities is required, the IRS believes that such approval “is not ministerial but involves substantive review,” meaning the fixed right is not established until the earlier of the time when the taxpayer receives payment or the year when the taxpayer is given notice that the claim is approved.

Taxpayers subject to the tax benefit rule do not have the option of amending prior years’ returns. Also, the tax benefit rule does not apply when the recovery occurs during the same tax year as the transaction generating the deduction; the deduction in that case is simply netted against the recovery instead of being left as a gross deduction and taxable recovery.

Tariff Refunds Related to Purchases of Inventory

In many if not most cases, businesses imported goods from overseas to be resold in the U.S., and many of those purchases were subjected to tariffs which may now be refunded.

Where tariffs were paid on purchases of inventory, the purchaser normally would capitalize those tariffs into their inventory costs. For instance, an importer who purchased $100,000 worth of product, and in addition to that amount paid $25,000 in unsanctioned tariffs, would have debited their inventory costs for $125,000. To the extent that the inventory was sold, it would have been included in their COGS and reduced income. To the extent that the inventory remains unsold, it is likely still sitting in their inventory costs.

So, what happens when the business receives a refund of the $25,000 in unsanctioned tariffs that they paid?

To the extent that the tariff refund can be ascribed to inventory sold during 2025, the taxpayer is required to include the refunded amount of those tariffs in gross income in the year that they receive the refund. Since the refunded tariffs directly associated with product sold in 2025 increased the taxpayer’s 2025 COGS, the taxpayer received a tax benefit which either reduced their tax or increased a loss carryover to 2026. As a result, the tax benefit rule applies and requires the taxpayer to include the previously deducted tariffs in gross income in the appropriate year.

Where goods upon which tariffs were paid remained in the taxpayer’s inventory at the end of 2025, the taxpayer excludes the recovery from gross income and accounts for the recovery through a reduction to their 2026 opening inventory costs. Depending on how slowly the inventory items move, the adjustments can affect 2027, and future years.

Under the above example, $125,000 in inventory purchases were incurred in 2025, and then in 2026 the taxpayer receives a refund of $25,000, bringing their cost of the inventory down to $100,000. Let’s assume that 25% of the inventory purchased in 2025 was sold in 2025, 50% is sold in 2026, and 25% remains on the shelf and in inventory at the beginning of 2027.

On their 2025 tax return, the taxpayer’s COGS related to the inventory was $31,250. Of that, $6,250 was refunded to the taxpayer in 2026. On its 2026 tax return, the taxpayer is required to include $6,250 in gross income. Partnerships and S corporations are required to pass this income through as a separately stated item of income on Schedule K-1.

On its 2026 tax return, the taxpayer will reduce its opening inventory by $18,750. This represents the tariffs paid on inventory that the taxpayer had on hand at the end of 2025. It also has the effect of reducing ending inventory at the end of 2026 by $6,250. Therefore, the taxpayer’s 2026 COGS is effectively decreased by $12,500. If the remaining inventory is sold in 2027, COGS for that year will effectively be decreased by $6,250.

Accordingly in 2025, the taxpayer paid $25,000 in unsanctioned tariffs, which it gets back in 2026. Instead of including the entire refund in income during 2026, the taxpayer picks up $6,250 using the tax benefit rule and $12,500 through a decreased COGS deduction, for a total adjustment to 2026 income of $18,750. In 2027 the remaining $6,250 gets taken into income via a decrease in COGS.

Of course, this all presumes that the taxpayer uses first-in, first-out accounting for inventories. Where LIFO, Lower of Cost or Market, Weighted Cost Average or another permissible method of accounting for inventory is utilized, appropriate adjustments will need to be calculated to determine the proper inclusion amount under the tax benefit rule, current year COGS, and inventory costs carried to 2027 and future years.

Refunds of Tariffs Paid on Fixed Asset Purchases

Where tariffs were paid on products or items that U.S. purchasers imported and capitalized as fixed assets, different tax accounting treatments may apply.

Again, let’s presume that a U.S. purchaser acquired an imported asset with a seven-year recovery period for $125,000 in 2025, and embedded in that cost was $25,000 in unsanctioned tariffs. The taxpayer placed the asset in service during 2025 and claimed 100% bonus depreciation for it on its 2025 federal tax return. This reduced the taxpayer’s taxable income by $125,000.

In 2026, the taxpayer receives a refund of $25,000 related to the unsanctioned tariff. Because the tariff amount was fully deducted through bonus depreciation in 2025, the refund constitutes a recovery of a prior‑year deduction that produced a tax benefit, and the tax benefit rule requires inclusion in gross income in 2026.

Let’s now assume that the taxpayer elected out of bonus depreciation and used regular MACRS or ADS depreciation rules to arrive at a 2025 depreciation deduction of $18,000. After receiving the tariff refund, the taxpayer’s effective cost of the asset is reduced to $100,000. Does the taxpayer have to amend their 2025 tax return or pick up any of the $25,000 refund or $18,000 in depreciation claimed in 2025 on its 2026 tax return? No, it does not.

Instead, IRC section 1016(a)(1) requires that the tariff refund be treated as an adjustment to the asset’s basis to be accounted for through reductions in depreciation expense over the remainder of the asset’s useful life. Therefore, the tariff refund is not immediately brought into income, but instead it reduces the company’s depreciation expense over the current and subsequent six years.

Refunds of Tariffs on Personal or Non-Deductible Purchases

In instances where taxpayers paid unsanctioned tariffs on imported products that (a) they did not use in a trade or business or (b) for which they received no tax benefit, the refund of the tariff most likely constitutes a tax-free purchase price adjustment for the item purchased. This will require the taxpayer to reduce their adjusted basis in the item for purposes of calculating gain or loss on its sale in the future.

Should you have any questions about tax rules associated with tariff refunds, please contact our NTO tax professionals.