How Tariff Costs Affect S-Corp Taxes and COGS in 2026

Few line items on an S-corp’s books have moved around as much in the past two years as tariff costs. The 10% baseline tariff that took effect in April 2025 was struck down by the Supreme Court in February 2026, some importers are now in line for refunds, and duties under other trade authorities are still being collected at the border. The trade policy will keep shifting. What doesn’t shift is the tax treatment: how tariff costs flow into inventory, cost of goods sold, and ultimately your Form 1120-S. That’s the part worth understanding well, because it applies no matter what the tariff schedule looks like next quarter.

Where Tariffs Actually Stand in 2026

On February 20, 2026, the Supreme Court held in Learning Resources, Inc. v. Trump that the International Emergency Economic Powers Act does not authorize the President to impose tariffs. That decision invalidated the IEEPA-based tariffs — both the 10% baseline “reciprocal” tariff in place since April 2025 and the earlier trafficking-related tariffs on imports from Canada, Mexico, and China. The same day, Executive Order 14389 formally terminated those duties.

That does not mean tariff costs are over. Executive Order 14389 expressly leaves in place duties imposed under other authorities, including Section 232 of the Trade Expansion Act of 1962 (which covers products such as steel and aluminum) and Section 301 of the Trade Act of 1974. Rates under those programs have changed repeatedly, so don’t build a pricing model around any specific percentage you read online — check the current Customs and Border Protection guidance for your product classifications, or have your customs broker do it, before you commit.

Tariff Costs Are Inventory Costs, Not Instant Deductions

Here is the core tax rule. If your S-corp maintains inventories, import duties are not deducted the year you pay them the way rent or payroll is. Under Treasury Regulation 1.471-3, the cost of purchased merchandise is the invoice price plus “transportation or other necessary charges incurred in acquiring possession of the goods.” A duty you must pay to get goods through customs is exactly that kind of charge. It becomes part of the landed cost of the inventory and is recovered through cost of goods sold only when the goods are sold.

The timing matters. Suppose your S-corp pays $40,000 in duties on goods that arrive in November 2026 and half of those goods are still on the shelf at year-end. Roughly $20,000 of that tariff cost sits in ending inventory and doesn’t reduce 2026 taxable income at all — it shows up as COGS in 2027 when the goods sell. Owners who mentally deduct the full duty bill in the year it’s paid routinely underestimate their taxable income and come up short on estimated tax payments.

The UNICAP Layer — and the $32 Million Small-Business Exemption

Larger businesses face a second layer: the uniform capitalization (UNICAP) rules of Section 263A, which require producers and resellers to capitalize not just direct costs but each item’s allocable share of indirect costs, including taxes. For a reseller subject to UNICAP, duties, freight, and a slice of purchasing and warehousing overhead all get pulled into inventory.

Most S-corps, however, are exempt from UNICAP. Section 263A(i) excuses any business that meets the Section 448(c) gross receipts test — and for taxable years beginning in 2026, Rev. Proc. 2025-32 sets that threshold at average annual gross receipts of $32 million or less for the prior three years. The same test unlocks Section 471(c), which lets a small-business taxpayer treat inventory as non-incidental materials and supplies or simply follow the inventory method used in its books and records.

Don’t read that exemption as a license to expense duties immediately. If your bookkeeping capitalizes landed costs into inventory — and any decent inventory system does — the books-and-records method generally carries that same treatment onto the tax return. The exemption spares you the UNICAP overhead allocations; it doesn’t turn a duty embedded in unsold inventory into a current deduction.

If You Get an IEEPA Duty Refund, Expect a Tax Effect

Because the Supreme Court invalidated the IEEPA tariffs, refund procedures for duties collected under those orders are working their way through Customs and the courts. If your S-corp receives one, the refund is not free money for tax purposes. A refunded duty attributable to goods still in inventory reduces the carrying cost of that inventory. A refunded duty you already ran through COGS in a prior year is generally income in the year the refund comes in — you deducted it once, so you can’t keep the deduction and the cash. Track refunds by entry and by the year the related goods were sold, and loop in your CPA before booking them.

De Minimis Is Gone — E-Commerce Importers Take Note

One tariff-adjacent change survived the Supreme Court ruling and matters enormously for smaller importers: the $800 de minimis exemption is effectively dead. A CBP interim final rule effective June 24, 2026 indefinitely suspended duty-free de minimis treatment for shipments arriving by every mode other than the international postal network, and the One Big Beautiful Bill Act terminates the exemption by statute effective July 1, 2027. If your S-corp built its sourcing around small direct-import parcels, those shipments now require formal or informal entry, and the duties you pay on them are tariff costs subject to the same inventory capitalization rules described above.

Planning Moves That Still Work

Tax planning can’t repeal a duty, but it can soften the hit. Bonus depreciation is the big one: the One Big Beautiful Bill Act made the 100% first-year depreciation deduction permanent for eligible property acquired after January 19, 2025, which helps if higher import costs are pushing you toward domestic equipment or retooling. The 20% qualified business income deduction continues to trim the effective rate on pass-through profits — our OBBBA guide for S-corp owners walks through it. Accurate landed-cost bookkeeping is the unglamorous third leg: capture duties, freight, and brokerage on every entry so your inventory, COGS, and estimated taxes are built on real numbers instead of invoice prices alone.

Bottom Line

Tariff policy in 2026 is a moving target — the IEEPA tariffs are gone, Section 232 and Section 301 duties remain, and refunds are in play. The tax mechanics are not a moving target. Tariff costs land in inventory, flow out through COGS, and hit your S-Corp taxes on the timing the inventory rules dictate, with a meaningful simplification available under the $32 million small-business exemption for 2026. If you want help getting the landed-cost accounting right, quantifying a potential refund, or updating your estimates for the year, contact us and we’ll walk through it with you.