Expecting a Tariff Refund? Start Preparing for the Tax Fallout Today
Now that the Supreme Court has formally ruled that Trump did not have authority under the International Emergency Economic Powers Act (IEEPA) to impose many of his tariffs, including reciprocal tariffs, importers are awaiting their refunds. As a surprise to many, the tariff refund process is already up and running—and by all accounts, seems to be running smoothly. Phase one of the refund process is available to importers who paid tariffs starting January 30, 2026 (and many pending, or unliquidated, entries). While the process for obtaining the refund can be complicated, refund claims are being processed. This means that many companies that are eligible to receive refunds will soon be dealing with the tax fallout. Given the complexities involved, advisors and clients should begin evaluating their positions now to avoid unexpected consequences down the road.
Tariff Refunds: The Basics
Not all importers can file for tariff refunds directly. The original customs broker that the business worked with—or the "importer of record"—must apply for the refund. Many expect that this rigid rule was established because of the lessons learned in the wake of the COVID-era employee retention tax credit, where promotors and other bad actors filed millions of fraudulent claims.
Importers of record and customs brokers submit refund claims via a new electronic system, the Consolidated Administration and Processing of Entries (CAPE) system, created by the Customs and Border Protection agency (CBP). The CARE system itself is found in the CBP's Automated Commercial Environment, or ACE portal.
CBP expects that refunds will be issued within 60 to 90 days after the claim has been processed.
The entire process is expected to be executed in phases. As of April 20, the phase one refund system is live.
Understanding How Tariffs Refunds are Taxed
The tax treatment of any given tariff refund depends on how the business handled the tariff in the first place. Generally, when a firm pays a tariff, they capitalize that expense by building the additional cost into their "cost of goods sold". If those goods have already been sold, it's very likely that the company has already deducted the tariffs they paid on last year's tax return.
In this situation, the business must understand the tax benefit rule. Via the deduction, the business has obtained a tax benefit in a prior year. Taxpayers are required to include amounts in gross income if they previously deducted the amount and later recover all (or a portion) of the previously-deducted amount.
If the taxpayer had previously deducted the tariff, they'll be required to include the associated refund in gross income during the year it is received. Note that accrual-based taxpayers must include the refund for the year in which the "all events test" has been satisfied. The "all events test" is satisfied when the company's right to the refund has been established and they can estimate the amount of the refund with reasonable accuracy. Depending on when the tariff is actually received, it's possible that the refund may be includable in gross income even before the refund is received.
When inventory hasn't been sold, the company has yet to realize the tax benefit of the deduction (i.e., the company has increased the cost of goods sold but has not yet deducted those costs). In these cases, the company would adjust the cost of inventory (based on the refunded tariff), reducing the cost of goods sold rather than including the refund in gross income.
It's also important to consider the tax treatment of any interest paid by the federal government. If the government pays interest, those interest payments must be included in income.
Of course, additional complications may arise along the way. Many companies are obligated to pass refunds along to customers. Transfer pricing considerations will arise for many multinational companies. State-level sales tax issues will arise for others, who may be eligible for refunds related to state sales taxes paid on goods that included tariffs in their taxable base. Of course, the process and time limits will vary from state-to-state.
Conclusion
U.S. importers are now eligible to claim billions of dollars' worth of tariff refunds. The process will almost certainly be complicated and involve ongoing guidance as more details are obtained and released. Best practices dictate that companies should obtain qualified tax counsel and be prepared for future audits—which, of course, means maintaining careful documentation. Your questions and comments are always welcome. Please post them at our blog, AdvisorFYI, or call the Panel of Experts.