Accounting for IEEPA Tariff Refunds: Which GAAP Model Applies to Your Business

Why the Accounting Question Is Harder Than It Looks

Receiving a large tariff refund sounds straightforward. In practice, the accounting treatment depends on decisions your company made over the past year about how to record tariff costs in the first place — decisions that may not have been made with a refund scenario in mind. Because no U.S. GAAP standard addresses tariff refunds resulting from judicial invalidation specifically, companies have to reason by analogy from existing guidance, and the right analogy depends on your facts.

Leading accounting experts have consistently held that two models are available and both constitute acceptable accounting policies. The model that applies to your company’s refund depends on how you originally recorded the tariff costs. Getting that determination right matters because the two models have meaningfully different recognition timing, balance sheet presentation, and income statement classification consequences.

Model 1: The Loss Recovery Model (ASC 410-30)

If your company expensed IEEPA tariff costs, meaning they flowed through cost of goods sold or depreciation as inventory sold or fixed assets depreciated, you may be able to recognize a refund receivable before the cash arrives. This is the loss recovery model, applied by analogy to ASC 410-30, which was written for environmental obligation recoveries but is widely accepted as the appropriate framework for any situation in which a previously recognized loss is expected to be recovered.

Under this model, recognition of a refund asset is permitted when recovery is probable. “Probable” is defined in the ASC Master Glossary as “likely to occur,” a standard that most advisors interpret as roughly 75% or higher likelihood. The asset is capped at the amount of the original loss: if you expensed $5 million in IEEPA duties and recovery is probable, you can recognize a $5 million receivable. You cannot recognize more than you originally lost, and any potential recovery above the recorded loss amount must be treated as a gain contingency.

The key judgment call is whether recovery is currently “probable” given the legal uncertainty described in the filing article. The Supreme Court ruling, the Court of International Trade’s nationwide refund order, CBP’s launch of CAPE, and the acceptance of your specific Declaration each contribute to the probability analysis. If the government’s appeal window lapses in early June 2026 without a stay, companies relying on the loss recovery model may provide a basis for concluding that recovery is possible.

One additional technical point worth noting: some companies may apply the loss recovery model not only to costs already recognized in earnings (through COGS or depreciation), but also to costs that remain on the balance sheet as capitalized inventory or fixed asset costs that have not yet been depreciated. Applying the model to those amounts reduces the carrying value of the relevant asset rather than flowing through income. It would not be unreasonable to apply the gain contingency model when amounts are still in inventory or capitalized to fixed assets. Both approaches are acceptable as accounting policies; they just need to be applied consistently and disclosed.

Where is the Offsetting Entry? 

Under the loss recovery model, the refund receivable is recognized as a separate asset, as it is not netted against the original expense. The offsetting credit reduces the same expense line where the original tariff cost was recorded. If the tariff was expensed through COGS, the credit reduces COGS in the period of recognition. This means the refund is visible on your income statement as a COGS benefit, not as “other income.”

Model 2: The Gain Contingency Model (ASC 450-30)

The alternative is the gain contingency model under ASC 450-30. Under this model, a refund cannot be recognized until it is realized, meaning cash is received, or the amount is fixed and determinable. Until that point, the refund exists in your financial statements only as a footnote disclosure.

This is the more conservative approach, and it is the one that some advisors consider the most practical and operable default for most companies right now, given the remaining legal uncertainty and the fact that CBP has not yet issued formal reliquidations for most entries. It is also the model that some companies have no choice but to use. For example, if you are uncertain whether your tariff costs were primarily expensed or capitalized, or if you passed most of your tariff costs through to customers (which makes it difficult to characterize the refund as a “recovery of a loss”).

Under ASC 450-30, the “realized” threshold for gain contingency recognition is met at the earlier of CBP’s formal approval of your specific refund claim or actual cash receipt. For most Phase 1 filers, the first of these events will likely occur in Q2 or Q3 2026 as entries are reliquidated and payments are processed.

It is worth noting that IFRS companies face a different framework. Under IAS 37, a contingent asset can be recognized only when the inflow of economic benefits is “virtually certain,” a higher threshold than the ASC 410-30 loss recovery model’s “probable” standard. This creates a potential divergence for dual-reporting entities: U.S. GAAP statements could show a refund receivable on the balance sheet while IFRS statements show only a footnote.

How Your Original Recording Determines the Right Treatment

The GAAP model is one decision. The classification within that model is a second, separate decision that depends on where your tariff costs originally landed:

• If the tariff was expensed directly through COGS as inventory sold, the refund reduces COGS in the period of recognition (loss recovery model) or when received (gain contingency model).
• If the tariff was capitalized into inventory that is still on hand, the refund reduces the inventory’s carrying value. When that inventory is eventually sold, the lower cost basis flows through to COGS.
• If the tariff was capitalized into property, plant, and equipment, the refund reduces the asset’s cost basis, and future depreciation expense should be adjusted prospectively from the date of recognition.

Most companies will find that the bulk of their IEEPA tariff costs are recoverable under the loss recovery model, because most tariff payments were expensed through COGS as inventory moved. The inventory-on-hand and fixed asset treatments apply to a smaller subset, but the dollar amounts can be significant for manufacturing companies or those with long inventory cycles.

From a balance sheet classification standpoint, the refund receivable is current or noncurrent based on when you expect to receive the cash. Given CBP’s stated 60-to-90-day processing window from Declaration acceptance, most Phase 1 refunds should be classified as current assets.

The Pass-Through Question

If your company recovered IEEPA tariff costs by passing them through to customers as explicit surcharges, price adjustments, or built into contract pricing, you have an additional layer of analysis before booking the refund as income.

Under ASC 606, amounts owed back to customers are generally treated as a reduction of revenue rather than as separate income. If you represented to customers that they were paying a tariff surcharge, or if your contracts contain duty drawback sharing provisions, price adjustment clauses, or cost-plus mechanics, you may have an obligation to return some or all of the refund to those customers. That obligation, if it exists, must be evaluated before you recognize any refund as a gain.

This is not a theoretical risk. Supply chain lawyers report that reimbursement demands from downstream buyers are already being received by importers across industries, and putative class actions on unjust enrichment theories have been filed against some importers. Evaluate your customer contracts carefully before you book the refund. If a customer obligation exists, the appropriate accounting entry is a reduction of revenue, not an offset to income.

Practical Note on Internal Controls

Accounting for IEEPA tariff refunds requires coordination among customs compliance, accounting, and tax functions. Companies that lack documented controls over how tariff costs were originally recorded, and how the refund claim maps back to those costs, face real audit risk. Failure to maintain adequate controls over the refund accounting could constitute a significant deficiency. Build the documentation now while the data is available.

Tax Treatment: What Happens When the Money Arrives

The tax treatment of tariff refunds follows the tax benefit rule: if your company deducted the tariff payment as a cost of goods sold or business expense in the year paid, the refund is taxable income in the year received. The statutory interest component is taxed separately as interest income. Timing differences between when you recognize the refund on your GAAP books and when you receive the taxable income can affect your deferred tax asset and liability positions, requiring coordination between your accounting and tax teams.

Multinational companies face additional considerations. If IEEPA tariff costs were allocated to subsidiaries through intercompany arrangements or transfer pricing, those allocation mechanisms need to be revisited in light of the refund. A refund received by the IOR entity that bears the economic benefit initially allocated elsewhere raises transfer pricing questions that should be evaluated before the cash arrives.

Subsequent Events: The December 31, 2025 Situation

For companies with a December 31, 2025 fiscal year-end, the Supreme Court’s February 2026 ruling is a non-recognized subsequent event under ASC 855. It occurred after the balance sheet date and reflects conditions that did not exist at year-end. That means:

• No adjustment to the 2025 financial statements is required or permitted for the refund.
• Disclosure is required in the 2025 footnotes describing the nature of the event, the refund opportunity, and an estimate of the financial effect if determinable.
• The refund asset and income will be recognized in 2026, when recovery becomes probable under the loss recovery model or when cash is received under the gain contingency model.

If your 2025 financial statements have not yet been issued, the disclosure should describe the current state of the CAPE process, including the Phase 1 launch, the 60-to-90-day expected payment timeline, any entries excluded from Phase 1, and the remaining legal uncertainty around the government’s potential appeal. The more specific the disclosure, the more it serves its informational purpose.

A Worked Example

Your company paid $10 million in IEEPA tariffs during 2025, all expensed through COGS as inventory was sold. In April 2026, you file a CAPE Declaration, and CBP accepts it. You conclude that recovery is probable based on the Supreme Court ruling, the CIT orders, and CBP’s acceptance of your Declaration.

Under the loss recovery model, recognize a $10 million receivable (current asset) and reduce Q2 2026 COGS by $10 million. If $2 million of that $10 million was for goods still sitting in your warehouse, reduce inventory carrying value by $2 million and reduce COGS by $8 million for the sold portion. When the warehoused goods eventually sell, the lower inventory cost flows through to COGS.

Under the gain contingency model, no recognition is made until CBP formally approves and reliquidates the entries (or cash is received), at which point you can record the receivable and the COGS benefit simultaneously. Footnote disclosure in the interim.

Neither model is wrong. Your choice between them should reflect the facts of your situation, be consistently applied, be documented, be disclosed, and be discussed with your auditors before quarter-end.