manufacturing investments

As manufacturers close out year-end reporting, one accounting issue continues to surface across the industry: the treatment of tariffs and import duties in inventory and the broader financial statements.

While the accounting guidance itself is not new, the operational reality has proven far more complex. Tariffs are no longer a peripheral cost consideration. For many manufacturers, they represent a material component of product cost that directly affects margins, pricing decisions, and reported financial results.

The Accounting Framework is Clear — Execution is Not

Under Accounting Standards Codification (ASC) 330, tariffs and other import duties are capitalizable as inventory costs. These costs should be included in inventory and recognized in cost of sales only when the related inventory is sold, and the associated revenue is recognized.

At a conceptual level, this treatment is straightforward. In practice, however, many manufacturers struggle to capture, allocate, and consistently capitalize tariff costs—particularly when tariffs apply across multiple products, suppliers, or shipment periods.

System limitations, fragmented data, and tariff invoices that span numerous inventory items often make direct capitalization impractical. As a result, companies are forced to evaluate alternative methodologies that balance precision, consistency, and operational feasibility.

Inventory Costing Methods and Practical Tradeoffs

Manufacturers typically rely on one or more of the following approaches to reflect tariff costs in inventory:

• Direct capitalization to inventory line items, which offer the highest level of precision, but often requires system capabilities that many organizations do not currently have.
• Standard costing adjustments, where standard costs are modified to approximate tariff impacts once tariffs become applicable.
• Estimated allocation methodologies, which allocate total tariff costs to inventory using a systematic approach, such as freight or overhead capitalization.

Each method introduces tradeoffs between accuracy, complexity, and audit supportability. Regardless of approach, consistency and documentation are critical to sustaining the methodology over time.

Tariffs Do Not Stop at Inventory

Accounting for tariff costs in inventory has implications that extend well beyond the cost of sales.

On the revenue side, manufacturers may attempt to recover tariff costs through price increases or contractual pass-throughs. While tariffs themselves do not affect revenue recognition, the structure and timing of price adjustments can—particularly when evaluated under ASC 606 as variable consideration or contract modifications.

Tariffs can also trigger broader financial reporting considerations, including:

• Risk and uncertainty disclosures when tariff costs cannot be fully recovered through pricing or operational changes.
• Concentration disclosures if tariff payments to government entities become significant relative to overall expenditures.
• Margin volatility may impact forecasts, covenant compliance, and management’s assessment of future performance.

In more severe cases, sustained tariff pressure may also raise questions about a company’s ability to continue as a going concern.

Why This Matters Now

As global trade policies continue to evolve, tariff costs are increasingly dynamic and material. Manufacturers who treat tariffs as a period expense, fail to consistently capitalize them, or overlook their downstream financial statement effects risk misstated inventory balances, distorted margins, and heightened scrutiny during audits and financial reviews.

The issue is not whether tariffs should be capitalized. The challenge lies in operationalizing that requirement in a way that is accurate, repeatable, and aligned with the company’s systems and controls.

How Dean Dorton Can Help

Dean Dorton works with manufacturers across the industry to evaluate tariff accounting methodologies, assess system and process readiness, and understand the downstream financial statement implications of tariff costs.

If you have questions or would like assistance navigating the accounting and reporting impacts of tariffs, please contact Dean Dorton’s manufacturing industry experts.

When Governor Andy Beshear took Kentucky’s message to the World Economic Forum in Davos, the signal to global capital markets was clear: Kentucky is positioning itself as a low-friction, high-subsidy jurisdiction for capital-intensive manufacturing in the United States.

For financial sponsors, corporate development teams, and CFOs, the state’s appeal is not rooted in a headline tax rate alone. Instead, Kentucky differentiates itself through a deliberately engineered incentive framework that materially compresses upfront capital requirements and lowers long-run effective tax rates—particularly for large manufacturing investments in automotive, EV batteries, and advanced industrial production.

A Simple Statute, a Very Different Effective Tax Outcome

At the statutory level, Kentucky imposes a flat 5% corporate income tax on C-Corporations, a structure commonly used by foreign investors establishing U.S. operations. On its own, this rate is largely in line with regional peers.

The distinction emerges at the project level.

Kentucky relies heavily on performance-based incentives—primarily income tax credits and refundable sales tax mechanisms—that can effectively shelter a substantial portion of project-level income for a decade or more. For qualifying manufacturers, this often drives the effective state income tax burden well below the statutory rate during the most capital-sensitive phase of a project’s lifecycle.

For domestically owned, privately held businesses operating as S-Corporations or partnerships, the picture can be even more favorable. Kentucky’s individual income tax rate is currently 4% for 2025 and is scheduled to decline to 3.5%, contingent on state budget targets. While all entity types are subject to Kentucky’s Limited Liability Entity Tax (LLET), that tax is calculated on the lesser of gross receipts or profits, has a modest minimum, and is deductible against income tax—softening its overall economic impact.

The Core Incentive Tools Driving Manufacturing Economics

Kentucky’s manufacturing strategy is anchored by a set of complementary incentive programs that, when properly structured, create a meaningful incentive-stacking effect.

Kentucky Business Investment (KBI) is the state’s primary income tax incentive. For eligible manufacturing projects meeting investment, job creation, and wage thresholds, KBI can offset up to 100% of the state income tax generated by the project, typically over 10- to 15-year periods. From a financial modeling standpoint, this frequently reduces the Kentucky income tax line to near zero during the capital recovery phase—improving IRRs and early-year cash flow profiles.

For capital-intensive projects, however, the most immediate value often comes from the Kentucky Enterprise Initiative Act (KEIA). KEIA provides refunds of sales and use tax on construction materials permanently incorporated into buildings, as well as qualifying machinery, equipment, and certain R&D or data-processing assets. With a 6% sales tax rate, KEIA can reduce total project cost by several percentage points of gross capex—often translating into tens or hundreds of millions of dollars in savings on large-scale facilities.

Existing operators can further benefit from the Kentucky Reinvestment Act (KRA), which provides income tax credits tied to reinvestment in plant modernization, equipment upgrades, and automation. This is particularly relevant for Tier 1 and Tier 2 automotive suppliers navigating ongoing tooling cycles and the industry’s transition toward electrification.

Incentive Stacking in Practice

Taken together, Kentucky’s programs function as an integrated incentive-stacking model. A typical large manufacturing investment may simultaneously benefit from:

• Multi-year income tax offsets under KBI
• Upfront sales tax refunds under KEIA
• Workforce training grants and credits
• Local property tax abatements or tax increment financing

The result is not simply a lower tax rate—it is a fundamentally different capital cost and cash flow profile compared to non-incentivized jurisdictions.

This structure is especially well-suited to EV battery plants and automotive supply-chain investments. These projects are characterized by high upfront capital intensity, long depreciation schedules, and multi-year ramp periods before reaching steady-state margins. KEIA directly reduces invested capital, while KBI improves early-cycle cash flows and de-risks the ramp phase from a state-tax perspective.

Illustrative Economics: A $100 Million Manufacturing Facility

Consider a hypothetical $100 million automotive or industrial manufacturing project:

• Eligible construction and equipment: $80 million
• Sales tax avoided under KEIA: approximately $4.8 million
• Effective project cost reduction: from $100.0 million to $95.2 million

That reduction alone can increase project IRR by roughly 50 to 80 basis points.

Assuming steady-state taxable income of $8 million, the Kentucky corporate income tax would normally total $400,000 per year. If KBI offsets 100% of that liability for 10 years, the nominal tax avoided is $4.0 million, with a net present value of approximately $2.7 million at an 8% discount rate.

Combined, KEIA and KBI can deliver incentive value approaching $7.5 million on a $100 million project—before accounting for workforce grants, local abatements, or infrastructure participation. In practice, total public support often reaches $9 to $12 million at this scale.

From an investment perspective, this typically results in:

• IRR uplift of 100 to 200 basis points
• Payback acceleration of 0.5 to 1.0 years
• An effective Kentucky state income tax rate near zero for approximately a decade

The Bottom Line for Investors

Kentucky should not be evaluated solely as a 5% corporate tax state.

For qualifying manufacturing investments—particularly in automotive, EV, and advanced industrial sectors—it is more accurate to view Kentucky as a performance-driven, high-subsidy manufacturing platform. When incentives are properly navigated and layered, the state can deliver materially lower effective tax rates, reduced invested capital, and improved early-cycle cash flows that directly align with the financial realities of capital-intensive production.

For decision-makers modeling site selection, Kentucky’s value proposition lies not in its headline numbers, but in the project-level economics beneath them.

How Dean Dorton Can Help

Navigating Kentucky’s incentive landscape—and accurately modeling its impact on capital costs, cash flow, and returns—requires more than a surface-level understanding of statutory tax rates. Properly structuring, negotiating, and sequencing state and local incentives can materially change the economics of a manufacturing investment.

Dean Dorton works with domestic and international manufacturers to evaluate site selection alternatives, model project-level effective tax rates, and maximize available incentives across income, sales, property, and workforce programs.

If you are considering a manufacturing investment, expansion, or reinvestment in Kentucky—or benchmarking Kentucky against other states—contact Emir Hodzic to discuss how these incentive programs may apply to your project and how to integrate them into your financial and capital planning.