Manufacturing

Article Autumn Hines

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.

Article Danielle Camara

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.

Article Autumn Hines

Tariffs are more than just a trade issue—they can significantly affect your tax reporting and financial strategy. If your company imports materials or finished goods, understanding how tariffs impact your inventory costing could help you avoid unexpected tax burdens and identify opportunities for improvement. 

In this article, we break down: 

  • How tariffs factor into inventory accounting for income tax purposes 
  • Key pitfalls that can trigger unfavorable tax consequences 

Why Inventory Tax Accounting Should Be on Your Radar 

Tariffs may not be top of mind when considering income taxes, but they should be. Rising tariff rates, especially in an inflationary environment, can directly impact how inventory is valued for tax purposes. Without careful planning, this can lead to significant book-to-tax differences and missed opportunities for tax savings. 

Aligning your financial and tax inventory costing is essential—not only for compliance, but for managing your company’s cash flow and tax position more effectively. 

Understanding Tariffs in the Context of Inventory Costing 

Both financial and tax accounting require that companies capitalize certain costs into inventory, typically acquisition costs like freight and tariffs, along with direct labor and materials. However, the rules and expectations differ in several key ways. 

  • Financial accounting may treat tariffs as variable costs, depending on their materiality. Inventory is often valued using net realizable value, based on the estimated selling price minus the costs to complete and sell it. 
  • Tax accounting, on the other hand, emphasizes capitalizing actual costs, including tariffs and other acquisition expenses, under IRS UNICAP (Uniform Capitalization) rules. 

Suppose you’re using standard costing, which sets product costs based on historical averages or expectations. In that case, tariff fluctuations can create a mismatch between book and tax inventory values, especially if those tariffs change mid-year and aren’t captured in real time. 

What to Watch For: Common Issues and Actionable Steps 

1. Uncapitalized Tariff Costs and Variances 

If your systems aren’t capturing tariffs accurately in inventory costing, you may be undercapitalizing these costs for tax purposes. That can trigger significant book-to-tax adjustments at year-end, and potentially underpayment penalties. 

Action step: Revisit your cost accounting methods. Analyze whether tariff-related costs are properly included in your inventory capitalization for both book and tax. Companies using standard costing or burden rates should regularly review and update those rates, especially in volatile tariff environments. 

For companies importing goods from related parties, be aware: if the final customs value is lower than what’s being recorded for tax purposes, and the difference isn’t one of the IRS’s allowed exceptions, your tax deduction may be limited. 

Action step: Ensure consistency between declared customs value and inventory costing, and consult with a tax advisor if transactions involve markups or shared services across borders. 

Planning Tip: Using LIFO to Capture Inflation-Driven Cost Increases 

Rising tariffs often signal inflation in product or material costs. That’s where the Last-In, First-Out (LIFO) inventory method can help. 

Under LIFO, the most recent (and often most expensive) inventory costs are used to calculate the cost of goods sold (COGS). In inflationary environments, this can result in higher deductions and lower taxable income. 

Action step: Evaluate whether switching to or adjusting your LIFO method makes sense for your business. You’ll need to consider: 

  • Whether you qualify under U.S. GAAP (note: IFRS prohibits LIFO) 
  • Which inflation index to use (e.g., Producer Price Index vs. Consumer Price Index) 
  • Compliance requirements like the LIFO conformity rule and annual maintenance 

Remember that while the Producer Price Index (PPI) doesn’t directly include tariffs, it reflects the pricing decisions producers make because of tariffs. Meanwhile, the Consumer Price Index (CPI) includes tariffs and may offer a more complete view of inflationary effects in certain industries. 

As tariff policies evolve, the tax consequences of inventory costing decisions grow more complex. Now’s the time to work closely with both your tax and supply chain advisors to: 

  • Ensure compliance with capitalization rules 
  • Minimize book-to-tax adjustments 
  • Explore accounting method changes that support your financial goals 

An experienced advisor can help you assess how tariffs are impacting your bottom line and what steps you can take to manage risk, stay compliant, and turn challenges into opportunities. 

If you’re dealing with the complexities of tariffs, inventory costing, or accounting method changes, our team is here to help you make informed decisions that move your business forward. 

Article Autumn Hines

Back in December, I wrote an article titled “Navigating the M&A Landscape – A Banker’s Perspective on 2025,” where I shared a cautiously optimistic outlook on the year ahead. While much of that optimism still holds, the reality of 2025 has taken on new dimensions, particularly with the unexpected resurgence of tariff-related uncertainty. 

Deal activity remains uneven across the lower-middle market. We see strong interest and competitive processes in sectors where the target’s supply chain is not meaningfully connected to international markets, especially China. The debt markets, meanwhile, have meaningfully opened up in recent months—but just in time for buyers and lenders to begin overanalyzing tariff implications and retrenching in affected categories. 

But here’s the nuance: in today’s climate, buyers are drawing sharp lines between businesses with exposure to international supply chains and those without. For companies that rely directly on imported inputs (particularly from Asia), tariff volatility has introduced real friction into processes. In some cases, that’s meant valuation discounts. In others, buyers are simply pausing until conditions stabilize. 

One notable response: an increased emphasis on non-cash and contingent considerations such as earn-outs. These tools are helping buyers and sellers bridge gaps in valuation expectations while preserving alignment amid lingering uncertainty. 

That said, for companies that are domestically sourced or only minimally exposed, valuations are holding up—and in some cases, improving. Why? Buyers still have capital. Strategics are looking for tuck-ins. And the scarcity of quality assets is giving sellers with clean narratives a rare advantage. 

A recent Dean Dorton M&A engagement offers a perfect example. We just completed a fully marketed process with impressive levels of demand, attention, and high-quality offers from several parties. It’s no coincidence that the company in question had virtually no exposure to international supply chains. 

What to Watch as 2025 Unfolds 

We still believe 2025 is a strong seller’s market—but not for everyone at the same time. If your business is in a tariff-neutral zone, the wind is at your back. If your inputs come from across the Pacific, it may be worth watching the next few months closely before launching a process. 

That said, we believe the moment the rules of the game are defined, market activity will snap back. The underlying fundamentals — ample dry powder, limited deal flow, and eager buyer pools — are all in place to support a swift rebound in valuations and demand once trade policy clarity returns. 

Our job at Dean Dorton M&A is to help clients navigate that nuance. Valuation isn’t static. It’s a function of timing, market sentiment, and buyer psychology. Right now, those levers are tilting favorably for the right companies. 

Let us know if we can help you think through where your business sits and how the current environment could affect value and process strategy. 

Article Autumn Hines

As we move into 2025, the manufacturing industry faces a rapidly evolving landscape shaped by technological advancements, workforce challenges, and economic pressures. Businesses that proactively address these risks while capitalizing on emerging opportunities will be better positioned for long-term success. From strengthening supply chains to navigating AI integration and sustainability initiatives, manufacturers must stay agile and forward-thinking to remain competitive.

RiskDescription
Smart Supply Chains– Create more connected supply chains through digitizing that help overcome global geopolitical issues and global pandemics. 
– Digitization will be essential as it will allow companies to diversify where they source and make their goods. 
– Growing emphasis on supply chain visibility and resilience over pure efficiency. 
– The combination of smart technologies, automated systems, and sustainable practices creates opportunities for innovation.
Talent Competition and Adaptability of the Workforce – Manufacturers should focus on retention by concentrating on long-term strategies that support employee development and allow their workforce to adapt. 
– More emphasis placed on outsourcing. 
This will involve retraining and reskilling the current workforce 
– Immigration policy could significantly impact the manufacturing sector with the new administration in office. 
Cybersecurity– Cybersecurity assessments are a must to identify critical information and intellectual property that needs to be protected. 
– Data demands and growing connectivity will prompt the need for greater security. 
Artificial Intelligence (AI), Generative AI, and Smart Manufacturing  – Enhance predictive maintenance by optimizing supply chains, increasing productivity, and improving cost savings. 
Controls around AI, including ethics. 
– Investing in appropriate infrastructure that supports moving to data-driven operations and decision-making. 
– Businesses that become leaders in AI and have an “AI First” mentality will have the advantage. 
Sustainability and Environmental, Social & Governance (ESG)– Legislation has emphasized green/clean technologies (tax credits, grants, government financing). 
– Decarbonization will likely need to become a bigger priority for manufacturing companies. 
Economic Environment– Expect constraints on global finance and investment. 
– Will result in a high-cost environment in the near future. 
– Increase in tariffs  

While the manufacturing sector faces significant challenges in 2025, it also presents numerous opportunities for innovation and growth. Companies prioritizing digital transformation, workforce adaptability, cybersecurity, and sustainability will gain a competitive edge in an increasingly complex global market. By staying ahead of economic shifts and regulatory changes, manufacturers can build resilience and drive long-term success in the industry.

Article Autumn Hines

Crocs, Inc. is facing a class action lawsuit over claims that it misled investors about the success of its HEYDUDE brand, which the company acquired in February 2022. The lawsuit alleges that Crocs pushed HEYDUDE products onto third-party wholesalers—whether they needed them or not—to make sales numbers look better than they actually were. 

This case highlights the risks associated with channel stuffing, a deceptive business practice that distorts financial performance and misleads investors. Left unchecked, it can result in financial restatements, legal consequences, and significant reputational damage. 

What is “Channel Stuffing”?

Channel stuffing happens when a company ships more products to retailers or distributors than they can realistically sell, creating the illusion of stronger sales. Companies often do this by: 

  • Offering deep discounts and rebates to encourage bulk purchases 
  • Extending payment terms to ease immediate financial burden on retailers 
  • Pushing aggressive sales tactics that prioritize short-term revenue over sustainable demand 

While this approach may temporarily boost revenue, it often backfires. Retailers may return unsold products, future sales can suffer, and the company might have to correct its financial statements—leading to lost trust from investors and customers. 

The Role of Forensic Accountants

Forensic accountants play a critical role in uncovering and preventing fraudulent financial practices like channel stuffing. Their expertise helps ensure accurate financial reporting and protects stakeholders from misleading financial statements. Key strategies they use include: 

1. Analyzing Financial Data 

Forensic accountants scrutinize revenue trends and compare them to industry benchmarks. Sudden, unexplained sales spikes—particularly near quarter-end—can indicate channel stuffing. 

2. Trend and Ratio Analysis 

By analyzing sales-to-inventory ratios, forensic accountants can detect inconsistencies. If revenue increases while inventory levels remain high, it suggests that products aren’t reaching end consumers. 

3. Reviewing Accounts Receivable and Inventory 

A rise in accounts receivable (unpaid invoices) alongside strong sales could indicate that distributors are struggling to move excess stock. Similarly, an increase in days sales outstanding (DSO) suggests delayed payments—another red flag. 

4. Examining Sales Agreements 

Forensic accountants review sales contracts for unusual terms, such as flexible return policies, bulk purchase incentives, or extended payment terms that may mask unsustainable revenue growth. 

5. Direct Distributor Confirmation 

Contacting distributors and resellers directly can help confirm whether sales figures match actual demand. Discrepancies between reported and actual orders can signal fraudulent revenue inflation. 

6. Conducting Enhanced Audits 

Through forensic audits, accountants assess internal controls, ensuring that revenue recognition policies align with ethical accounting standards and regulatory guidelines. 

Why This Matters

The Crocs lawsuit is a reminder that financial transparency matters—for companies, investors, and consumers. Unethical practices like channel stuffing may seem like a quick fix to boost sales, but they often lead to bigger problems down the road. 

Forensic accountants help businesses stay on the right track, ensuring that sales numbers reflect reality, protecting investors from misleading information, and promoting ethical business practices. 

At the end of the day, financial integrity isn’t just about avoiding lawsuits—it’s about building trust, protecting long-term success, and ensuring sustainable growth. 

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