The Impact of U.S. Tariffs on Tax Strategy

Navigating Cost Segregation and R&D Credits

As the United States continues to reshape its trade policies through current and proposed tariffs, businesses across industries are grappling with the ripple effects on their financial strategies. Tariffs, which act as taxes on imported goods, have far-reaching implications beyond trade, influencing tax planning, cost segregation, and research and development (R&D) credits. This blog post explores how these tariffs might affect the tax strategy business, with a particular focus on cost segregation and R&D credits, and offers insights for businesses navigating this evolving landscape. 

Understanding the Tariff Landscape 

In 2025, the U.S. has implemented significant tariffs, including a 10% baseline tariff on imports from nearly every country, with additional levies of 25% on goods from Canada and Mexico (except Canadian energy products at 10%) and escalated tariffs on Chinese imports, reaching as high as 145% in some cases. These tariffs, part of a broader strategy to boost domestic production and address trade imbalances, are projected to raise substantial revenue—potentially $2.4 trillion over 2026–2035—but come with economic trade-offs, including higher consumer prices and supply chain disruptions. 

Tariffs increase the cost of imported goods, which can raise production expenses for businesses reliant on foreign inputs. This cost increase prompts companies to reassess their financial and tax strategies to mitigate the impact. For tax professionals, the challenge lies in adapting strategies like cost segregation and R&D credits to align with the new economic realities shaped by tariffs. 

Cost Segregation: Opportunities Amid Rising Costs 

Cost segregation is a tax strategy that allows property owners to accelerate depreciation deductions by reclassifying certain building components as shorter-lived assets. This approach reduces taxable income and improves cash flow, making it particularly appealing for real estate investors and businesses with significant property holdings. However, tariffs can complicate the application of cost segregation in several ways. 

 Increased Construction Costs 

Tariffs on imported materials, such as steel and aluminum, directly increase construction costs. For example, a 25% tariff on steel imports raises the price of building materials, inflating the depreciable basis of new properties or renovations. While a higher basis could lead to larger depreciation deductions, the increased upfront costs may deter some businesses from undertaking new projects, potentially reducing the demand for cost segregation studies. 

However, for businesses that proceed with construction or property acquisitions, cost segregation becomes even more critical. By accelerating depreciation, companies can offset the higher costs driven by tariffs, freeing up cash flow to cover increased expenses. Tax professionals should emphasize the value of cost segregation to clients facing tariff-induced cost pressures, particularly for properties with a depreciable basis above $400,000, where the return on investment for a study is typically justified. 

Supply Chain Shifts and Domestic Investment 

Tariffs are designed to encourage domestic production, which could lead to increased investment in U.S.-based facilities. Businesses may relocate manufacturing or build new properties to avoid import taxes, creating opportunities for cost segregation. For instance, a company constructing a new factory to produce goods domestically could leverage cost segregation to accelerate depreciation on components like lighting, HVAC systems, or specialized equipment. 

Tax strategists should proactively engage with clients exploring domestic expansion, highlighting how cost segregation can maximize tax savings on new facilities. Additionally, the uncertainty surrounding tariffs may prompt businesses to accelerate property improvements before costs rise further, increasing the demand for cost segregation services in the short term. 

R&D Credits: Adapting to Tariff-Driven Innovation 

The R&D tax credit is a powerful incentive for businesses investing in innovation, offering a dollar-for-dollar reduction in tax liability for qualified research expenses. Tariffs can both challenge and enhance the relevance of R&D credits as companies adapt to new trade dynamics. 

Innovation to Offset Tariff Costs 

Tariffs raise the cost of imported inputs, pushing businesses to innovate to maintain competitiveness. For example, a manufacturer reliant on Chinese components may invest in R&D to develop alternative materials or processes that use domestic or tariff-exempt inputs. These efforts, such as designing new products or improving production efficiency, often qualify for R&D credits. 

The auto industry, heavily impacted by tariffs on parts from Mexico and Canada, illustrates this trend. With vehicle costs potentially rising by $3,000 to $5,000 per unit due to tariffed components, automakers may accelerate R&D to redesign supply chains or develop cost-saving technologies. Tax professionals can play a pivotal role by identifying qualifying R&D activities and ensuring clients maximize credits to offset the financial strain of tariffs. 

Challenges for Global R&D Operations 

For multinational companies, tariffs complicate global R&D strategies. The OECD’s Pillar II global minimum tax framework, combined with retaliatory tariffs from countries like China, introduces new tax liabilities for firms operating in low-tax jurisdictions. Companies may need to re-evaluate R&D locations to balance tariff costs, tax incentives, and global tax compliance. Tax advisors should help clients model these scenarios, ensuring R&D credits are optimized while navigating international tax complexities. 

 Domestic R&D Incentives 

Tariffs aimed at boosting U.S. manufacturing may encourage companies to relocate R&D activities to the U.S., where they can benefit from robust R&D credits. The U.S. offers a federal R&D credit of up to 20% of qualified expenses, with many states providing additional incentives. Tax strategists can guide clients in restructuring R&D operations to take advantage of these credits, particularly for industries like technology and pharmaceuticals facing high tariff exposure. 

Strategic Tax Planning in a Tariff-Driven Economy 

The interplay of tariffs, cost segregation, and R&D credits underscores the need for proactive tax planning. Here are key strategies for businesses and tax professionals: 

Reassess Supply Chains and Tax Strategies: Tariffs disrupt global supply chains, prompting businesses to diversify suppliers or invest domestically. Tax advisors should align cost segregation and R&D credit strategies with these shifts, identifying opportunities to accelerate deductions or claim credits for innovation driven by tariff pressures. 

Monitor Legislative Changes: The Tax Cuts and Jobs Act (TCJA) provisions, such as bonus depreciation and the pass-through deduction, are set to phase out or expire, adding uncertainty to tax planning. Tariffs may generate revenue to extend these provisions, but political gridlock could lead to tax increases. Businesses should work with tax professionals to scenario-plan for multiple outcomes. 

Leverage Data and Modeling: Advanced tax software and cost modeling can help businesses quantify the impact of tariffs on costs and tax savings. For cost segregation, detailed studies with site visits ensure IRS compliance, while R&D credit calculations require precise documentation of qualifying expenses. 

Communicate Value to Clients: As tariffs increase costs, tax strategies like cost segregation and R&D credits become critical for maintaining profitability. Tax professionals should educate clients on how these tools can mitigate financial pressures, particularly for industries like real estate, manufacturing, and technology. 

 The Road Ahead 

The current and proposed U.S. tariffs are reshaping the economic landscape, presenting both challenges and opportunities for the tax strategy business. Cost segregation remains a vital tool for property owners facing higher construction costs, offering accelerated depreciation to improve cash flow. Meanwhile, R&D credits are increasingly relevant as businesses innovate to navigate tariff-driven disruptions. By staying agile and informed, tax professionals can help clients turn tariff challenges into opportunities, ensuring financial resilience in a dynamic trade environment. 

For businesses seeking to adapt their tax strategies, now is the time to consult with experts who understand the intersection of tariffs, cost segregation, and R&D credits. Contact a tax advisor today to explore how these strategies can safeguard your bottom line in the face of evolving trade policies.  

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