Federal courts struck down tariffs imposed under the International Emergency Economic Powers Act (IEEPA). The Court of International Trade ruled that IEEPA does not authorize the President to impose tariffs and ordered refunds for importers who paid those tariffs.
Here is the part most contractors miss: if you charged any of those tariff costs to a government contract, you owe the government a credit when the refund arrives. FAR 31.205-41(d) requires it. FAR 52.216-7(h)(2) reinforces it. Most small contractors have no system in place to track, allocate, or return those credits.
The court ruling resolved one layer of tariff exposure. But 25% steel and aluminum tariffs under Section 232 remain active. So do Section 301 tariffs on Chinese imports.
The tariff accounting problem did not end with the court decisions. It got more layered.
Tariffs government contractor accounting creates obligations on both sides of the ledger. On cost-type contracts, tariff costs are generally allowable under FAR 31.205-41, but refunds must be credited back to the government. On fixed-price contracts, FAR 52.229-3 allows price adjustments for tariffs imposed after contract award, though contractors must notify their contracting officer promptly and any adjustment must exceed $250.
Amerifusion Bookkeeping helps government contractors track tariff costs, prepare for refund obligations, and maintain documentation built to hold up under DCAA audit.
Which Tariffs Remain Active After the Court Rulings
The Court of International Trade rulings struck down tariffs imposed under IEEPA, but three other tariff authorities remain untouched. Government contractors importing materials for federal work still face active tariffs under Section 232, Section 301, and the potential application of Section 122.
| Tariff Authority | Rate | Scope | Status |
|---|---|---|---|
| IEEPA (“Liberation Day” tariffs) | Varied (10–50%) | Global reciprocal tariffs | Struck down by Court of International Trade. Refunds ordered for affected importers. |
| Section 232 (Trade Expansion Act of 1962) | 25% on steel and aluminum | Steel articles, aluminum articles, and derivative products | Active. Unaffected by IEEPA ruling. Rate set by presidential proclamation Feb. 2025. |
| Section 301 (Trade Act of 1974) | Verify current rate at USTR.gov | Chinese imports | Active. Unaffected by IEEPA ruling. Rates have changed; confirm current rate before filing. |
| Section 122 (Trade Act of 1974) | Not confirmed from primary source | Global temporary surcharge authority | Verify whether any Section 122 surcharge applies to your imports. |
Rates in this table are subject to change. Verify current rates at USTR.gov and Commerce.gov before making cost or billing decisions. Table current as of May 2026.
The Department of Commerce expanded Section 232 coverage in 2025 to include derivative products beyond raw steel and aluminum. Contractors buying heavy equipment, construction materials, or manufactured components face tariff exposure beyond raw materials.
Construction material cost increases from active tariffs have affected government contractor input costs. These cost increases hit government contractors directly through materials pricing and indirectly through subcontractor rate increases. Proper tariffs government contractor accounting starts with knowing which tariff authority covers each cost.
How Tariffs Government Contractor Accounting Rules Work Under FAR 31.205-41
Tariff duties fall under FAR 31.205-41 (Taxes), the cost principle governing tax allowability on government contracts. The FAR treats tariffs as analogous to taxes: generally allowable on cost-type contracts unless a specific exclusion applies. This makes tariff costs presumptively recoverable when allocated to flexibly-priced contracts.
The critical provision is FAR 31.205-41(d). It states: “Any taxes, interest, or penalties that were allowed as contract costs and are refunded to the contractor shall be credited or paid to the Government in the manner it directs.” This one sentence creates the refund obligation every contractor with IEEPA tariff costs needs to understand.
Two additional FAR provisions reinforce the credit requirement. FAR 31.201-5 requires contractors to credit “any income, rebate, allowance, or other credit relating to any allowable cost.” FAR 52.216-7(h)(2) obligates contractors on cost-reimbursement contracts to “pay to the Government any refunds, rebates, credits, or other amounts” properly allocable to reimbursed costs.
The bottom line: if you treated tariff costs as allowable and billed them to the government, you have a documented obligation to return the allocable portion of any refund. Failing to credit the refund risks a questioned cost finding during your next incurred cost audit. In cases of deliberate concealment, contracting officers may escalate to the contracting chain for further review.
Cost-Type vs. Fixed-Price Contracts: Different Tariff Treatment
Tariffs government contractor accounting rules differ by contract type. Cost-type contracts have broader allowability but stricter refund requirements. Fixed-price contracts limit cost recovery to specific FAR clauses, but the refund obligation is narrower.
Cost-Type Contracts
Tariff costs on cost-type contracts are allowable under FAR 31.201-2 as long as they meet the standard tests: reasonable, allocable, and compliant with FAR Part 31. When tariffs increase your material costs, those increases flow through to the government as part of your allowable incurred costs.
The obligation runs both directions. When IEEPA refunds arrive, FAR 31.205-41(d), FAR 31.201-5, and FAR 52.216-7(h)(2) all require crediting the government. Three overlapping provisions create a tight net around refund credits on cost-type contracts.
Fixed-Price Contracts
FAR 52.229-3 allows contract price increases for “after-imposed Federal excise tax or duty” on contract materials. Two conditions apply. The tariff must have been imposed after the contract award date. The contractor must “promptly notify” the contracting officer of the impact. Note that no adjustment is made unless the amount exceeds $250 per FAR 52.229-3(f).
Check your contract for this clause before assuming you have a remedy. If FAR 52.229-3 is not in your contract, tariff cost recovery on fixed-price work is limited to Economic Price Adjustment clauses [FAR 52.216-4], which cap aggregate increases at 10% of the original unit price and require notification within 60 days after the increase.
Large defense primes have disclosed material tariff cost impacts in earnings calls and SEC filings. Small contractors with fixed-price contracts and no relief clauses absorb the cost entirely.
How Tariff Costs Affect Your Indirect Rates
Tariff-driven material cost increases do not stay in one cost pool. They cascade through your entire indirect rate structure, and this is the tariffs government contractor accounting impact most firms overlook.
A spike in materials pricing changes your direct cost base, which changes every rate calculated against it.
Scenario: a construction contractor buys $200,000 in steel for a government project. Section 232 tariffs add 25%, increasing the cost to $250,000. The $50,000 tariff cost enters the direct materials base.
If the contractor’s overhead rate is calculated on total direct costs, the overhead pool now allocates across a larger base, changing the rate for every contract in the portfolio.
The problem compounds at the G&A level. G&A rates typically allocate across total cost input. Higher material costs inflate the total cost input figure, changing the G&A distribution across all contracts.
One tariff increase on one material category ripples through the entire indirect rate structure.
DCAA auditors review rate movements during incurred cost audits. Unexplained rate spikes trigger follow-up questions.
Contractors who track tariff-driven cost increases in separate accounts give auditors a clean audit trail. Contractors who blend tariff costs into general materials accounts create the appearance of poor cost controls.
Five Bookkeeping Steps Every Contractor Should Take Now
The refund process for IEEPA tariffs requires importers to document their claims with U.S. Customs and Border Protection. Contractors who act now will process credits smoothly. Those who wait will scramble to reconstruct records under deadline pressure.
- Create a separate tariff tracking account in your accounting system. Set up a sub-account under direct materials for tariff costs. Code every tariff payment against the specific contract and purchase order it supports. Do not blend tariff costs into general materials expense.
- Document the link between tariff payments and contracts. For each tariff payment, record: the customs entry number, the material purchased, the contract it supports, the tariff rate applied, and the total duty paid. This documentation feeds both your incurred cost submission and any future refund credit calculation.
- Identify which tariff payments fall under IEEPA (potentially refundable) vs. Section 232/301 (still active). The IEEPA rulings only affected tariffs imposed under IEEPA authority. Pull your customs records and categorize each payment by tariff authority. Only IEEPA payments are eligible for refunds under the court orders.
- Calculate the allocable portion of future refunds. Not every dollar of a tariff refund goes back to the government. Only the portion allocable to government contract costs triggers the FAR 31.205-41(d) credit obligation. If 60% of a material purchase supported government work and 40% supported commercial work, the government credit is 60% of the refund amount.
- Notify your contracting officer early. FAR 52.229-3 requires “prompt notification” of tariff impacts affecting contract pricing. Waiting until DCAA asks about tariff costs during an audit is too late. Proactive notification builds trust with the contracting officer and creates a documented record of good-faith compliance.
Preparing for the IEEPA Tariff Refund Credit
For government contractors, the refund is only half the story. The credit obligation under tariffs government contractor accounting rules is the other half.
When your IEEPA refund arrives, here is what happens on a cost-type contract. You calculate the portion of the refund allocable to government contract costs. You credit the government in the manner your contracting officer directs [FAR 31.205-41(d)].
You then adjust your incurred cost records for the fiscal year the tariff was originally charged.
Contractors who blended tariff costs into general materials accounts face a harder problem. Without a clean audit trail tying specific tariff payments to specific contracts, calculating the allocable refund credit becomes guesswork. Guesswork in front of a DCAA auditor is a losing position.
Here is what most contractors miss: even on fixed-price contracts, FAR 52.229-3 requires a contract price decrease for “after-relieved” taxes. No court has ruled definitively whether IEEPA tariff refunds qualify under this clause as after-relieved taxes. But contracting officers who see a contractor receive a tariff refund and not offer a price adjustment will ask questions. Early disclosure is the safer path.
Frequently Asked Questions
Are tariff costs allowable on government contracts?
Tariff duties are treated as taxes under FAR 31.205-41, which makes taxes generally allowable unless specifically excluded. On cost-type contracts, allocable tariff costs are presumptively allowable if reasonable and properly documented. On fixed-price contracts, recovery depends on whether FAR 52.229-3 or an Economic Price Adjustment clause is in your contract.
Do I have to return my IEEPA tariff refund to the government?
On cost-type contracts, yes. FAR 31.205-41(d) requires contractors to credit refunded taxes back to the government. FAR 52.216-7(h)(2) reinforces this credit obligation. The credit applies only to the portion allocable to government contract costs. Commercial-portion refunds are yours to keep.
Which tariffs are still in effect after the court rulings?
The IEEPA ruling struck down only tariffs imposed under IEEPA authority. Section 232 tariffs on steel and aluminum remain active at 25% per the February 2025 presidential proclamation. Section 301 tariffs on Chinese imports remain active; verify current rates at USTR.gov because rates have changed. The rulings were narrow: IEEPA does not authorize tariffs, but other statutory authorities are unaffected.
How do tariff cost increases affect my indirect rates?
Tariff costs on materials increase your direct cost base. If overhead rates are calculated on direct costs, the overhead pool allocates across a larger base, changing rates across all contracts. Track tariff-driven increases in a separate account so you have a clean explanation for rate movements during audit.
What relief options exist for fixed-price contracts hit by tariffs?
Check your contract for FAR 52.229-3 (price adjustment for after-imposed duties, subject to a $250 minimum threshold), Economic Price Adjustment clauses (capped at 10% aggregate increase with 60-day notification after the cost change), and FAR 52.225-8 (duty-free entry for qualifying goods). If none of these clauses appear in your contract, recovery options are limited.
What documentation do I need for tariff costs on government contracts?
Record the customs entry number, material purchased, contract supported, tariff rate applied, tariff authority (IEEPA, Section 232, 301, or other), and total duty paid. Link each tariff payment to a specific purchase order and contract. This documentation supports both allowability claims and refund credit calculations.
Key Takeaways
- Separate your tariff costs now. Create a dedicated tracking account in your accounting system. Code each tariff payment to the specific contract and material purchase it supports. Blending tariff costs into general materials accounts creates audit risk and makes refund credit calculations difficult.
- The IEEPA refund creates a credit obligation, not a windfall. FAR 31.205-41(d) requires you to credit the government for the allocable portion of any refund on tariff costs you billed as allowable. Three FAR provisions overlap to enforce this. Start calculating allocable percentages before the refund arrives.
- 25% steel and aluminum tariffs are still active. The IEEPA ruling was narrow. Section 232 tariffs at 25% on steel and aluminum remain in force per the February 2025 presidential proclamation. Section 301 tariffs on Chinese imports also remain active; verify current rates before making contract cost decisions.
- Review every active contract for FAR 52.229-3, Economic Price Adjustment clauses, and duty-free entry provisions. Fixed-price contractors without these clauses absorb tariff costs entirely.
- Notify your contracting officer before DCAA asks. Early disclosure of tariff impacts, refund receipts, and cost allocation changes builds trust and creates a documented compliance record. Reactive responses during audit look like concealment.
Tariff accounting for government contractors sits at the intersection of trade law, federal acquisition regulation, and cost accounting standards. The legal analysis is well-covered by law firms. The bookkeeping execution is where most small contractors need help.
If your accounting system is not tracking tariff costs by contract, by authority, and by material purchase, you are not ready for the refund cycle ahead. Talk to our CPA-managed team about getting your tariff documentation in order before the first refund arrives.
