Tariff Refunds and Credit Agreement Financial Covenants

In the wake of the United States Supreme Court’s decision in Learning Resources, Inc. v. Trump, No. 25-1732 (Fed. Cir. 2026), US Customs and Border Protection (“CBP”) has begun issuing refunds of tariffs levied under the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. §§ 1701–1708. CBP is processing tariff refunds through its Consolidated Administration and Processing of Entries (“CAPE”) system, and companies have already begun receiving such refunds. However, lenders and borrowers alike are only now beginning to examine how tariff refunds are reflected in financial covenants and related defined terms within credit agreements.

The answer begins with how the relevant borrower initially accounted for the tariff and, thereafter, how the borrower accounts for the related refund—including the method and timing of recognition. Once the accounting treatment of the tariff refund has been determined, the borrower and its lenders can assess the refund’s impact under the credit agreement. In most cases, the tariff refund will result in an increase to consolidated net income (“CNI”) for the period in which the refund is recognized, and therefore will typically produce a corresponding increase to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the same period. Such an increase obviates the need for an add-back to EBITDA relating to the tariff refund—an approach consistent with the general resistance in the leveraged loan market to tariff-related add-backs—but may implicate other issues depending on any exclusions from CNI or deductions from EBITDA that may be included in a given credit agreement.

Recording the Tariff Cost and Applying the Tariff Refund

At the time of this writing, there is no published U.S. GAAP Accounting Standards Codification (“ASC”) topic providing specific guidance on the accounting treatment of tariff refunds. As a result, classification of a tariff refund in a borrower’s financial statements is typically tied to the accounting method used by the borrower to record the original tariff cost. Based on recent public company filings, a borrower will likely have recorded the tariff cost using one of the three methods set forth below, with the corresponding treatment of the related tariff refund:

• Capitalized to Inventory: An import tariff on inventory is typically recorded as a cost under ASC 330 (Inventory) and is included in cost of goods sold (“COGS”) for the relevant income statement period. Upon recognition of the refund for such a tariff, the refund would be reflected either as a reduction in COGS (if the inventory has been sold by the time the refund is recognized) or as a reduction in the carrying amount of the applicable inventory (if the inventory remains on hand at the time of recognition).

• Capitalized to PP&E: If the tariff cost was capitalized to property, plant, and equipment (“PP&E”) and depreciation is ongoing with respect to the applicable asset, the tariff refund would either reduce the carrying amount of such asset (with a corresponding reduction to future depreciation) or offset depreciation expense in the current period.

• Expensed as Incurred: A tariff refund with respect to a tariff cost that was originally expensed (rather than capitalized) would typically be reflected as a reduction of the same expense line in which the tariff cost was originally recorded (commonly COGS). Alternatively, certain borrowers may recognize the tariff refund within other operating income.

As a result, in each of these scenarios, a reduction of the related cost, depreciation, or expense is likely to result in an increase to CNI for the period in which the tariff refund is recognized, other than in certain situations due to the nature of the relevant asset or the timing of recognition.

Recognizing the Tariff Refund

While market practice generally appears to align the presentation of a tariff refund with the related tariff cost, there is greater disparity among borrowers with respect to the method for recognizing a tariff refund. As noted above, no ASC guidance expressly addresses the recognition of tariff refunds. Accordingly, the method used by a borrower to recognize a tariff refund may proceed by analogy to other ASC topics, such as loss-recovery (ASC 410-30), which would permit a borrower to recognize a tariff refund once it is “probable” (as defined in ASC 450-20-20, providing that the future event or events are “likely to occur”) and can be reasonably estimated. Another potential method of recognition by analogy would be gain contingency (ASC 450-30), which would defer recognition of the tariff refund until it has been realized or is realizable.

In addition, if a borrower previously passed tariff costs through to its customers and is contractually obligated to remit tariff refunds to those customers, the reimbursement of the tariff cost may be treated as consideration payable by the borrower to its customer pursuant to ASC 606-10-32-25 (Revenue from Contracts with Customers). In such a case, the tariff refund would reduce revenue (and correspondingly reduce CNI) for the relevant period. Depending on the method a borrower uses to recognize the tariff refund, there may also be a timing mismatch between recognition of the tariff refund itself and recognition of the obligation to reimburse the customer under ASC 606.

Based on the foregoing, if the parties to a credit agreement are negotiating the treatment of tariff refunds, limiting recognized tariff refunds to amounts actually received in cash would represent a more lender-friendly formulation. In addition, it may be prudent for the parties to align the timing of recognition of the tariff refund with the recognition of any obligation to reimburse customers, thereby avoiding asymmetry in the calculation of financial metrics under the credit agreement.

Financial Covenant Implications

The financial covenants set forth in most leveraged credit agreements include a ratio determined by reference to EBITDA. In turn, EBITDA is typically derived from CNI. Accordingly, increases to CNI will generally result in a corresponding increase to EBITDA, which can bolster compliance with the applicable financial covenant and provide a borrower with increased flexibility under its credit agreement for concepts tied to a percentage of EBITDA (such as caps, baskets, carve-outs, and thresholds) or an incurrence-based condition utilizing a financial ratio that includes EBITDA (such as a pro forma leverage test).

The most common formulation of CNI is based on “net income as determined in accordance with GAAP.” As a result, any increase to CNI attributable to the recognition of a tariff refund as described above would likewise increase CNI under the credit agreement. However, that may not always be the case. It is common in highly negotiated transactions to include a number of exclusions from the definition of CNI. In certain instances, the definition of CNI will expressly exclude extraordinary, unusual, or non-recurring items, gains, or income. Given the unprecedented and singular nature of the IEEPA tariff refunds, a party could assert that a tariff refund constitutes an extraordinary, unusual, or non-recurring item, and is therefore excluded from CNI where such an exclusion is included in the applicable definition.

In other instances, the definition of CNI may expressly exclude the impact of ASC 606, which could result in an overstatement of CNI under the credit agreement if the borrower has recognized the tariff refund but is not required by the credit agreement to reduce CNI by the amount of any reimbursement owed to its customers.

In addition to the construction of CNI, the definition of EBITDA typically includes certain deductions that may affect the treatment of a tariff refund. If the credit agreement includes a broad deduction from EBITDA for extraordinary, unusual, or non-recurring gains or income, a party could similarly assert that the tariff refund is extraordinary, unusual, or non-recurring, and therefore subject to deduction from EBITDA. When reviewing a credit agreement for this issue, the parties should take care to consider whether the EBITDA deductions are drafted with sufficient breadth to capture the tariff refund.

Key Takeaways

How a tariff refund impacts financial covenants and related definitions in a credit agreement is necessarily a case-by-case determination, driven by the accounting treatment applied by the relevant borrower and the specific terms of the applicable credit agreement. The parties to a financing may find that an existing credit agreement does not achieve the desired result due to previously negotiated exclusions, deductions, or other provisions that create a divergence between GAAP-compliant financial reporting and the financial metrics calculated under the credit agreement—potentially resulting in difficult conversations for borrowers and lenders alike in the coming months.