Trade relations between the United States and China have always carried significant weight in shaping global markets. For large corporations, the stakes are clear – supply chains, investments, and market access hinge on policy shifts. But for small businesses, the effects are more nuanced and, in many cases, more disruptive. From tariffs to compliance rules, evolving U.S.–China policies directly influence cost structures, taxable income, and long-term planning.
This article breaks down what small business owners, especially those operating in cross-border trade, distribution, or supply chains, need to know about how U.S.–China trade relations affect taxes and what can be done to prepare.
When tariffs are imposed on Chinese goods, the immediate effect is higher import costs. For a small business importing raw materials, electronics, or finished goods, this raises the cost basis of inventory.
The challenge is not just paying more upfront—it’s navigating how these higher costs ripple into income tax calculations, deductions, and pricing strategies. Businesses often face the dilemma: absorb the costs and reduce profitability, or raise prices and risk losing customers.
Ongoing trade tensions have pushed many businesses to diversify their sourcing—either moving away from China or creating multi-country supply chains. While this reduces dependence on one region, it also adds complexity to deductible expenses.
Each of these is deductible, but the challenge lies in documentation and categorization. Small businesses without robust accounting systems risk under-claiming deductions or misclassifying expenses, which may trigger audits.
Trade policy uncertainty has also led business owners to rethink their legal and tax structures.
For small businesses, these choices carry long-term tax implications. For instance, setting up a foreign subsidiary introduces additional reporting requirements (like Form 5471) and potential exposure to Global Intangible Low-Taxed Income (GILTI) rules.
It’s not all negative. While tariffs raise costs for importers, some U.S. small businesses benefit when Chinese goods become more expensive domestically. This opens opportunities for local producers to fill the gap.
Additionally, businesses that export to China may qualify for certain export tax incentives or benefit from treaties reducing double taxation. The key is aligning sales records and invoices with IRS requirements to take advantage of credits like the Foreign Tax Credit (FTC).
For businesses that trade with related entities in China—such as a U.S. parent importing from a Chinese subsidiary—transfer pricing rules come into play.
The IRS closely monitors these transactions to ensure goods are not under- or over-valued to shift profits. Small businesses, even those with modest related-party dealings, must maintain arm’s-length documentation.
Failure to do so can result in significant penalties, not just adjustments to taxable income. This is an area where small firms often underestimate their exposure compared to multinational corporations.
Another trend shaped by U.S.–China dynamics is the rise of offshore talent and outsourcing. Many small businesses hire Chinese contractors or teams for manufacturing, design, or IT support.
While this reduces costs, it creates questions about:
Small businesses must tread carefully to avoid double taxation or penalties for failing to withhold.
One of the hidden costs of trade tensions is compliance. Filing requirements increase as businesses engage in more cross-border transactions.
For a small business with limited staff, compliance hours—and the professional fees associated with them—rise significantly. While deductible, these costs affect overall profitability.
Owners with cross-border exposure face added complexity in estate and gift tax planning. The transfer of shares in a company engaged in international trade may involve valuation challenges, potential foreign taxes, and treaty considerations.
This is especially relevant for Chinese-American entrepreneurs or family businesses with dual presence in both countries. A lack of planning may lead to unnecessary estate tax burdens.
Perhaps the greatest challenge for small businesses is uncertainty. Tariffs may be lifted or re-imposed depending on political negotiations. Credits may disappear as treaties shift.
This makes multi-year tax planning difficult. For example:
Tax professionals increasingly recommend a phased planning approach:
Here are some steps small businesses can take to stay proactive:
The U.S.–China trade relationship is not just a matter for headlines—it shapes the daily reality for small business owners. Tariffs, compliance requirements, and shifting treaties affect everything from cash flow to corporate structure.
While challenges abound, there are also opportunities. Businesses that stay agile, document thoroughly, and work with experienced CPAs can navigate the storm and even uncover advantages.
At ASAM LLP, we’ve spent decades guiding businesses through these complexities, ensuring they not only remain compliant but also thrive in uncertain environments. If your business is exposed to U.S.–China trade dynamics, now is the time to revisit your tax and financial strategy.
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