The Cohan Rule is named after the landmark 1930 U.S. Tax Court case, Cohan v. Commissioner, involving Broadway producer George M. Cohan. Cohan faced an IRS audit but lacked complete receipts for some deductible business expenses. The court ruled that while exact proof is ideal, taxpayers can rely on reasonable estimates when full documentation is missing, as long as they can show the expenses were legitimate and related to their trade or business.
Under normal IRS rules, deductible expenses need to be substantiated with receipts, invoices, or other records. However, life events such as floods, fires, or simple misplacement sometimes result in lost or destroyed records. The Cohan Rule provides relief by permitting taxpayers to submit reasonable expense estimates supported by some form of evidence like bank statements, calendars, emails, or witness testimony.
This rule applies strictly to expenses allowable by tax law. It does not permit deductions for expenses that are illegal, personal, or explicitly non-deductible under IRS regulations. Importantly, the Cohan Rule does not extend to estimating income — only expenses.
How the Cohan Rule Works in Practice:
- Taxpayers estimate the amount of the expense honestly and reasonably.
- Supporting evidence should still be provided when possible (for instance, bank or credit card statements, business logs, or partial records).
- The IRS or courts review the estimate for credibility and may accept, adjust, or reject the deduction based on the evidence.
Examples of the Cohan Rule Application
- A small business owner loses all fuel and supply receipts due to flood damage but uses credit card statements and vendor delivery records to approximate expenses.
- A sales consultant estimates travel costs using calendar entries and partial credit card statements after losing receipts.
- An entertainer recalls client meetings and uses partial meal records plus personal notes to estimate entertainment expenses.
Who Can Use the Cohan Rule?
The rule is available to any taxpayer subject to audit who can’t provide full documentation for deductible expenses but can reasonably estimate costs with some evidence. It is often used by small business owners, self-employed individuals, and freelancers.
Best Practices for Using the Cohan Rule
- Preserve all available documentation, even if incomplete.
- Base your estimates on objective data like bank or credit card statements.
- Document how you calculated your estimates, including assumptions.
- Avoid exaggeration; courts and IRS auditors carefully scrutinize inflated claims.
- Consult a tax professional if you expect an audit or need help substantiating expenses.
Common Misunderstandings
- The Cohan Rule does not allow deductions for non-deductible expenses.
- It requires a reasonable basis; wild guesses are not accepted.
- It cannot be used to estimate missing income — only deductible expenses.
- Proper recordkeeping is still essential to avoid relying on the rule.
Summary Table: Cohan Rule Quick Facts
| Aspect | Details |
|---|---|
| Origin | 1930 court case Cohan v. Commissioner |
| Purpose | Allows reasonable estimation of deductible expenses without full records |
| Applicable to | Business or otherwise deductible expenses |
| Not applicable to | Non-deductible expenses and income |
| Proof required | Some supporting evidence plus reasonable estimate |
| IRS acceptance | Case-by-case, dependent on credibility of estimates |
| Best practice | Keep thorough records; use rule only when necessary |
FAQs
Q: Can I rely on the Cohan Rule if I lost all receipts?
A: Yes, but you must provide some other evidence and reasonable estimates.
Q: Does it apply to personal expenses?
A: No, only legitimate deductible expenses qualify.
Q: Can the IRS disallow estimated expenses under the Cohan Rule?
A: Yes, if estimates are unsupported or exaggerated.
Q: Is the Cohan Rule codified in law?
A: No, it is a court precedent that influences IRS practice, not a statutory law.
For more on maintaining proper records, see the IRS guide on Recordkeeping. Understanding how to document your expenses can help avoid the need to rely on the Cohan Rule.
Sources:
- IRS Recordkeeping: https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping
- Investopedia on Cohan Rule: https://www.investopedia.com/terms/c/cohanrule.asp
- Cornell Law School Case Summary: https://www.law.cornell.edu/case/cope-cm-4008
- Kiplinger Tax Tips: https://www.kiplinger.com/taxes/tax-benefits/603449/how-to-recover-lost-tax-receipts