You can estimate expenses on a tax return for most ordinary business costs when your original receipts are missing, provided you have a factual basis for the numbers. You cannot estimate travel, meals, gifts, or vehicle expenses. Congress carved those categories out by statute and requires precise, contemporaneous records, with no room for approximation no matter how reasonable your guess sounds.1eCFR. 26 CFR 1.274-5A – Substantiation Requirements Sorting your expenses into those two buckets is the first thing to do before filing.
The General Rule for Ordinary Expenses
A 1930 federal appeals court case, Cohan v. Commissioner, established that when a taxpayer can prove an expense actually happened but cannot pin down the exact amount, a court should make the closest reasonable approximation rather than throw the deduction out entirely.2Justia. Cohan v. Commissioner of Internal Revenue The court said absolute certainty in these matters is usually impossible and unnecessary.3Cornell Law Institute. Cohan Rule
The nuance matters. Cohan is a judicial doctrine, not an IRS policy that invites guesswork on your return. It gives a Tax Court judge authority to allow a reasonable portion of a challenged deduction rather than zeroing it out. And the court will bear heavily against you when your poor records are your own fault, so any amount a judge does allow will almost certainly come in below what you originally claimed.
Two things have to be true for the doctrine to help you. You need to prove the expense actually happened, not just assert it. And you need a factual basis for the amount, even if it is imprecise. Bank statements showing regular payments to a vendor, prior-year returns with consistent expense levels, or calendar entries documenting the underlying business activity all work.
The Expenses You Cannot Estimate
Section 274(d) of the Internal Revenue Code imposes strict substantiation on three categories: travel expenses (including meals and lodging away from home), business gifts, and listed property such as passenger vehicles.4Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses For each expense in these categories, your records must show the amount, the time and place, the business purpose, and the business relationship of anyone who benefited.
IRS Publication 463 puts it plainly: you cannot deduct amounts you approximate or estimate for these categories.5Internal Revenue Service. Publication 463, Travel, Gift, and Car Expenses If you drove 12,000 business miles last year but kept no mileage log, you lose the entire vehicle deduction regardless of whether the trips actually happened. Same with a business dinner where you cannot document who was there and why.
One narrow break exists. You do not need a physical receipt for any expense other than lodging that is under $75, or for transportation costs where receipts are not readily available.5Internal Revenue Service. Publication 463, Travel, Gift, and Car Expenses You still need a written record of the amount, date, place, and business purpose. The exception only waives the receipt itself.
How to Build an Estimate That Holds Up
For expenses outside the strict category, office supplies, software subscriptions, professional development, general operating costs, secondary evidence is what makes an estimate defensible.
Where to Find the Numbers
Bank and credit card statements are your strongest backup. They confirm the date, vendor, and amount of a transaction. For routine expenses where the vendor name makes the business purpose obvious, a monthly payment to a cloud hosting service, for example, a statement combined with a note of the business purpose is generally sufficient. Statements fall short for mixed-use purchases at retailers where personal and business items might appear on the same charge, and they never satisfy the 274(d) categories no matter how clearly they show the amount.
Other useful sources include prior-year tax returns showing consistent expense patterns, invoices or order confirmations sitting in your email, contracts with vendors that specify pricing, and calendar entries verifying the underlying activity took place. The goal is a logical chain connecting the deduction to a real expenditure.
What “Reasonable” Actually Means
An estimate that holds up is one where someone else could follow your reasoning and arrive at a similar number. If you paid a $49.99 monthly subscription for eleven months and are missing one statement, claiming $49.99 for the twelfth month is defensible. If you spent roughly $200 per month at the same office supply store for three years running and lost the current year’s receipts, pulling the average from prior returns gives you a credible basis.
What does not hold up: rounding everything to the nearest thousand, or claiming expense levels well above your history with nothing to explain the jump. The IRS sees those patterns constantly, and they draw scrutiny. Write your logic down in a short memo and keep it with your tax records. You are not required to submit it, but you may need to walk through it two years from now.
If a Disaster Destroyed Your Records
When records were destroyed through no fault of your own, the IRS provides a specific path to rebuild them. You can request free transcripts of prior-year returns through the “Get Transcript” tool online or by calling 800-908-9946. If you are in a federally declared disaster area, write the disaster designation in red at the top of Form 4506-T to speed processing and waive fees.6Internal Revenue Service. Reconstructing Records After a Natural Disaster or Casualty Loss
Beyond transcripts, the IRS suggests contacting banks for duplicate statements, requesting invoices from suppliers, pulling property tax records from your county assessor, checking insurance policies for replacement values, and using photos or videos taken before the disaster to document property and inventory. For business owners, the IRS recommends gathering at least a full calendar year of supplier invoices to reconstruct lost inventory records, and using bank deposit records to approximate income for specific periods.6Internal Revenue Service. Reconstructing Records After a Natural Disaster or Casualty Loss
What It Costs If the IRS Rejects Your Estimate
If the IRS disallows estimated deductions and your tax bill goes up, you owe interest on the underpayment, compounding daily. For the third quarter of 2026, the rate is 7%.7Internal Revenue Service. Accuracy-Related Penalty
On top of interest, the accuracy-related penalty adds 20% of the underpayment if the IRS finds you were negligent or substantially understated your income tax. For individual filers, a substantial understatement means your tax was understated by more than 10% of the correct amount or $5,000, whichever is greater.8Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments The threshold drops to 5% if you claim the qualified business income deduction under Section 199A.
One boundary to note: filing Form 8275 to disclose your position does not shield you from this penalty when the problem is missing documentation. The Form 8275 instructions say directly that if you failed to keep proper books and records or failed to properly substantiate the items, you cannot avoid the penalty by disclosure.9Internal Revenue Service. Instructions for Form 8275
The more practical protection is the reasonable cause exception under Section 6664. No accuracy-related penalty applies if you can show reasonable cause for the underpayment and that you acted in good faith.10Office of the Law Revision Counsel. 26 USC 6664 – Definitions and Special Rules Reconstructed expenses backed by bank statements and prior-year data tell a very different story to an auditor than “I just didn’t keep receipts.” The quality of your reconstruction is itself evidence of good faith.
The far more serious consequence sits at the fraud line. If the IRS determines that estimated expenses were fabricated rather than reconstructed, the penalty jumps to 75% of the underpaid tax attributable to fraud.11Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty Once the IRS establishes that any portion of the underpayment was fraudulent, the entire underpayment is presumed fraudulent unless you can prove otherwise. Having a factual basis for every figure is what keeps an aggressive estimate on the right side of that line.
How Long to Keep the Backup
The general rule for records is three years from the date you filed the return, or two years from the date you paid the tax, whichever is later.12Internal Revenue Service. How Long Should I Keep Records? If you omitted more than 25% of your gross income, the IRS has six years to audit. There is no limit at all if the return was fraudulent or never filed.
When you use estimates, keep whatever evidence you used to build them for at least six years. If the IRS ever questions the numbers, you will need to show the bank statements, prior-year returns, or reconstruction logic that supported them. Discarding that evidence a year after filing defeats the whole point of building defensible estimates.