The Cohan Rule is a principle of federal tax law that lets you claim a deduction based on a reasonable estimate when you can prove a business expense occurred but cannot produce exact records. It comes from a 1930 federal appeals court decision and still works as a fallback during IRS audits and Tax Court proceedings. The rule has real limits: it only helps with expenses you actually paid for a business purpose, and Congress has walled off several categories of spending where estimates are not accepted no matter how reasonable they look.
Where the Rule Comes From
George M. Cohan, the Broadway entertainer and producer, spent heavily on travel and entertainment tied to his shows and kept almost no financial records. When the IRS disallowed his deductions outright, he fought back. In Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), the Second Circuit held that the IRS should not erase a deduction just because the taxpayer cannot name the exact dollar amount. If the evidence shows a real expense was paid, the government should approximate the amount as closely as it can rather than treat the spending as if it never happened.
That reasoning stuck. Courts still apply it when a taxpayer can show that money actually left their hands for a legitimate business purpose but cannot produce the paper trail. One built-in penalty for sloppy records: the court estimates on the low side, because any remaining uncertainty gets resolved against the taxpayer whose bookkeeping caused it.
What You Have to Prove
Two things must be true before a court or an IRS examiner will consider a Cohan-based estimate. First, you have to prove the expense actually happened. A vague claim that you “probably spent around $3,000 on supplies” will not survive. Second, the expense must have a clear business connection to your trade or profession.
The burden of proof sits on you. Tax Court rules place the burden on the petitioner to show that the IRS’s determination is wrong.1Office of the Law Revision Counsel. Rule 142 – Burden of Proof In practice, you need to convince the court that it is more likely than not that you incurred the expense and that it served a business purpose. Saying “I know I spent the money” without supporting evidence is where most Cohan arguments collapse. The court needs something concrete to anchor its estimate to, even if that something falls short of a receipt.
Expenses the Rule Can Cover
The Cohan Rule applies most naturally to ordinary and necessary business expenses under Internal Revenue Code Section 162, which allows deductions for costs that are common and accepted in your line of work.2Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses Office supplies, cleaning services for a storefront, minor repairs, routine maintenance materials. Courts are comfortable estimating these because nearly every business incurs them and the amounts tend to be modest and predictable.
A small business owner who paid cash for a plumbing repair at their shop and never got a written receipt can still make a plausible case. If bank records show a cash withdrawal around the same date and the shop obviously has working plumbing, the pieces line up. The same logic covers printer ink, basic tools, and janitorial supplies. Auditors and judges have seen enough businesses to accept that these costs are real even when a particular receipt goes missing.
Home office utilities can also be estimated when exact records are unavailable, as long as you have a factual basis for the allocation, such as the square footage of the workspace relative to the full house. Utility bills plus a consistently used office space give you a starting point. Without at least that much, the number is guesswork, which the rule does not protect.
Equipment and small tangible property purchases fit the rule too. A separate IRS provision, the de minimis safe harbor election, already lets you deduct tangible property costing up to $2,500 per item (or $5,000 if you have audited financial statements) without capitalizing it.3Internal Revenue Service. Tangible Property Regulations – Frequently Asked Questions If a missing receipt was for something in that range, the safe harbor and Cohan-style estimation reinforce each other, provided you have some corroborating evidence the purchase happened.
Expenses the Rule Cannot Cover
Congress has blocked the Cohan Rule from applying to several major spending categories. Internal Revenue Code Section 274(d) requires strict substantiation for travel expenses (including meals and lodging away from home), business gifts, and any listed property such as passenger vehicles.4Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses For each of these you must document four things: the amount, the time and place, the business purpose, and the business relationship of anyone who benefited. No estimate substitutes for those records, however reasonable it sounds.
Entertainment expenses deserve a separate note. Since the Tax Cuts and Jobs Act took effect for amounts paid after December 31, 2017, entertainment is not just subject to strict substantiation; it is completely non-deductible. Taking a client to a concert or a sporting event generates zero deduction regardless of how thorough your records are. The Cohan Rule is irrelevant because there is no deduction left to estimate.
Passenger automobiles, defined as four-wheeled vehicles rated at 6,000 pounds unloaded gross vehicle weight or less, fall under the listed property rules of Section 280F.5Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles You need contemporaneous mileage logs and specific records of business versus personal use. Reconstructing a log from memory months later almost always fails in Tax Court. Heavier vehicles that exceed the weight threshold escape the listed property classification but still need adequate records under general Section 162 standards.
Charitable contributions have their own substantiation rules that effectively shut Cohan out. For any cash contribution, regardless of size, you must keep either a bank record or a written acknowledgment from the charity showing the organization’s name, the date, and the amount.6Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts Contributions of $250 or more require a contemporaneous written acknowledgment from the donee organization. Estimating a cash donation without any of these records will get the deduction disallowed entirely.
Evidence That Makes an Estimate Hold Up
When you invoke the Cohan Rule, the strength of your supporting evidence determines whether you get a generous estimate or nothing at all. Examiners and judges look for a combination of testimony and documentation that, taken together, makes the expense more likely than not.
Testimony
Your own testimony about what you spent is a starting point, but self-serving statements alone are not enough. You need objective corroboration. A written statement from a vendor confirming they performed work at your business, or testimony from a partner who witnessed the purchase, carries far more weight than your word alone.
Financial Records and Patterns
Bank and credit card statements showing withdrawals or charges that line up with claimed expenses are among the strongest secondary evidence. If you withdrew $400 in cash the same week you say you paid a contractor, that is a meaningful data point. Prior-year statements showing consistent spending in the same category help too. A business that spent roughly $6,000 on supplies every year for four straight years has a credible basis for estimating a similar amount in the year with missing records.
Calendars, Logs, and Digital Records
Detailed calendar entries showing where you were and what you were doing on specific dates help establish that business activity occurred. GPS data from a mapping app, time-stamped photos of a job site, and email confirmations of appointments can place you at a location for a business reason on a specific date. This is exactly what the rule requires: a factual basis to anchor an estimate.
Industry Benchmarks
If your estimated expenses are roughly in line with what similar businesses in your industry typically spend, that consistency makes your numbers harder to reject. The IRS has aggregate data from millions of returns, and an estimate that lands within the normal range for your business type and size is far more defensible than one that looks like an outlier.
Penalties for Overestimating or Fabricating
The Cohan Rule protects honest taxpayers with imperfect records. It does not protect anyone who inflates numbers or invents expenses. The penalties escalate quickly depending on how far you push it.
- Accuracy-related penalty of 20%. If the IRS determines you were negligent or carelessly disregarded the rules, the penalty equals 20% of the resulting tax underpayment. Negligence includes any failure to make a reasonable attempt to comply with tax law.7Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
- Civil fraud penalty of 75%. If the IRS establishes that any portion of your underpayment was due to fraud, the penalty jumps to 75% of the fraudulent portion. Once the IRS proves fraud on any part, the entire underpayment is presumed fraudulent unless you prove otherwise by a preponderance of the evidence.8Office of the Law Revision Counsel. 26 U.S. Code 6663 – Imposition of Fraud Penalty
- Frivolous submission penalty of $5,000. Filing a return with information clearly designed to impede tax administration, or based on a position the IRS has identified as frivolous, triggers a flat $5,000 penalty per submission.9Office of the Law Revision Counsel. 26 U.S. Code 6702 – Frivolous Tax Submissions
The line between a good-faith Cohan estimate and a fraudulent deduction usually comes down to whether you can point to real business activity that generated the expense. Estimating $800 for office supplies when you actually spent $600 lands in Cohan territory. Claiming $5,000 in supplies you never bought lands in penalty territory. The absence of any corroborating evidence makes the wrong conclusion much more likely.
Where the Rule Actually Gets Argued
You rarely invoke the Cohan Rule on the original return. It comes up during a dispute, after the IRS has proposed changes to your return. You generally have 30 days from the date of that letter to request a conference with the IRS Office of Appeals.10Internal Revenue Service. Preparing a Request for Appeals Appeals is an independent office within the IRS and often the stage where Cohan-based arguments get their most sympathetic hearing, because Appeals officers can settle cases based on the probable outcome at trial.
If Appeals does not resolve the dispute, the IRS issues a statutory notice of deficiency and you have 90 days to file a petition in U.S. Tax Court. This is where the Cohan Rule carries the most formal weight, because a Tax Court judge has the authority to estimate your deduction based on whatever credible evidence you present. The burden stays with you: you have to show that the expense occurred, that it was business-related, and that your estimate has a reasonable basis.1Office of the Law Revision Counsel. Rule 142 – Burden of Proof Any remaining uncertainty gets resolved against you, so even a successful Cohan argument usually produces a deduction smaller than what you originally claimed.