The Cohan Rule is a court-created tax doctrine that lets you claim estimated deductions for legitimate business expenses when you cannot produce complete records, provided you can show the expense actually happened and give a court some reasonable basis for the amount. It is a fallback, not a recordkeeping method. Courts that apply it routinely cut the taxpayer’s claimed number, and several important expense categories are walled off from it entirely by statute.
Where the Rule Comes From
The rule takes its name from George M. Cohan, the Broadway entertainer whose heavy career-related spending on travel and entertainment was denied in full by the Board of Tax Appeals because he kept almost no records. In 1930 the Second Circuit reversed. Judge Learned Hand wrote that “absolute certainty in such matters is usually impossible and is not necessary,” and that the Board should “make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.”
Two ideas from that opinion still drive how the rule works today. A court cannot deny a real business deduction all the way to zero just because receipts are missing. And when the court estimates, it resolves doubt against the taxpayer whose sloppy records created the problem.
What You Have to Prove Before a Court Will Estimate
The rule addresses uncertainty about how much you spent, not whether you spent anything. Before any estimation happens, you carry the burden of showing two things. You actually paid or incurred a cost. And that cost qualifies as a deductible expense, most commonly an “ordinary and necessary” business expense under Internal Revenue Code Section 162.1Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
You need credible evidence, documentary or testimonial, that the expense exists and has a business connection. Courts sometimes describe this as requiring “some factual basis” for the deduction. A vague assertion that you “probably spent around $5,000 on supplies” with nothing behind it will not clear the bar. Even Cohan himself testified about the types of expenses he incurred and the circumstances around them before the court was willing to approximate amounts.
Expenses You Can Estimate Under the Rule
The Cohan Rule works best for ordinary business costs where a spending pattern is plausible even without a receipt for every transaction:
- Office supplies and materials such as ink, paper, postage, and cleaning supplies, where bank or card statements can corroborate the pattern.
- Contract labor and subcontractor payments made in cash, where testimony about the work performed and going rates supports an estimate.
- Advertising and marketing costs for flyers, online ads, or signage.
- Tools and equipment used exclusively for business that are not classified as listed property.
- Professional development like books, courses, and trade subscriptions, where a card statement identifies the vendor but the itemized receipt is gone.
The common thread is that the expense type is clearly business-related, the spending is typical for the industry, and indirect evidence exists that money was spent. Where courts push back is on claimed amounts wildly out of proportion to the taxpayer’s income or activity with nothing to back them up.
Expenses the Rule Cannot Help With
Congress has carved out several categories where estimation is not allowed, no matter how believable your story. These are the situations where taxpayers most often assume the Cohan Rule will save them, and it will not.
Section 274(d) Expenses
Internal Revenue Code Section 274(d) requires that certain expenses be backed by adequate records or sufficient corroborating evidence showing the amount, time and place, business purpose, and business relationship of the person involved.2Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses The categories subject to these requirements are:
- Travel expenses, including airfare, hotels, and related costs while away from home on business.
- Business meals where you or an employee are present and the expense is not lavish.
- Business gifts to clients, vendors, or other contacts.
- Listed property, including passenger automobiles, other vehicles, and property typically used for entertainment or recreation.3Office of the Law Revision Counsel. 26 USC 280F – Limitation on Depreciation for Luxury Automobiles; Limitation Where Certain Property Used for Personal Purposes
For these items, missing records means a zero-dollar deduction. A court will not estimate the cost of a business dinner even if your calendar proves the client meeting happened. The statute overrides the Cohan Rule.
Cell phones were removed from the listed property category in 2010, which means business use of a personal cell phone no longer requires the same detailed logging and can potentially be estimated under Cohan when other records are thin.4Internal Revenue Service. IRS Issues Guidance on Tax Treatment of Cell Phones
Entertainment Expenses
Since 2018, entertainment expenses have been completely nondeductible under the Tax Cuts and Jobs Act.5Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Contributions and Gifts Client golf outings, sporting event tickets, and concert tickets cannot be written off at all, no matter how well documented. Estimation cannot revive a deduction Congress eliminated.
Charitable Contributions
Charitable donations have their own substantiation rules that block Cohan estimation. Cash contributions of $250 or more require a contemporaneous written acknowledgment from the receiving organization, and no deduction is allowed without it.6Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts Smaller cash donations still require a canceled check, bank record, or receipt.
Standard Rates as a Workaround
If your expenses fall into a Section 274(d) category and your actual-cost records are shaky, IRS standard rates can replace much of the detailed tracking. You still document business purpose, dates, and destinations, but you skip the receipt-by-receipt accounting.
The 2026 IRS standard mileage rate is 72.5 cents per mile for business use.7Internal Revenue Service. 2026 Standard Mileage Rates Log the business miles, multiply, and you avoid the need for gas, insurance, and maintenance receipts. You still need a mileage log showing dates, destinations, and business purpose for each trip.
For business travel, per diem rates cover lodging and meals without individual receipts for every hotel and restaurant. Under the high-low method effective October 1, 2025, the rate is $319 per day for high-cost localities and $225 per day for all other locations within the continental United States.8Internal Revenue Service. 2025-2026 Special Per Diem Rates Of those amounts, $86 and $74 respectively are allocated to meals.
Building Your Evidence for an Estimate
When you are missing receipts for expenses eligible for Cohan estimation, the goal is to assemble enough secondary evidence to make your claimed amount look reasonable. Courts and the IRS respond better to organized, cross-referenced records than to a story told from memory.
Bank and credit card statements are the strongest starting point. They show dates, amounts, and vendor names, and together they create a spending pattern that is hard to fabricate. Monthly charges at an office supply store support the existence of supply expenses even without individual receipts. Canceled checks and digital payment histories do the same work.
Calendars and appointment records tie the spending to business activity. A calendar entry showing a client meeting in another city on the same day your card was charged at a nearby gas station tells a coherent story. The more your records confirm each other, the more convincing the whole picture becomes.
Testimony carries more weight than most taxpayers expect. Your own detailed account, corroborated by a supplier who confirms your regular orders or a subcontractor who recalls the jobs, adds a human layer to the paper trail. Written statements land better than first-time-at-trial oral claims.
Industry benchmarks help anchor the number. A freelance photographer claiming $3,000 in annual equipment maintenance looks reasonable when comparable photographers in the area typically spend $2,500 to $4,000. Context of that kind gives a court something concrete to land on.
Why Your Claimed Amount Usually Gets Cut
When a court accepts that an expense occurred but cannot pin down the amount, it makes its own approximation and resolves every doubt against the taxpayer. This is the “bearing heavily” principle from the original Cohan decision, and it means substantial reductions from the return figure.
In one Tax Court case, a taxpayer who claimed $2,880 in advertising expenses was allowed $500. The same taxpayer claimed $9,258 in supply costs and received $6,000, and claimed $5,620 in labor costs and received $4,000. Across the board, the court chose the lowest number the evidence could support. That pattern is typical, not exceptional.
The practical takeaway is that the Cohan Rule recovers part of your deduction, not the whole thing. Ten thousand dollars in legitimate but poorly documented business costs might come back as $4,000 or $5,000. That beats zero, which is what you get without the rule, but the gap represents deductions that better recordkeeping would have preserved.
Penalties for Weak Records
Federal law requires every taxpayer to keep records sufficient to determine tax liability.9Office of the Law Revision Counsel. 26 USC 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns Falling short of that obligation can trigger penalties on top of the additional tax you owe.
The most common is the 20% accuracy-related penalty under Section 6662, which applies when an underpayment results from negligence or disregard of rules and regulations. The IRS defines negligence to include any failure to make a reasonable attempt to comply with the tax code, and claiming deductions you cannot substantiate fits that definition.10Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments If a Cohan estimation shrinks your deductions by $8,000 and creates a $2,000 underpayment, expect a $400 penalty on top.
Filing Form 8275 to disclose the estimated position does not solve the problem. The IRS instructions state that if you failed to keep proper books and records or failed to substantiate items, disclosure does not avoid the penalty.11Internal Revenue Service. Instructions for Form 8275 – Disclosure Statement Disclosure protects debatable legal positions, not missing records.
You can potentially avoid the 20% penalty by showing reasonable cause and good faith. The IRS evaluates this case-by-case, looking at the effort you made to determine your correct liability.12eCFR. 26 CFR 1.6664-4 – Reasonable Cause and Good Faith Exception to Section 6662 Penalties Records destroyed in a fire or natural disaster support the argument. Never bothering to keep receipts does not.
At the extreme end, fabricating expenses can trigger the civil fraud penalty under Section 6663, which is 75% of the underpayment attributable to fraud.13Internal Revenue Service. 20.1.5 Return Related Penalties The Cohan Rule protects honest taxpayers with imperfect records. Courts distinguish between someone who lost a shoebox of receipts and someone who never had expenses to document.
How Long to Keep Records So You Never Need the Rule
The IRS recommends keeping tax records for at least three years from the date you filed the return or two years from the date you paid the tax, whichever is later. If you underreport income by more than 25% of the gross income shown on your return, the retention period extends to six years. Claims involving worthless securities or bad debt deductions require seven years.14Internal Revenue Service. How Long Should I Keep Records?
Digital backups are worth the small effort. A phone photo of a receipt stored in cloud storage costs nothing and eliminates the most common reason taxpayers end up leaning on the Cohan Rule: paper that gets lost, damaged, or thrown out. The rule exists as a last resort. The best position to be in is never having to use it.