One of the most common tax myths is that if you lose your receipts, you automatically lose your tax deduction.

That is not always true.

Federal tax law recognizes that taxpayers sometimes incur legitimate business expenses without preserving perfect documentation. Under a famous court decision known as the Cohan Rule, courts may estimate deductible expenses when the evidence shows that deductible expenses were actually incurred.

However, many taxpayers misunderstand this doctrine. The Cohan Rule is not a free pass to estimate every deduction, and Congress has specifically prohibited courts from applying it to several important categories of expenses.

Understanding where the rule applies—and where it absolutely does not—can save taxpayers from expensive IRS disputes.

What Is the Cohan Rule?

The Cohan Rule comes from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).

George M. Cohan, the famous Broadway producer and entertainer, deducted substantial business expenses but lacked complete records. Rather than denying every deduction, the court held that where it is clear deductible expenses were incurred, a reasonable approximation may be allowed.

The court recognized that requiring mathematical precision in every circumstance could unfairly deny legitimate deductions.

Today, the Cohan Rule remains an important judicial doctrine in federal tax law.

The Internal Revenue Code Still Requires Records

Although the Cohan Rule exists, taxpayers should understand that the Internal Revenue Code still places the burden of maintaining records on taxpayers.

IRC § 6001 provides:

“Every person liable for any tax imposed by this title… shall keep such records… as the Secretary may from time to time prescribe.”

Treasury regulations reinforce this obligation.

Treasury Regulation § 1.6001-1(a) provides:

“Any person subject to tax… shall keep such permanent books of account or records… as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown.”

In other words, good records remain the rule—not the exception.

When Can the Cohan Rule Apply?

Generally, the taxpayer must first establish:

• that a deductible expense actually occurred;
• that the expense was business-related;
• that there is some credible evidence supporting the expenditure; and
• that the court has a reasonable basis to estimate the amount.

Evidence can include:

• bank statements;
• cancelled checks;
• invoices;
• calendars;
• appointment books;
• emails;
• testimony;
• mileage logs; or
• other circumstantial evidence.

The stronger the evidence, the more likely a court will be willing to make a reasonable approximation rather than deny the deduction altogether. Mere speculation, however, is not enough. A taxpayer must first convince the court that deductible business expenses were actually incurred before the Cohan Rule becomes available.

When the Cohan Rule Does NOT Apply

Congress has determined that certain deductions require strict substantiation, regardless of whether the taxpayer actually incurred the expense.

The biggest example is IRC § 274(d), which specifically overrides the Cohan Rule for certain expenses.

The statute provides:

“No deduction or credit shall be allowed… unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement…”

The categories subject to these heightened requirements include:

• travel expenses;
• meals while traveling;
• gifts;
• listed property (subject to current law); and
• certain entertainment-related expenses where otherwise applicable.

Treasury Regulation § 1.274-5T further explains the documentation requirements, generally requiring taxpayers to substantiate:

• the amount;
• the time;
• the place;
• the business purpose; and
• the business relationship (where applicable).

For these expenses, courts generally cannot simply estimate deductions under the Cohan Rule.

An Example

Suppose a self-employed contractor purchases numerous small hardware items throughout the year but loses several receipts during an office move.

If bank statements, vendor records, testimony, or other evidence establish that legitimate business purchases were made, a court might estimate the deductible amount under the Cohan Rule.

Now consider a different situation.

The contractor claims $12,000 of travel expenses but kept no mileage log, hotel receipts, airfare records, or other documentation required by IRC § 274(d).

Even if everyone agrees that some travel occurred, the deduction may be denied because Congress specifically requires detailed substantiation.

This distinction surprises many taxpayers.

What Kind of Evidence Can Help?

Even when receipts are unavailable, taxpayers should gather every piece of supporting evidence they can find.

Helpful documentation may include:

• bank statements;
• credit card statements;
• canceled checks;
• invoices;
• vendor account histories;
• appointment calendars;
• email correspondence;
• photographs;
• contracts;
• client communications;
• bookkeeping records; and
• credible witness testimony.

The more evidence presented, the more comfortable a court may be making a reasonable estimate.

Practical Advice for Small Business Owners

While the Cohan Rule can occasionally save a deduction, taxpayers should never rely on it as part of their tax planning.

Modern technology makes recordkeeping easier than ever.

Consider:

• photographing receipts immediately;
• maintaining cloud-based bookkeeping software;
• downloading bank statements monthly;
• using accounting software;
• tracking mileage electronically; and
• preserving electronic invoices.

Good documentation is far less expensive than defending an IRS examination.

The IRS May Still Challenge Estimates

Even when the Cohan Rule applies, the IRS is not required to accept a taxpayer’s estimates.

Courts often reduce claimed deductions substantially when the supporting evidence is weak.

Remember, the burden remains on the taxpayer to establish that deductible expenses actually existed.

The Cohan Rule simply allows a court to approximate an amount once that initial burden has been met.

Frequently Asked Questions

Can I deduct business expenses if I lost my receipts?

Sometimes. If you can present credible evidence showing the expenses were actually incurred, a court may estimate certain deductions under the Cohan Rule. However, some deductions require strict documentation under the Internal Revenue Code.

Does the Cohan Rule apply to travel expenses?

Generally, no. Travel expenses are among the deductions subject to the strict substantiation requirements of IRC § 274(d).

Does the IRS have to accept my estimates?

No. The IRS may reject unsupported estimates, and courts will only approximate expenses when there is sufficient evidence that deductible expenses actually occurred.

Is the Cohan Rule part of the Internal Revenue Code?

No. The Cohan Rule comes from federal case law rather than the Internal Revenue Code, but it continues to influence how courts evaluate insufficiently documented deductions.

Conclusion

The Cohan Rule recognizes an important reality: taxpayers sometimes incur legitimate business expenses without maintaining perfect records. When credible evidence establishes that deductible expenses were actually incurred, courts may estimate the allowable deduction rather than deny it entirely.

However, taxpayers should not mistake this doctrine for a substitute for proper bookkeeping. Congress has imposed strict substantiation requirements for several important categories of deductions—particularly travel, meals, gifts, and certain other expenses under IRC § 274(d)—and the Cohan Rule generally cannot override those statutory requirements.

Maintaining organized records remains the best way to protect your deductions, reduce the likelihood of disputes with the IRS, and ensure that you receive every deduction the law allows.

At Dino Tax Co, we help clients navigate tax matters ranging from unfiled returns to IRS letters and levies and everything in between with clarity and confidence. If you’d like guidance on your situation, schedule a consultation today. Call or text (713) 397-4678 or email davie@dinotaxco.com. We’re here to help you take the next step.