I focus my practice on tax resolution, representing taxpayers in Colorado, Florida, and across the United States.
The Cohan rule is a legal principle that allows taxpayers to claim deductions for expenses that are not fully substantiated, as long as they can provide reasonable estimates and demonstrate the expenses were indeed incurred. This rule was established after the landmark Cohan v. Commissioner case all the way back in 1930, which set a precedent for the treatment of deductions when taxpayers lack complete records.
The Cohan rule is particularly helpful for taxpayers who may have lost or misplaced receipts, or for those who engage in cash transactions that are difficult to track. It recognizes the practical difficulties of keeping perfect records and allows taxpayers to rely on estimates and other credible evidence to support their claims.
For example, let's say a small business owner attends a conference to gain knowledge and improve their skills. However, they misplace the receipt for the conference registration fee. Under the Cohan rule, the business owner can still deduct the fee by providing reasonable evidence of the expense, such as a credit card statement or testimonies from other attendees. I think I can safely say everyone, myself included, has experienced this situation!
This rule is also beneficial for individuals who incur expenses related to their profession or business but may not have access to all the necessary documentation. It helps prevent an undue burden on taxpayers by allowing them to claim deductions for legitimate expenses, even if they cannot produce every single receipt.
However, it's important to note that the Cohan rule does not give taxpayers free rein to estimate their expenses without any substantiation. The IRS still requires reasonable estimates and credible evidence to support the deductions claimed. This is an area where a tax professional can greatly help you if you are being audited.