Navigating Business Deductions: The Cohan Rule

If you find yourself without the necessary records to support business deductions, you might still have options thanks to the Cohan rule. Here’s what you need to know:

Understanding the Cohan Rule

In situations where you lack complete records for business deductions, you can potentially utilize the Cohan rule. This rule originated from a historic court case involving George M. Cohan, a renowned performer known for iconic songs like “Give My Regards to Broadway” and “I’m a Yankee Doodle Dandy.” Despite inadequate documentation of his business travel and entertainment expenses, Cohan successfully argued his case in court.

Legal Basis

The Cohan rule derives its authority from a landmark decision in the 2nd Circuit Court in 1930. Judge Learned Hand presided over the case and acknowledged that while Cohan lacked meticulous records, there was sufficient evidence to support that deductible expenses had been incurred in connection with his business activities. This decision set a precedent that in certain circumstances, taxpayers may substantiate deductions based on reasonable estimates and credible evidence, even without perfect documentation.

Application Today

It’s important to note that the Cohan rule has its limitations and may not universally apply to all types of expenses or in every tax scenario. For instance, subsequent changes in tax laws have restricted its use for travel expenses but still allow for deductions in other categories of business expenses where documentation is incomplete but credible evidence exists.

Strategic Considerations

If you’re relying on the Cohan rule to support deductions, it’s advisable to gather as much supporting evidence as possible. This may include bank statements, credit card records, invoices, or any other documentation that can substantiate the expenses incurred. While the rule provides flexibility, it’s not a guaranteed shield against IRS scrutiny, so maintaining thorough records remains a best practice.

Conclusion

By understanding the Cohan rule and its application, taxpayers may be able to substantiate business deductions even in the absence of complete records. Consulting with a tax professional can provide additional guidance on leveraging this rule effectively while ensuring compliance with current tax regulations.