Using the “Cohan Rule” to take record-less deductions
Most taxpayers understand the importance of maintaining thorough records to substantiate tax deductions and credits. These records are not only essential for tax purposes but also play a critical role in various scenarios such as insurance claims, wage disputes, and legal proceedings.
Despite the requirement for records, situations may arise where records are lost, unavailable, or destroyed. In such cases, taxpayers may still claim deductions and credits under what is known as “The Cohan Rule”.
In the late 1920s, George M. Cohan, a prominent Hollywood composer, successfully deducted business expenses that lacked documentation. The court, upon appeal, allowed the deductions, emphasizing that the expenses were business-related, though an approximate amount was required for deduction purposes.
Taxpayers seeking to utilize the Cohan Rule face several challenges. They must provide sufficient evidence demonstrating:
- The relevance of the expense to the business,
- Actual payment of the expense,
- The reasonableness of the amount claimed,
- The dates of the transactions,
- The reasons for the absence of records.
The decision to allow deductions under the Cohan Rule is discretionary and varies depending on the facts and circumstances of each case. It does not replace the need for proper recordkeeping. The justification for lacking records significantly influences whether the deduction will be approved by the IRS or a court.
Taxpayers must convince the IRS or a court that the expenses in question were genuine and reasonable. The Cohan Rule permits deduction only for the amount of the expense, provided its existence can be substantiated.
There is no substitute for good records. If you are concerned about your record-keeping procedures, please contact your ShindelRock tax professional.