The Cohan Rule Explained: How to Deduct Expenses Without Receipts
TL;DR
Missing receipts does not automatically mean you lose every tax deduction. Under certain circumstances, the IRS and courts may allow reasonable estimates of legitimate business expenses.
The Cohan Rule can help taxpayers reconstruct expenses, but it is never as favorable as maintaining proper records from the beginning.
Some categories of deductions require strict documentation, including mileage, travel, meals, and certain business-use property expenses, making recordkeeping essential.
The Cohan Rule: A Lifeline for Small Businesses and Landlords Who Didn't Keep Perfect Records
Every tax season, I meet small business owners, independent contractors, and residential landlords who have something in common: they worked hard all year but did not keep perfect records.
Some operate successful Schedule C businesses. Others own rental properties reported on Schedule E. Many are hardworking people focused on serving customers, managing tenants, raising families, and paying bills—not maintaining detailed accounting systems.
Then tax season arrives.
Suddenly they are trying to remember:
How much they spent on repairs
What they paid for insurance
How much they spent on supplies
Whether they hired contractors
How many miles they drove for business
The good news is that imperfect recordkeeping does not necessarily mean all deductions are lost.
The bad news is that poor recordkeeping almost always costs taxpayers money.
This is where an important tax principle known as the Cohan Rule comes into play.
Your Silent Business Partner: The IRS
One way I explain taxes to clients is this:
You have a business partner.
That partner is the federal government.
Your partner knows how much money you make because banks, customers, employers, payment processors, and others report that information through:
Forms 1099
Forms W-2
Forms K-1
Forms 1099-K
Other information returns
What your partner does not automatically know is how much money you spent to earn that income.
That responsibility falls on you.
If you want deductions, you must show where those deductions came from.
And unlike a friendly business partner, the IRS has the right to audit you.
What Happens If You Have No Receipts?
Many taxpayers assume that if they lose receipts or fail to maintain records, they automatically lose every deduction.
That is not always true.
The IRS cannot simply pretend that legitimate expenses never existed.
After all, businesses generally incur expenses in order to operate.
Landlords must maintain property.
Contractors must purchase materials.
Salespeople must travel.
Business owners must buy supplies.
The question becomes:
How much can be reasonably proven?
That question led to one of the most important tax cases ever decided.
The Story Behind the Cohan Rule
The Cohan Rule comes from a court case involving entertainer and producer George M. Cohan.
Cohan was famous for his theatrical productions and extensive travel throughout the United States.
Unfortunately, he was not famous for maintaining tax records.
When the IRS audited him, the government took an aggressive position.
The auditor effectively argued that because Cohan lacked proper documentation, many of his deductions should be disallowed entirely.
The case eventually reached court.
The court recognized an obvious reality:
George Cohan clearly incurred business expenses.
Nobody could travel around the country producing shows without spending money.
The fact that he failed to keep perfect records did not mean his expenses were zero.
As a result, the court established what became known as the Cohan Rule.
Under this principle, courts may allow reasonable estimates of deductible expenses when taxpayers can demonstrate that expenses were incurred, even if precise documentation is unavailable.
What the Cohan Rule Does—and Does Not—Do
Many taxpayers misunderstand the Cohan Rule.
It does not mean:
You can invent expenses.
You can guess wildly.
You automatically win an audit.
Instead, the rule allows reasonable approximations supported by credible evidence.
The taxpayer must still convince the IRS—or a court—that the expenses actually existed.
For example:
Suppose a landlord cannot locate a homeowners insurance bill.
However:
The property has a mortgage.
The lender required insurance.
Insurance existed the prior year.
Similar policies increased in cost.
A reasonable estimate may be possible.
But the taxpayer does not get the benefit of every doubt.
The estimate must be conservative and defensible.
The burden remains on the taxpayer.
Why Poor Records Cost Taxpayers Real Money
One of the most common mistakes I see is taxpayers forgetting legitimate expenses.
Not because they are dishonest.
Because they simply do not remember.
For example, landlords frequently forget:
Smoke detector batteries
Minor repairs
Snow removal
Landscaping
Small hardware purchases
Realtor commissions
Cleaning supplies
Individually these expenses may seem minor.
Collectively they can add up to hundreds or thousands of dollars.
When records are missing, deductions are often understated.
That means taxpayers pay more tax than necessary.
Congress Limited the Cohan Rule
Many taxpayers are surprised to learn that Congress eventually restricted portions of the Cohan Rule.
Certain categories of expenses now require stricter documentation.
These categories generally include:
Mileage
Business mileage is one of the most heavily scrutinized deductions.
Taxpayers generally need:
Dates
Destinations
Business purpose
Number of miles traveled
Without proper documentation, mileage deductions may be denied.
Travel Expenses
Hotel stays, airfare, and other travel costs generally require records showing:
Amount spent
Business purpose
Dates
Locations
Meals
Business meals require documentation demonstrating:
Amount
Date
Business purpose
Participants
Certain Business Property
Depending on the circumstances, business-use property such as computers and other equipment may require additional substantiation.
In these categories, the IRS has significantly greater authority to reject unsupported deductions.
Technology Has Made Recordkeeping Easier Than Ever
Fortunately, taxpayers today have tools that George Cohan never imagined.
Many business owners use mileage tracking applications that automatically record trips.
Popular accounting systems can track:
Income
Expenses
Receipts
Vendor payments
Financial statements
Even simple methods can work.
A shoebox full of receipts is not ideal.
But it is often far better than having no records at all.
The goal is not perfection.
The goal is documentation.
Better Records Usually Mean Lower Taxes
One interesting thing happens when clients improve their recordkeeping:
They often discover they spent more money than they realized.
When expenses are properly tracked:
Fewer deductions are forgotten.
Profit calculations become more accurate.
Tax returns become easier to prepare.
Audit defense becomes stronger.
Tax liability is often reduced.
For self-employed individuals, every legitimate deduction can be especially valuable because it may reduce:
Federal income tax
State income tax
Self-employment tax
The combined savings can be substantial.
The Best Tax Strategy Is Prevention
The Cohan Rule remains an important protection for taxpayers.
It recognizes reality.
People sometimes lose records.
Small businesses sometimes make mistakes.
Landlords sometimes fail to maintain perfect accounting systems.
However, the rule should be viewed as a safety net—not a strategy.
The strongest position is always:
Keep receipts.
Track expenses regularly.
Maintain mileage logs.
Save supporting documentation.
Review records throughout the year instead of waiting until tax season.
Good records produce better deductions, better tax returns, and better audit protection.
Final Thoughts
If you are a small business owner, independent contractor, or residential landlord and your records are less than perfect, do not assume that all is lost.
The Cohan Rule may provide a path to reconstruct legitimate expenses and claim deductions you are entitled to take.
At the same time, every year is an opportunity to improve your recordkeeping practices so that future tax returns are more accurate, more defensible, and potentially less expensive.
The best tax return is not simply the one that gets filed.
It is the one that accurately reflects every legitimate deduction you earned.
Note
This article is intended for educational purposes only and does not constitute legal or tax advice. Every taxpayer's situation is unique. If you have missing records, have received an IRS audit notice, or need assistance preparing business, rental property, partnership, S-corporation, or individual tax returns, consult with a qualified tax professional regarding your specific circumstances.