The Cohan rule is a legal doctrine that allows taxpayers to estimate certain tax deductions when they lack precise records of actual expenses. Named after the taxpayer in the landmark case Cohan v. Commissioner, this rule provides taxpayers with a degree of flexibility in substantiating their deductions, particularly when faced with incomplete or missing documentation.
Understanding the Cohan Rule
The Cohan rule is rooted in the principle that taxpayers should not be penalized for failing to maintain perfect records, especially when the underlying expenses are genuine. Under this rule, taxpayers may rely on reasonable estimates to support their claimed deductions, provided that they can demonstrate a factual basis for their estimates.
Applicability of the Cohan Rule
The Cohan rule is generally applicable to various types of deductible expenses, including:
- Business expenses
- Travel and entertainment expenses
- Charitable contributions
- Depreciation and amortization
Limitations on the Cohan Rule
While the Cohan rule provides taxpayers with some flexibility, it is important to note that it is not a license for随意猜测. The rule only applies when taxpayers can provide a reasonable basis for their estimates, and it does not excuse taxpayers from the obligation to maintain adequate records.
Additionally, the Cohan rule is not applicable in certain circumstances, such as:
- Expenses subject to specific substantiation requirements under the Internal Revenue Code (IRC), such as travel and entertainment expenses under IRC Section 274
- Charitable contributions exceeding certain thresholds, which require specific documentation under IRC Section 170
Using the Cohan Rule
To successfully utilize the Cohan rule, taxpayers should:
-
Establish the Existence of the Expense: Taxpayers must first demonstrate that they actually incurred the expense in question. This can be done through evidence such as receipts, invoices, or bank statements.
-
Provide a Reasonable Basis for the Estimate: Taxpayers must provide a reasonable basis for their estimate of the expense. This can include factors such as:
- Industry averages
- Similar expenses incurred in prior years
- Estimates from experts or professionals
-
Be Prepared to Substantiate the Estimate: Taxpayers should be prepared to provide documentation or other evidence to support their estimate if requested by the IRS.
Advantages and Disadvantages of the Cohan Rule
Advantages:
- Provides taxpayers with flexibility in substantiating deductions
- Prevents taxpayers from being penalized for missing or incomplete records
- Allows taxpayers to claim deductions for legitimate expenses that would otherwise be lost
Disadvantages:
- Requires taxpayers to provide a reasonable basis for their estimates
- May not be applicable in all circumstances, particularly where specific substantiation requirements exist
- Can lead to disputes with the IRS if the taxpayer’s estimate is deemed unreasonable
The Cohan rule is a valuable tool for taxpayers who lack precise records of their deductible expenses. By understanding the rule’s requirements and limitations, taxpayers can effectively utilize it to claim legitimate deductions and minimize their tax liability. However, it is crucial to remember that the Cohan rule does not absolve taxpayers from the responsibility of maintaining adequate records and providing a reasonable basis for their estimates.
The Cohan Rule
FAQ
What is the Cohan rule and how do you use it?
What is the Cohan rule for tax court?
What is the burden of proof for expenses?
When a tax practitioner uses estimates when preparing a tax return?
What is the Cohan rule?
The Cohan rule allows people to estimate the cost of certain business expenses even when they don’t have the records to support them. It’s based on the 1930 court case Cohan v. Commissioner. For instance, if you pay $100 for a business expense in cash and then lose the receipt, you might not have a record of that expense anywhere.
How does the Tax Court apply the Cohan rule?
The Tax Court has also applied the Cohan Rule for patents even in cases where the records regarding the patents have been destroyed, though the final amounts entered by the Tax Court were far less than the taxpayers’ estimates. The Tax Court has applied the Cohan rule to estimate the basis of stock.
What is the Cohan rule if you lose a receipt?
It’s based on the 1930 court case Cohan v. Commissioner. For instance, if you pay $100 for a business expense in cash and then lose the receipt, you might not have a record of that expense anywhere. Depending on what you’re trying to claim, the Cohan rule might still allow you to include a reasonable estimate of the expense on your tax return.
Can a reasonable estimate be included in the Cohan rule?
Depending on what you’re trying to claim, the Cohan rule might still allow you to include a reasonable estimate of the expense on your tax return. How did the Cohan rule start?