There is a specific kind of cold sweat that breaks out when you realize you have lost a receipt for a legitimate business expense. Maybe you left it in a taxi; maybe it went through the washing machine; maybe your dog, in a fit of pique, actually ate it. In the eyes of the IRS, if you can’t prove it with a piece of paper, it didn’t happen.
But before you resign yourself to overpaying your taxes, you should know the story of George M. Cohan. He was the Broadway legend who gave us “Give My Regards to Broadway” and “Yankee Doodle Dandy.” But to tax nerds, he is a hero for a different reason: He was a man who hated paperwork, got sued by the IRS because of it, and won.
What is the Cohan Rule?
In the late 1920s, the IRS audited Cohan. They found that while he was undoubtedly spending a fortune traveling and entertaining actors and producers to generate business, he hadn’t kept a single receipt. True to form, the IRS disallowed every single dollar of his travel and entertainment deductions. They argued that without paper proof, the expense was zero.
Cohan sued, and the case went all the way to the U.S. Second Circuit Court of Appeals. In 1930, the court handed down a decision that would become legendary (Cohan v. Commissioner). The judge ruled that “absolute certainty in such matters is usually impossible and is not necessary.”
Essentially, the court told the IRS that if it is obvious a taxpayer spent money to run their business, it is unfair to allow zero deduction just because the exact paperwork is missing. The court ordered the IRS to make “as close an approximation as it can.” This principle — that you can estimate expenses if you can prove the activity occurred — became known as the Cohan Rule.
The Big “But”: Where the Rule Fails (The Section 274 Problem)
Before you start shredding your receipts and estimating your way to a refund, there is a massive catch. The Cohan Rule was so generous that Congress eventually stepped in to stop the party. They passed Internal Revenue Code Section 274(d), which specifically kills the Cohan Rule for the most fun categories of spending.
Today, you cannot use the Cohan Rule to estimate:
- Travel expenses (flights, hotels)
- Meals (business lunches)
- Entertainment (golf outings, tickets — though most of these are nondeductible now, anyway)
- Gifts
- “Listed Property” (cars, computers, and other assets used for both business and personal life)
For these specific categories, the rule remains strict: No receipt, no deduction. The Cohan Rule cannot save you here.
Get more articles like this straight to your inbox 
When Can You Use It?
So, if you can’t use it for travel or meals, is the Cohan Rule useless? Not at all. It still applies to a wide range of “other” business expenses where strict substantiation isn’t explicitly required by the tax code.
It acts as a powerful bargaining chip for:
- Office supplies: If you bought a printer but lost the receipt.
- Petty cash expenses: Small cash outlays for the business.
- Taxi fares or tips: Small amounts where receipts are rarely given or easily lost.
- Renovation labor/materials: If you can prove you painted your rental property (photos, tenant testimony) but lost the receipt for the paint.
The key is reconstruction. You shouldn’t just guess a number out of thin air. You need a credible basis for your estimate. If you hired a guy to fix your roof for three days, and you lost the invoice, you can estimate the cost based on the going hourly rate for roofers in your area.
The Catch: The “Lowest Possible” Standard
There is a sting in the tail of the Cohan decision. The court explicitly stated that because the inexactitude is the taxpayer’s own fault, the IRS should “bear heavily” against them.
In practice, this means the IRS will give you the minimum reasonable amount, not the average. If paint costs between $30 and $60 a gallon, and you don’t have a receipt, they will allow you a deduction of $30. It is a “penalty” for being disorganized, but it is infinitely better than a deduction of zero.
A Raft, Not a Luxury Yacht
The Cohan Rule keeps you from drowning during an audit when your records are imperfect, but it won’t get you to the best possible destination. It allows you to approximate expenses when you can reasonably show that some money was spent.
However, it has its limits. It won’t save you if you try to estimate your travel or meals, and you will likely get a lower deduction than if you had just kept the piece of paper. Our advice? Keep your receipts. But if disaster strikes, channel your inner George M. Cohan, stand your ground, and remind the auditor that “absolute certainty is not necessary.”
