Usually, the IRS requires detailed records to substantiate deductions, but there are exceptions. Notably, a business owner may rely on the “Cohan rule” to reasonably estimate deductible expenses if it’s clear that expenses were actually incurred. However, as shown in a new case, Branch, TC Memo 2026-51, 6/17/26, this tax law principle often leads to mixed reviews.
Background: The Cohan rule is named after the decision in a case involving legendary vaudeville performer George M. Cohan, the “Yankee Doodle Dandy” born on the fourth of July (Cohan, 39 F.2d 540, 543–44, 2d Cir. 1930). Cohan claimed substantial deductions for business entertainment travel and entertainment (T&E) costs relating to his career even though he professed to be too busy to do all the necessary recordkeeping
After the IRS challenged the deductions, the case wended its way through the courts, eventually landing in the Second Circuit Court before Judge Learned Hand. The renowned judge refused to move the case to the U.S. Supreme Court. Instead, Hand issued a stinging rebuke to the IRS, allowing Cohan to benefit from deductions because there was credible evidence that business expenses had been incurred. Thus, the “Cohan rule” was born.
Ironically enough, the Cohan rule may enable taxpayers to salvage certain business deductions, but not T&E write-offs.
Facts of the new case: The taxpayer owned and operated a sole proprietorship in the New Orleans area that provided personal care attendants, supervised living services and ran a program for about 100 adult clients with physical and mental disabilities. The business was heavily regulated and most of its income came from Medicaid payments.
During the tax years of 2015 through 2017, the taxpayer failed to file federal income tax returns, despite generating millions of dollars in revenue. In 2019, the IRS assessed a number of deficiencies.
Although the taxpayer conceded the gross receipts amount in the case, she argued that the IRS failed to account for offsetting business expenses and itemized deductions, including T&E expenses, rent, utilities, and contract labor. She cited the Cohan rule in her arguments to the Tax Court.
Tax outcome: Generally, the Tax Court sided with the taxpayer on business expenses other than those requiring strict substantiation. However, it denied deductions for T&E expenses that are subject to strict requirements under Section 274 of the tax code and accompanying regulations. Note: In any event, deductions for entertainment expenses were permanently eliminated by the Tax Cuts and Jobs Act (TCJA).
Another interesting aspect of the new case is the Tax Court stated that information found through online searches like Googling don’t automatically support tax claims like proof of a business purpose. Nor can a taxpayer merely claim that they had relied on the advice of a tax professional without producing other evidence.
Curtain closer: Finally, be advised that reliance on the Cohan rule should be viewed as a last resort. There’s no substitute for keeping accurate records that can prove the existence and amount of deductible expenses.
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