Cohan Rule Deduction 2026 Substantiation Calculator

The Cohan rule comes from Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), where Judge Learned Hand held that if a taxpayer clearly incurred deductible expenses but lacks perfect records, the court should make "as close an approximation as it can." It is a doctrine of estimation, not a license to invent numbers — you still need credible evidence the expense happened and was ordinary and necessary under IRC §162.

When Cohan Applies — And When It Does Not

The rule covers most ordinary business deductions: supplies, advertising, utilities, contract labor, professional fees, repairs. But Congress carved out an exception in IRC §274(d): travel, meals, business gifts, and "listed property" (vehicles, cell phones, computers used personally) require strict contemporaneous substantiation — amount, time, place, business purpose, and business relationship. If §274(d) applies and you lack records, the deduction is fully disallowed, no estimate allowed. Entertainment expenses were largely eliminated by the Tax Cuts and Jobs Act (TCJA) starting 2018.

How Courts Apply the Cohan Rule in 2026

Courts weigh three things: (1) was the expense actually incurred (bank statements, canceled checks, third-party invoices), (2) is the amount reasonable for the trade or business (compared against industry norms and the taxpayer's other records), and (3) is there a business purpose (calendar, emails, contracts). The Tax Court typically bears heavily against the taxpayer whose inexactitude is of their own making — meaning the estimate is often discounted 30-70% versus what the taxpayer claimed. The IRS may also assert a 20% accuracy-related penalty under IRC §6662 for negligence.

Audit Risk and What to Do Before You File

If you are claiming a Cohan-type estimate, expect heightened audit risk on Schedule C, Schedule E, and Form 2106 expenses. Build the strongest paper trail you can before filing: reconstruct from bank and card statements, gather third-party invoices, pull calendar entries, write a contemporaneous-style memo explaining business purpose. For any §274(d) category, abandon the estimate approach — without a contemporaneous log, you risk full disallowance plus penalty. For 2026, consider using a mileage and meal log app to capture §274(d) data going forward; courts have repeatedly affirmed that retroactive reconstruction does not satisfy §274(d).

Last updated May 2026. This tool is educational and not tax advice — confirm with a CPA or enrolled agent. Sources cited in tool output.