Ideally, a business has documentation for every expense. Realistically, a lack of receipts is an expected and normal part of doing business.

Recognizing that even the best-run businesses often have gaps in their documentation, the Cohan Rule fills out a middle ground, allowing businesses to claim expenses even when they're missing receipts or other needed documentation. The rule essentially recognizes that businesses incur expenses, and estimates of those expenses are reasonable.

The IRS recommends that businesses keep track of gross receipts, purchases, expenses (such as travel or transportation), assets, and employment taxes. Proof of these expenses can be shown in a variety of ways, but the proof must be credible and reasonable.

The key is that a business must have some factual basis for claiming a business deduction. The IRS recognizes that absolute certainty is often impossible, although there is a balance between giving businesses flexibility and not allowing for self-inflicted carelessness.

Businesses should also check that a deduction is allowable. Certain types of entertainment expenses aren't deductible, and a lack of documentation doesn't change that requirement.

How to Prove Business-Related Expenses

Businesses can use non-receipt documentation. Bank statements, canceled checks, credit card statements, other bookkeeping methods, and other invoices can all be used in place of receipts. In some cases, businesses may need multiple documents to establish a claim.

The details of a claim can matter. A business that has several cash-only expenses may need to provide more documentation than one that has credit card statements.

The Cohan Rule is flexible, which can be good and bad for taxpayers. It gives taxpayers leeway with how they can prove business expenses, but it also means the IRS has some leeway in determining what is and isn't a business expense. This doesn't mean that the IRS should be arbitrary in what it considers a business expense, merely that the Cohan Rule isn't always cut-and-dry.

Contact a Skilled IRS Tax Attorney

If you have questions about business expenses and how to establish documentation for tax purposes, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.