Businesses are supposed to keep books and records of income and expenses. When they don’t the IRS can reconstruct income through bank deposits and disallow unsubstantiated deductions. In some situations, the Tax Court may use the Cohan rule essentially to estimate an expense where there are insufficient records but enough to clearly indicate something. That’s what happened to a grocer who lacks good books. The Tax Court applied the Cohan rule for the cost of goods sold (COGS), which would then be subtracted from his gross receipts to arrive at income. Of course, the estimate may be lower than the real COGS, so the lesson is keep good books and records. #IdeaoftheDay
Remember to check out the online Supplements to both tax books!
