If you've ever heard a fellow small-business owner say "don't worry about receipts, the IRS lets you estimate," they were probably talking about the Cohan rule — and they were only half right. A new 2026 Tax Court memorandum decision, Branch v. Commissioner, is a clean, current illustration of exactly where that estimate-your-way-out-of-it strategy works, and where it collapses completely.
The taxpayer in Branch ran a personal care services business in New Orleans that pulled in millions of dollars in revenue, largely from Medicaid payments, across 2015 through 2017 — and never filed a federal tax return for any of those years. When the IRS came knocking with deficiency notices, the taxpayer fought back in Tax Court, claiming a long list of business deductions: rent, utilities, contract labor, and travel and entertainment (T&E) expenses.
The result was a split decision that every small-business owner should read carefully, because it draws a bright line between two very different categories of expense.
What the Cohan Rule Actually Is
The rule takes its name from a 1930 case, Cohan v. Commissioner, involving Broadway legend George M. Cohan. Cohan had spent lavishly on business travel and entertainment but kept essentially no records — he was, by his own account, too busy being famous to save receipts. The Second Circuit ruled that when a court is convinced an ordinary and necessary business expense really happened, it doesn't have to disallow the entire deduction just because the exact amount can't be proven to the penny. Instead, the court can make a reasonable estimate.
That's a genuinely useful backstop. It means a disorganized business owner isn't automatically wiped out at audit for failing to save every parking receipt from three years ago. But it comes with two big conditions that are easy to overlook:
- The court must first be convinced the expense actually happened for a real business purpose. Vague assertions and after-the-fact reconstructions don't meet that bar on their own.
- The court is not required to estimate anything. Cohan is a permission slip for judges, not a guarantee for taxpayers.
Where Branch Sided With the Taxpayer
On the ordinary operating expenses — rent, utilities, contract labor — the Tax Court was willing to work with the taxpayer despite the missing records. These are costs that almost every personal care business incurs as a matter of course, and the court found enough circumstantial evidence (the nature of the business, its scale, industry norms) to estimate reasonable deduction amounts under Cohan. This is the rule functioning as intended: filling gaps in an otherwise credible picture.
Where Branch Drew the Line: Section 274(d)
The travel and entertainment deductions were a different story entirely — the court denied them in full. The reason is a specific piece of the tax code, IRC Section 274(d), which Congress wrote precisely to override Cohan for certain expense categories: travel, vehicle use, meals, and (formerly) entertainment.
Section 274(d) requires strict substantiation — adequate records or sufficient corroborating evidence establishing the amount, the time, the place, and the business purpose of each expenditure. Courts have no discretion to estimate these amounts no matter how sympathetic the taxpayer's story is. And thanks to the Tax Cuts and Jobs Act, most business entertainment deductions are gone from the tax code entirely regardless of documentation.
In Branch, the taxpayer tried to bridge the documentation gap in ways the court flatly rejected:
- Generic internet search results offered as after-the-fact "proof" that a trip or purchase had a business purpose
- Bare assertions of relying on a tax preparer's advice, with no corroborating records showing what was actually communicated or done
- No detailed, contemporaneous records tying specific expenditures to specific business activities
None of that satisfies Section 274(d), and the court said so plainly.
The Practical Lesson: Two Different Standards, One Bookkeeping Habit
The lesson from Branch isn't "keep better records" in some vague, generic sense — it's that different expense categories are held to genuinely different legal standards, and your recordkeeping needs to match the stricter one wherever it applies.
For general operating expenses, reasonable records plus a credible business narrative can survive an audit even with some gaps. For travel, vehicle mileage, and meals, the IRS and the courts want:
- The date of each trip or expense — not "sometime in March"
- The amount spent
- The specific business purpose — "quarterly review with client Jane Smith at Summit Financial," not "business meeting"
- The business relationship, where relevant (who you met with and why)
For vehicle expenses specifically, that means a genuinely contemporaneous mileage log — recorded at or near the time of each trip, not reconstructed from memory after an audit notice arrives — showing the date, destination, mileage, and business purpose of every trip, backed up by odometer readings at the start and end of the year. A "representative period" log can substitute for a full-year log, but only if it's genuinely representative and supported by odometer evidence. Whatever format you use — paper logbook, spreadsheet, or a GPS-based mileage app — the closer the entry is to the actual trip, the more it looks like proof and the less it looks like a story assembled for the IRS.
The standard mileage rate for 2026 is 72.5 cents per mile, but the rate is worthless without a log that would survive the scrutiny Branch just described. And keep those records for at least three years after filing — many tax professionals recommend seven, just to be safe.
Why This Matters Even If You'll Never See a Courtroom
Most businesses never end up in Tax Court. But the same substantiation gap that sank the T&E deductions in Branch is exactly what turns a routine IRS correspondence audit into a drawn-out, expensive fight. An examiner asking "can you document this business trip?" is asking the same question a Tax Court judge would — and if the honest answer is "I'm pretty sure it was for business," you're already in Cohan territory, hoping a judge extends you the same latitude a personal care company got for its rent and utilities but was explicitly denied for its travel expenses.
The fix costs almost nothing in time compared to the cost of losing a deduction after the fact: record the trip, the amount, and the specific business purpose when it happens, not months or years later.
Keep Your Records Straight From the Start
Cases like Branch are really about bookkeeping discipline more than tax law — the taxpayer's core failure was not tracking expenses accurately as they occurred, which meant there was nothing credible to substantiate later. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — every transaction is recorded in version-controlled, human-readable files, so there's a clear, timestamped trail instead of a reconstruction project at audit time. Get started for free and see why developers and finance professionals are switching to plain-text accounting.