Are we not human?
Those who have read our articles will probably ask: Do we have to keep all those records for the government? Are we supposed to become "de facto" accountants if we have a business? You mean to tell me that if I lose a receipt, or don't ask for a receipt, or I just forget who I had dinner with, where, and when, I cannot take a deduction?
We are not allowed to make mistakes!Are we not human?
What if there is a flood, or a fire, and my records get lost?
Fortunately, there is a thing called the "Cohan Rule" which was named after the taxpayer's name in a case. Under the Cohan Rule the taxpayer is allowed to estimate the amount of the expenses and its relation to the taxpayer's business by reasonable inferences.
For example, you can establish your costs of goods sold by identifying the specific sale and presenting invoices of similar merchandise.
If you lost the rent payment checks you may show the lease agreement as evidence of actual liability to pay. If you cannot produce the actual invoice for a piece of machinery, you may provide copies of catalogues and oral evidence by employees that the machine existed at the time in question. You are allowed to reconstruct and estimate what your income and expenses have been. Income is not much of a problem. The IRS will prove it for you. The expenses are your responsibility.
However, to take advantage of the Cohan Rule you need to prove that the records have been lost due to circumstances beyond your control.
Unfortunately, the Cohen Rule can not be used to prove certain expenses that are susceptible to abuse such as travel, entertainment, business gifts, cars, computers, etc.
Remember, when you run your own business you wear many hats. You need to be a part time accountant, part time lawyer, part time banker, your own doctor, and your own psychiatrist.
This is the challenge in being you own boss. And keeping a good accounting system is something that we cannot get away from. So, select a good accountant, establish an adequate accounting system, and once you do that, apply devoutly the procedures that are established. Once you get used to them they become a routine that does not require conscious thinking and allows you to dedicate your time to make your business grow. It is sort like putting your socks and shoes on every morning.
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