Question

True or False - Tim makes his living selling popcorn on a street corner. He pops the corn and then places his product in paper bags while it is still warm. In 2006 Tom did not keep any records pertaining to the cost of the paper bags he used during the year. Tom may not properly deduct any amount for the cost of the paper bags on his 2006 return.

Answer 1

While businesses are expected to keep accurate records for deductions, Tom may estimate the cost of paper bags for his tax return using a reasonable basis under the Cohan rule, but this may subject his deduction to scrutiny or disallowance by the IRS.

Step-by-step explanation:

The subject of the question concerns business expenses and tax deductions. When it comes to filing taxes, businesses are generally expected to keep accurate records of their expenses in order to claim them as deductions. According to the IRS, to be deductible, a business expense must be both ordinary and necessary. However, the lack of records doesn't necessarily mean that no deduction can be claimed. A taxpayer like Tom may estimate expenses, provided he has a rational basis for doing so. This is known as the Cohan rule. He may be able to estimate the cost of the paper bags based on other information, but his deduction might be more heavily scrutinized, and he risks the IRS disallowing it if they do not find his estimation method or basis to be reasonable.