Burden of Proof and White-Footed Mice
In this edition of the Flying Point Update we're going to talk about what a tax return actually is, the Cohan rule and when it can help you, and a new addition to the naturalist team.
Top of Mind
Here’s a tax fact that people are often surprised to learn: a tax return is not a record of truth. It's a statement of claims.
Think about what we're actually doing when we file. We're representing a summary of events that happened over an entire year. We're claiming that your employer paid you a certain amount, that you paid a certain amount in real estate taxes, that you drove a certain number of miles for business purposes. These are assertions. Documentation is what backs them up.
The good news is that the system mostly works because the documentation exists naturally. How do we know what your employer paid you? There's a W-2. Claiming real estate taxes as an itemized deduction? We have a tax bill and a bank statement. Claiming a solar credit? You probably have an invoice and proof of payment. The records exist because they'd exist anyway, independent of any tax return.
Where it gets harder is with expenses that don't generate obvious paper trails on their own. Cash transactions, mileage, home office use, meals. These require more intentional record keeping because the documentation doesn't just materialize automatically.
Here's something else that surprises people: I'm not the auditor. My job is to prepare an accurate return based on information you provide, and to conduct reasonable professional due diligence on certain items. That's different from demanding a receipt for every cup of coffee. The IRS intentionally uses the word "reasonable" throughout its guidance on record keeping. Reasonable documentation for reasonable expenses. The goal is that you could explain and support your numbers credibly if anyone ever asked.
Worth Knowing
So what happens when you don't have perfect records? There's actually a longstanding legal principle that addresses exactly this.
The Cohan rule comes from a 1930 federal appeals court case involving George M. Cohan, the Broadway entertainer, who claimed substantial business expenses but couldn't document them. The court ruled that while deductions require substantiation, when a taxpayer can demonstrate that deductible expenses were genuinely incurred, the IRS and courts can make a reasonable estimate rather than disallowing everything. The rule essentially says that imperfect records aren't necessarily fatal, as long as there's credible evidence that the expenses actually happened.
In practice, this means that if you can establish the general nature and approximate amount of a legitimate business expense, you have some basis to claim it even without a complete paper trail. A contractor who paid for materials and can show the project happened, the invoices from suppliers, and the general scope of work is in a very different position than someone who simply claims expenses with no corroborating evidence at all.
But there's an important carve-out, and I want to be direct about it: the Cohan rule is not a license to invent history. Courts applying the rule still require credible evidence that the expenses were real. If you can't establish that something actually happened, no amount of estimation will save the deduction. The rule allows reasonable estimation of real expenses, not fabrication of expenses that didn't exist.
There's also a category where the Cohan rule doesn't apply at all. Vehicle mileage, along with travel, meals, and entertainment, falls under IRC Section 274(d), which imposes strict substantiation requirements that override the Cohan rule entirely. As I covered in Record Keeping and Bobcats back in November, vehicle mileage requires a contemporaneous log with specific information: date, destination, business purpose, and miles driven. No log, no deduction. There's no equitable estimation available for mileage the way there might be for other business expenses. If you're claiming vehicle mileage and you're not keeping a log, that's worth fixing before next tax season.
The broader takeaway is that documentation exists on a spectrum. Some expenses are supported automatically by records that would exist anyway. Others require more intentional effort. The Cohan rule provides some relief when genuine expenses are imperfectly documented, but it's not a substitute for good habits, and it doesn't help with certain categories at all.
Mark Your Calendar
April 15th: Individual returns are due. This is also the deadline for IRA contributions for 2025 and Q1 2026 estimated tax payments. This is the only date the matters right now in the tax world.
Maine Wildlife Facts
We have an announcement. Catherine, our youngest, just turned 2, and has been formally welcomed onto the naturalist team. She'll be working her way up from junior associate status for now, but the early signs are promising.
Cat, as she goes by, has developed a particular interest in the white-footed mice that live in our barn. White-footed mice are one of the most common small mammals in Maine, though most people never think about them. They're actually quite handsome little animals: white bellies, reddish-brown backs, and oversized ears and eyes that give them a permanently alert expression. Unlike house mice, they're native to North America and were here long before we were.
White-footed mice don't hibernate. They spend the winter caching seeds and nuts and making periodic foraging runs even in cold weather, which is why they're active in the barn year-round. They're also remarkably agile climbers, capable of scaling rough wood surfaces and navigating the kind of cluttered barn infrastructure that would confuse most animals. They build small, tidy nests from plant material and soft debris, often in sheltered spots that seem impossibly inconvenient to access.
What impressed the boys most is how white-footed mice can squeeze through openings roughly the size of a dime. Their skulls are the limiting factor - if the head fits, the rest of the body follows. It goes a long way toward explaining how they seem to appear and disappear through solid barn walls.
Will and Frank were already familiar with white-footed mice but have been happy to explain everything they know to their younger sister. Cat's current contribution to the research effort is pointing and saying "mouse." It's a solid start.
These Maine wildlife facts have been brought to you by Will (7), Frank (4), and Catherine (2), Flying Point Advisors' on-staff naturalists.
Questions about any of this? Just reach out - I read every email and love hearing from you. Thanks for reading. You'll hear from me again in about two weeks.
-Mike
Disclaimer
The Flying Point Update is provided for general educational and informational purposes only. The content in this newsletter reflects my thoughts and observations on tax, accounting, and financial planning topics, but should not be considered personalized tax, accounting, or investment advice for your specific situation.
Tax laws are complex and change frequently. The information presented here is based on current tax law as of the publication date and represents general concepts that may not apply to your circumstances. Every individual and business has unique factors that affect their optimal tax and financial planning strategies.
Before making any financial decisions or implementing any tax strategies discussed in this newsletter, please consult with a qualified tax professional, CPA, or financial advisor who can evaluate your specific situation. If you'd like to discuss how any of these topics might apply to your circumstances, I'm always happy to chat.