Material Participation

Material participation is the standard that decides whether a business activity is passive or non-passive for a given taxpayer. The regulations provide seven tests, and satisfying any one of them for the year makes participation "material," letting losses offset ordinary income (subject to basis and at-risk limits). The most used tests are: more than 500 hours of participation during the year; participation that constitutes substantially all of the participation in the activity by anyone; and more than 100 hours with no one else participating more. Participation means actual work in the operations of the activity; investor-type review of reports generally does not count. Hours of a spouse count toward the taxpayer's total. Because hours drive the outcome, contemporaneous logs, calendars, and records are the difference between winning and losing this issue on audit.