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.
Material Participation
Primary authority: Treas. Reg. §1.469-5T
The authority behind it
Treas. Reg. §1.469-5T
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
An owner spends 620 documented hours during the year running an equipment rental side business that produced a $45,000 loss. Meeting the 500-hour test makes the activity non-passive, so the loss offsets her W-2 income.
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