Material Participation
The IRS standard for involvement in a trade or business that distinguishes active income (no passive loss limitation) from passive income (subject to PAL rules).
Detailed Explanation
IRC Section 469 establishes seven tests for material participation. The most common: (1) more than 500 hours per year, (2) substantially all of the activity is performed by the taxpayer, (3) more than 100 hours and more than any other individual, (4) significant participation in multiple activities totaling more than 500 hours combined, (5) material participation in five of the prior ten years, (6) personal service activity for any three prior years, or (7) regular, continuous, substantial participation based on facts. Material participation converts passive losses to active losses, enabling deduction against W-2 and other ordinary income.
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Real Estate Professional Status (REPS)
A federal tax status under IRC Section 469(c)(7) that, when properly qualified, allows rental real estate losses to offset ordinary income with no passive activity loss limitation.
Pass-Through Entity
A business entity that does not pay federal income tax at the entity level; instead, profits and losses pass through to owners who report them on their individual returns.
Partnership
A business entity owned by two or more persons who share in profits and losses, taxed as a pass-through with each partner reporting their share on their individual return.
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