Material participation is a key element of the . Under the passive activity rules, you cannot apply losses from one business activity against income from another business activity unless you materially participate in each business activity.
You materially participate in an activity if you are involved in the operation of the activity on a basis which is:1
IRS regulations have detailed tests for determining material participation.2 Under the two most straightforward tests, you materially participate if:3
1 IRC Section 469(h)(1).
2 Reg. Section 1.469-5T.
3 Reg. Section 1.469-5T(a)(1), (a)(2).