Material Participation

Material participation is a key element of the Passive Activity Rules. 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

Regular;

Continuous; and

Substantial.

IRS regulations have detailed tests for determining material participation.2 Under the two most straightforward tests, you materially participate if:3

You participate in the activity for more than 500 hours during the Tax Year; or

Your participation constitutes substantially all of the participation in the activity during the Tax Year.

For articles in our Tax Reduction Letter on tax strategies for dealing with the passive activity rules, click on Passive income and losses in our Browse by Topic finding tool.