If your husband is a shareholder-employee of an S-Corporation, he is (more likely than not) an active participant in the S-Corp activity. Active participation is defined by the material participation tests listed below, but given that he is being paid for rendering services in the business (as an officer or an employee) is evidence that suggests material participation.
See the following material participation tests from IRS Publication 925:
Material participation tests. You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests.
You participated in the activity for more than 500 hours.
Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who didn’t own any interest in the activity.
You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who didn’t own any interest in the activity) for the year.
The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you didn’t materially participate under any of the material participation tests, other than this test. See Significant Participation Passive Activities , under Recharacterization of Passive Income, later.
You materially participated in the activity (other than by meeting this fifth test) for any 5 (whether or not consecutive) of the 10 immediately preceding tax years.
The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital isn’t a material income-producing factor.
Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.
Any person other than you received compensation for managing the activity, or
Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services).
Participation. In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity.
