Pertaining to Schedule K-1; Is it material participation in a business if i was employed as a director in the test operation of the business?

[LudwigVan_fan · Accepted solution]

There is not enough information in your question to give a specific answer and probably wouldn't be able to give a direct answer.

Review the material below and see if you meet any of the rules.

Link to Pub 925

https://www.irs.gov/publications/p925/index.html

This is From 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.

1. You participated in the activity for more than 500 hours.

2. 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.

3. 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.

4. 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 Participatio..., under Recharacterization of Passive Income, later.

5. 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.

6. 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.

7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year.

  You didn’t materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Your participation in managing the activity doesn’t count in determining whether you materially participated under this test if:

• 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.

[egwelke]

I could really use some help interpreting this, please.

I am a full-time employee at a privately owned firm and a couple years ago was granted a small amount of equity in the company. Based on this I receive a small extra bonus annually in the form of a "partnership distribution". For this I am issued a K-1 after year-end.

For my TurboTax k-1 questions, I am asked if I materially participated in the business activities during the year. Should my answer be "yes" because I work there >500 hours/year? Or is it "no" because I am not running the company - just participating in an operational capacity as an employee?

Thank you!

[PatriciaV]

If your participation influences the management or success of the company, then you materially participate. The IRS tests for participation mention hours per year and some compare to individuals who are not owners. You are both, so your hours should count.

For additional information, see this article from Tax Advisor: Determining a Member’s Participation in LLC Activities