you have to meet one of seven IRS rules to be consideered materially participating
What Are Material Participation Tests?
Let’s talk about the material participation standards you need to meet to qualify for. According to the IRS, a trade or business is considered a passive activity unless the taxpayer materially participates. You could describe your activity as active participation in the operation of a trade or business activity by meeting one of seven following material participation tests:
- You work more than 500 hours of material participation during the year.
- You do all, or nearly all, of the work in the activity.
- You work more than 100 hours in the activity during the year, and no one else works more than you do.
- The activity is a significant participation activity (SPA), and the sum of the SPAs in which you work 100–500 hours exceeds 500 hours for the year.
- You materially participated in the activity in any five of the previous 10 years, as historical participation.
- The activity is a personal service activity and you materially participated in that activity in any three prior years.
- Based on all of the facts and circumstances, you participate in the activity on a regular, continuous, and substantial basis during that year. Note that this test only applies if you work at least 100 hours in the activity, no one else works more hours than you in the activity, and no one else receives compensation for managing the activity.
