a trade or business is not a passive activity if you materially participate. As a limited partner, you are considered to materially participate if you meet one of these tests (see IRS REG 1.469-5T)
1) you spend more than 500 hours participating in the activity during the year
2) you met the material participation requirements for and 5 of the 10 prior tax years
3) the activity is a personal service activity and the individual materially participated in any 3 prior tax years, consecutive or not. A personal service activity is the performance of personal services in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business where capital is not an income- producing factor.
IRC 469 - the passive loss rules
(a)Disallowance
(1)In general
If for any taxable year the taxpayer is described in paragraph (2), neither—
(A)the passive activity loss, nor
(B)the passive activity credit,
for the taxable year shall be allowed.
(2)Persons described
The following are described in this paragraph:
(A)any individual, estate, or trust,
(B)any closely held C corporation, and
(C)any personal service corporation.
(b)Disallowed loss or credit carried to next year
Except as otherwise provided in this section, any loss or credit from an activity which is disallowed under subsection (a) shall be treated as a deduction or credit allocable to such activity in the next taxable year.
(c)Passive activity defined
For purposes of this section—
(1)In general
The term “passive activity” means any activity—
(A)which involves the conduct of any trade or business, and
(B)in which the taxpayer does not materially participate.
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(h)Material participation defined
For purposes of this section—
(1)In general
A taxpayer shall be treated as materially participating in an activity only if the taxpayer is involved in the operations of the activity on a basis which is—
(A)regular,
(B)continuous, and
(C)substantial.
(2)Interests in limited partnerships
Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.
My opinion is that your friend is wrong unless you meet one of those 3 tests. I'm not sure if Turbotax ever asks these questions.
