When entering a K1 for a limited partnership does it impact your tax if you indicate that you materially participated?

Partners who materially participate in the business affairs of a partnership are not limited by the passive activity loss rules of Section 469 which means losses (on their K-1s) can be deducted essentially without limitation (to the extent of basis).

 

However, limited partners rarely materially participate in partnerships (if they do, they're typically considered to be general partners). 

 

The information at the link below can be used to determine whether or not you materially participated.

 

https://www.irs.gov/publications/p925#en_US_2023_publink1000104582

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:

1. You work more than 500 hours of material participation during the year.
2. You do all, or nearly all, of the work in the activity.
3. You work more than 100 hours in the activity during the year, and no one else works more than you do.
4. 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.
5. You materially participated in the activity in any five of the previous 10 years, as historical participation.
6. The activity is a personal service activity and you materially participated in that activity in any three prior years.
7. 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.