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Updated for 2011
Passive Activity Rules
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Material Participation
Participation:
Any work you do in connection with an activity in which you own an interest is treated as participation in the activity.
Whether your participation constitutes material participation depends on the facts and circumstances. The IRS has seven tests to determine whether you materially participated in an activity (discussed below).
If you materially participate in your business it is not considered a passive activity. Therefore, net income or loss is classified as nonpassive.
This means you may deduct businesses losses of the activity from your other nonpassive income (e.g., a spouses income, interest, dividends, income from another business in which you materially participate).
Married couples:
If you're married and your spouse works in the activity, his/her participation is treated as participation by you, even if your spouse does not own an interest in the activity and you and your spouse do not file a joint return for the year.
Proof of Participation
This may include:
- An appointment book calendar, or narrative summary.
Your records should show the services performed and the approximate number of hours spent.
You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way.
Next:
Passive Activity Rules: Qualifying for Material Participation; Seven Material Participation Tests
Related Links
- Passive Activity and At-Risk Rules
- Who Do Passive Activity Rules Apply To
- Investors
- Purpose of Passive Activity Rules
- What is a Passive Activity?
- Tax Forms You May Need to File
- Significant Participation Passive Activities
- Passive Income and Losses
- Rental Real Estate
- Special $25,000 Allowance for Real Estate Nonprofessionals
- Portfolio Income
- Portfolio Income and Passive Losses
- Interest on Accounts Receivable
- What are At-Risk Rules?
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