Business
Material participation
Whether an owner is genuinely involved in running a business, which decides how their share is taxed.
The IRS sets out seven tests. The common ones are more than 500 hours in the year, or substantially all of the participation in the activity, or more than 100 hours and no less than anyone else’s.
It decides whether losses are active or passive, and passive losses can generally only offset passive income.
For a partner it also bears on self-employment tax: an active partner’s share is generally subject to it, a passive partner’s generally is not.
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