Material Participation Tests

We’ve taken it upon ourselves to be more...present. Sometimes this involves asking deep, soul-searching questions, like...what our purpose is in the universe, and why we are the way we are. But happily, one thing we’ll never have to wonder about is whether or not we’re a material participant in a business, because the IRS has a test for that.

Actually, they have seven tests, and they are collectively referred to as “material participation tests.” If we pass any one of them, then we are indeed a material participant in a business. This means we’re gonna have to pay taxes on any income we earned as a result of our materially participative activities.

In a nutshell, these tests try to determine how many hours we participated over this year and in previous years, and what sort of activities that participation entailed. If we contributed to an organization’s profits or losses in a non-passive way (i.e., we’re not just a random investor), then chances are good that we’re a material participant. For specifics, it’s always helpful to consult the tax code…or a tax professional.