Nina's Soap

What qualifies as “materially participate” in your business

• Any work you did in a business if you own it and own a share of it
• A work you did that people don’t usually do in that business just to claim the deduction as you materially participate doesn’t qualify
• A work you did in a business you invested in or own a share to just analyses the finances and operations for your personal use doesn’t qualify
• If your spouse works on the business you own or own a share of whether your spouse owns interest in the business or not, your spouse participation would count as you materially participate even if you don’t file joint tax return.

Rules to meet materially participation test for passive activity rules

You need to meet ANY of the following to state that you materially participate in your business for passive activity rules

1. You work on or in your business for more than 500 hours a year or the tax year
2. All the main functions performed in your business, you perform them—You did all the works in the business yourself
3. You work on or in your business for more than 100 hours a year and you work as much as any other person that works in your business and don’t own any interest in it.
4. If your activity is a trade or a business which requires a lot of time involvement and you perform the major works related for more than 500 hours a year
5. You materially participated in your venture for  at least 5 years out of the past 10 years
6. Your activity is a personal service in which you materially participated for any 3 prior years
   1. Health
   1. Law
   1. Engineering
   1. Accounting
   1. Consulting
   1. Architecture
   1. Actuarial science
   1. Arts
   1. Any other trade or business in which money is not the main factor to generate income. In this section I would include online business
      1. YouTube
      1. Blog
      1. Podcast
      1. Third party product review
      1. Digital products
      1. Web design
      1. Graphic design
      1. Social media management

• You material participated in your activity or business regularly, and work a lot on the business for more than 100 hours a year
  • If you spent time managing your business like performing  administrative tasks in your business
    • and somebody else is paid to perform management tasks in your business
    • or the person worked more hours than you on the managerial tasks even if he was not paid,

 your time spent on management tasks doesn’t count into factoring the 100 hours of your material participation in the business.

It is important to have a record of your time spent working in your business.

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