Material Participation

Definition

A standard used under IRC Section 469 to determine whether a taxpayer is sufficiently involved in a business activity to treat its income or loss as non-passive. The IRS provides seven tests for meeting material participation, the most common being involvement in the activity for more than 500 hours during the tax year. Failing to meet at least one of these tests results in the activity being classified as passive, which limits the deductibility of any losses it generates.