Question

Given that losses from passive activities can only offset income from passive activities unless the passive activity is sold, what types of activities are not considered to be passive? Name at least three ways (tests) a taxpayer may be treated as an active participant in an activity.

Answer 1

Solution:-

To be considered an active participant in an activity, a taxpayer must materially participate in the activity. An individual will qualify as a material participant in an activity if any one of the seven tests below is satisfied:-

1. You work 500 hours or more in the activity during the year.
2. You do all, or nearly all, of the work in the activity.
3. You work more than 100 hours in the activity during the year, and no one else works more than you do.
4. The activity is a significant participation activity (SPA), and the sum of the SPAs in which you work 100–500 hours exceeds 500 hours for the year.
5. You materially participated in the activity in any 5 of the previous 10 years.
6. The activity is a personal service activity and you materially participated in that activity in any three prior years.
7. Based on all of the facts and circumstances, you participate in the activity on a regular, continuous, and substantial basis during that year. Note that this test only applies if you work at least 100 hours in the activity, no one else works more hours than you in the activity, and no one else receives compensation for managing the activity.