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Tax Law (Questions About Taxes)/Do I materially participate if I own 100% of the s-corp as passive shareholder and have zero involvement, while my wife works there full time?


Material Participation under IRC Sec 469(h)(5).  I am a shareholder of a 100% shareholder of an S-Corp.  I do nothing for the business, but my spouse is an employee and works there full time.  My spouse does not own any interests in the S-Corp.   

1.  When I file my tax return, can I claim that I don't materially participate?  Or will Sec 469(h)(5) force me to claim material participation because of work from my spouse.     

2.  Does this change whether we file jointly or separate?     

I have a lot of passive real estate losses to offset passive income, so not being a material participant is better for me.

do you want me to do your taxes for you?


IRC § 469(h)(5), Reg. 1.469-5T(f)(3), Reg. 1.469-1T(j):  Participation of both spouses counts.  Income or losses for both spouses are non-passive, even if only one spouse rises to any of the seven tests for material participation.

otherwise this applies:

A taxpayer materially participates in an activity if he or she works on a regular, continuous and substantial basis in operations (IRC § 469(h)(1)). If a taxpayer does not materially participate, losses are passive, which means they generally are not deductible in the absence of passive income. Material participation is time sensitive. A taxpayer materially participates in an activity only if he or she meets any one of the seven material participation tests in Reg. § 1.469-5T(a).

A trade or businesses is a passive activity if the taxpayer does not materially participate.  The taxpayer materially participates if and only if he or she meets one of the following seven tests provided in Reg. § 1.469-5T(a).  

1.The taxpayer works 500 hours or more during the year in the activity.
2.The taxpayer does substantially all the work in the activity.
3.The taxpayer works more than 100 hours in the activity during the year and no one else works more than the taxpayer.
4.The activity is a significant participation activity (SPA), and the sum of SPAs in which the taxpayer works 100-500 hours exceeds 500 hours for the year.
5.The taxpayer materially participated in the activity in any 5 of the prior 10 years.
6.The activity is a personal service activity and the taxpayer materially participated in that activity in any 3 prior years.
7.Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year.  However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity.[3]

Note: The first four tests look to a set number of hours of participation in the tax year.  The next two tests look to material participation in prior tax years.  The final test looks to the facts and circumstances, but is highly restrictive.  

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