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Tax Planning/Material Participation Test

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Question
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.   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.     Does this change whether we file jointly or separate?     I have a lot of passive loss, so not being a material participant is better for me.

Answer
Sam, whether you file jointly or not won't make much difference in the final amount you pay. My opinion is that you probably do not materially participate as just a shareholder without daily business involvement. However, passive losses that exceed passive income will probably be disallowed. So, if you don't get any income from your shares you won't get any amount of loss to declare.
RS

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Richard S

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My expertise is in collecting past due taxes and tax returns. While at the IRS I worked on wage and bank levies, liens, Offer in Compromise, late filing and payment agreements every day. I spoke with over 20,000 people concerning their issues while I worked there (just retired).

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Ten years working for the the IRS in Collections and tax return review. Worked with over 20,000 people on their IRS issues. Explained their options and usually worked out a solution while they were on the phone.

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Masters Degree from Iowa State in Ames.

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