You are here:

Tax Planning/Material Participation

Advertisement


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
This is a very complex issue as can be seen from the IRS Audit Technique Guide (https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-4-Material-Participation and https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG-Chapter-7-Interaction-With-Other-IRC-Sections).

My concern is that you will run afoul of the rules of attribution (https://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Attribution-of-Ownership-Rules-Definition-of-Disqualified-Persons as well as this under 26 USC 318 --> https://www.law.cornell.edu/uscode/text/26/318)

I hope this analysis helps.

Tax Planning

All Answers


Answers by Expert:


Ask Experts

Volunteer


OWEN S. ARNOFF, EA

Expertise

As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.

Experience

I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

Organizations
National Association of Tax Professionals

Publications
http://www.amazon.com/Owen-Arnoff/e/B00BLRIZNU/ref=ntt_dp_epwbk_2

Education/Credentials
Enrolled Agent, Admitted to Practice Before the IRS, Accredited Tax Preparer, Fellow of National Tax Practice Institute, Certified QuickBooks ProAdvisor (1999-2011), Sleeter Group Certified QuickBooks Consultant, Life & Disability Insurance Agent License (California, Texas, Maine), Real Estate Agent License (California); Many years of continuing education in all these fields.

©2016 About.com. All rights reserved.