Reg. § 1.469-5T Material participation (temporary).
(a) In general Except as provided in and of this section, an individual shall be treated, for purposes of section and the regulations thereunder, as materially participating in an activity for the taxable year if and only if—
(1) The individual participates in the activity for more than 500 hours during such year;
(2) The individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year;
(3) The individual participates in the activity for more than 100 hours during the taxable year, and such individual's participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year;
(4) The activity is a significant participation activity (within the meaning of of this section) for the taxable year, and the individual's aggregate participation in all significant participation activities during such year exceeds 500 hours;
(5) The individual materially participated in the activity (determined without regard to this ) for any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year;
(6) The activity is a personal service activity (within the meaning of of this section), and the individual materially participated in the activity for any three taxable years (whether or not consecutive) preceding the taxable year; or
(7) Based on all of the facts and circumstances (taking into account the rules in of this section), the individual participates in the activity on a regular, continuous, and substantial basis during such year.
(b) Facts and circumstances
(1) In general [Reserved]
(2) Certain participation insufficient to constitute material participation under this paragraph (b)
(i) Participation satisfying standards not contained in section 469 Except as provided in section and of this section (relating to certain retired individuals and surviving spouses in the case of farming activities), the fact that an individual satisfies the requirements of any participation standard (whether or not referred to as “material participation”) under any provision (including sections and and the regulations thereunder) other than section and the regulations thereunder shall not be taken into account in determining whether such individual materially participates in any activity for any taxable year for purposes of section and the regulations thereunder.
(ii) Certain management activities An individual's services performed in the management of an activity shall not be taken into account in determining whether such individual is treated as materially participating in such activity for the taxable year under of this section unless, for such taxable year—
(A) No person (other than such individual) who performs services in connection with the management of the activity receives compensation described in section in consideration for such services; and
(B) No individual performs services in connection with the management of the activity that exceed (by hours) the amount of such services performed by such individual.
(iii) Participation less than 100 hours If an individual participates in an activity for 100 hours or less during the taxable year, such individual shall not be treated as materially participating in such activity for the taxable year under of this section.
(c) Significant participation activity
(1) In general For purposes of of this section, an activity is a significant participation activity of an individual if and only if such activity—
(i) Is a trade or business activity (within the meaning of ) in which the individual significantly participates for the taxable year; and
(ii) Would be an activity in which the individual does not materially participate for the taxable year if material participation for such year were determined without regard to of this section.
(2) Significant participation An individual is treated as significantly participating in an activity for a taxable year if and only if the individual participates in the activity for more than 100 hours during such year.
(d) Personal service activity An activity constitutes a personal service activity for purposes of of this section if such activity involves the performance of personal services in—
(1) The fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting; or
(2) Any other trade or business in which capital is not a material income-producing factor.
(e) Treatment of limited partners
(1) General rule Except as otherwise provided in this , an individual shall not be treated as materially participating in any activity of a limited partnership for purposes of applying section and the regulations thereunder to—
(i) The individual's share of any income, gain, loss, deduction, or credit from such activity that is attributable to a limited partnership interest in the partnership; and
(ii) Any gain or loss from such activity recognized upon a sale or exchange of such an interest.
(2) Exceptions of this section shall not apply to an individual's share of income, gain, loss, deduction, and credit for a taxable year from any activity in which the individual would be treated as materially participating for the taxable year under , , or of this section if the individual were not a limited partner for such taxable year.
(3) Limited partnership interest
(i) In general Except as provided in of this section, for purposes of section and this , a partnership interest shall be treated as a limited partnership interest if—
(A) Such interest is designated a limited partnership interest in the limited partnership agreement or the certificate of limited partnership, without regard to whether the liability of the holder of such interest for obligations of the partnership is limited under the applicable State law; or
(B) The liability of the holder of such interest for obligations of the partnership is limited, under the law of the State in which the partnership is organized, to a determinable fixed amount (for example, the sum of the holder's capital contributions to the partnership and contractural obligations to make additional capital contributions to the partnership).
(ii) Limited partner holding general partner interest A partnership interest of an individual shall not be treated as a limited partnership interest for the individual's taxable year if the individual is a general partner in the partnership at all times during the partnership's taxable year ending with or within the individual's taxable year (or the portion of the partnership's taxable year during which the individual (directly or indirectly) owns such limited partnership interest).
(f) Participation
(1) [Reserved]. See for rules relating to this paragraph.
(2) Exceptions
(i) Certain work not customarily done by owners Work done in connection with an activity shall not be treated as participation in the activity for purposes of this section if—
(A) Such work is not of a type that is customarily done by an owner of such an activity; and
(B) One of the principal purposes for the performance of such work is to avoid the disallowance, under section and the regulations thereunder, of any loss or credit from such activity.
(ii) Participation as an investor
(A) In general Work done by an individual in the individual's capacity as an investor in an activity shall not be treated as participation in the activity for purposes of this section unless the individual is directly involved in the day-to-day management or operations of the activity.
(B) Work done in individual's capacity as an investor For purposes of this , work done by an individual in the individual's capacity as an investor in an activity includes—
(1) Studying and reviewing financial statements or reports on operations of the activity;
(2) Preparing or compiling summaries or analyses of the finances or operations of the activity for the individual's own use; and
(3) Monitoring the finances or operations of the activity in a non-managerial capacity.
(3) Participation of spouse In the case of any person who is a married individual (within the meaning of section ) for the taxable year, any participation by such person's spouse in the activity during the taxable year (without regard to whether the spouse owns an interest in the activity and without regard to whether the spouses file a joint return for the taxable year) shall be treated, for purposes of applying section and the regulations thereunder to such person, as participation by such person in the activity during the taxable year.
(4) Methods of proof The extent of an individual's participation in an activity may be established by any reasonable means. Contemporaneous daily time reports, logs, or similar documents are not required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period, based on appointment books, calendars, or narrative summaries.
(g) Material participation of trusts and estates [Reserved]
(h) Miscellaneous rules
(1) Participation of corporations For rules relating to the participation in an activity of a personal service corporation (within the meaning of ) or a closely held corporation (within the meaning of ), see .
(2) Treatment of certain retired farmers and surviving spouses of retired or disabled farmers An individual shall be treated as materially participating for a taxable year in any trade or business activity of farming if paragraph (4) or (5) of section would cause the requirements of section to be met with respect to real property used in such activity had the individual died during such taxable year.
(3) Coordination with rules governing the treatment of passthrough entities [Reserved]. See for rules relating to this paragraph.
(i) [Reserved]
(j) Material participation for preceding taxable years [Reserved]. See for rules relating to this paragraph.
(k) Examples The following examples illustrate the application of this section:
Example 1. A, a calendar year individual, owns all of the stock of X, a C corporation. X is the general partner, and A is the limited partner, in P, a calendar year partnership. P has a single activity, a restaurant, which is a trade or business activity (within the meaning of ). During the taxable year, A works for an average of 30 hours per week in connection with P's restaurant activity. Under and of this section, A is treated as materially participating in the activity for the taxable year because A participates in the restaurant activity during such year for more than 500 hours. In addition, under , A's participation will cause X to be treated as materially participating in the restaurant activity.
Example 2. The facts are the same as in Example 1, except that the partnership agreement provides that P's restaurant activity is to be managed by X, and A's work in the activity is performed pursuant to an employment contract between A and X. Under of this section, work done by A in connection with the activity in any capacity is treated as participation in the activity by A. Accordingly, the conclusion is the same as in Example 1. The conclusion would be the same if A owned no stock in X at any time, although in that case A's participation would not be taken into account in determining whether X materially participates in the restaurant activity.
Example 3. B, an individual, is employed fulltime as a carpenter. B also owns an interest in a partnership which is engaged in a van conversion activity, which is a trade or business activity (within the meaning of ). B and C, the other partner, are the only participants in the activity for the taxable year. The activity is conducted entirely on Saturdays. Each Saturday throughout the taxable year, B and C work for eight hours in the activity. Although B does not participate in the activity for more than 500 hours during the taxable year, under of this section, B is treated for such year as materially participating in the activity because B participates in the activity for more than 100 hours during the taxable year, and B's participation in the activity for such year is not less than the participation of any other person in the activity for such year.
Example 4. C, an individual, is employed full-time as an accountant. C also owns interests in a restaurant and a shoe store. The restaurant and shoe store are trade or business activities (within the meaning of ) that are treated as separate activities under the rules to be contained in . Each activity has several full-time employees. During the taxable year, C works in the restaurant activity for 400 hours and in the shoe store activity for 150 hours. Under of this section, both the restaurant and shoe store activities are significant participation activities of C for the taxable year. Accordingly, since C's aggregate participation in the restaurant and shoe store activities during the taxable year exceeds 500 hours, C is treated under of this section as materially participating in both activities.
Example 5. [Reserved]. See Example 5 for this example.
Example 6. The facts are the same as in Example 5, except that D does not acquire any stock in the S corporation until 1994. Under of this section, D is not treated as participating in the activity for any taxable year prior to 1994 because D does not own as interest in the activity for any such taxable year. Accordingly, D materially participates in the activity for only one taxable year prior to 1995, and D is not treated under of this section as materially participating in the activity for 1995 or subsequent taxable years.
Example 7.
(i) E, a married individual filing a separate return for the taxable year, is employed full-time as an attorney. E also owns an interest in a professional football team that is a trade or business activity (within the meaning of ). E does no work in connection with this activity. E anticipates that, for the taxable year, E's deductions from the activity will exceed E's gross income from the activity and that, if E does not materially participate in the activity for the taxable year, part or all of F's passive activity loss for the taxable year will be disallowed under . Accordingly, E pays E's spouse to work as an office receptionist in connection with the activity for an average of 15 hours per week during the taxable year.
(ii) Under of this section any participation in the activity by E's spouse is treated as participation in the activity by E. However, under of this section, the work done by E's spouse is not treated as participation in the activity because work as an office receptionist is not work of a type customarily done by an owner of a football team, and one of E's principal purposes for paying E's spouse to do this work is to avoid the disallowance under of E's passive activity loss. Accordingly, E is not treated as participating in the activity for the taxable year.
Example 8.
(i) F, an individual, owns an interest in a partnership that feeds and sells cattle. The general partner of the partnership periodically mails F a letter setting forth certain proposed actions and decisions with respect to the cattle-feeding operation. Such actions and decisions include, for example, what kind of feed to purchase, how much to purchase, and when to purchase it, how often to feed cattle, and when to sell cattle. The letters explain the proposed actions and decisions, emphasize that taking or not taking a particular action or decision is solely within the discretion of F and other partners, and ask F to indicate a decision with respect to each proposed action by answering certain questions. The general partner receives a fee that constitutes earned income (within the meaning of section (d)(2)(A)) for managing the cattle-feeding operation. F is not treated as materially participating in the cattle-feeding operation under through of this section.
(ii) F's only participation in the cattle-feeding operation is to make certain managerial decisions. Under of this section, such management services are not taken into account in determining whether the taxpayer is treated as materially participating in the activity for a taxable year under of this section, if any other person performs services in connection with the management of the activity and receives compensation described in section for such services. Therefore, F is not treated as materially participating for the taxable year in the cattle-feeding operation.
[T.D. 8175, 53 FR 5725, Feb. 25, 1988; 53 FR 15494, Apr. 29, 1988, as amended by T.D. 8253, 54 FR 20565, May 12, 1989; T.D. 8417, 57 FR 20759, May 15, 1992; 61 FR 14247, Apr. 1, 1996]