what are material participation tests 
material participation tests are a set of internal revenue services irs criteria that evaluate whether a taxpayer has materially participated in a trade business rental or other income producing activity a taxpayer materially participates if they pass one of the seven material participation tests however passive activity rules limit the deductibility of losses when taxpayer participation fails to meet at least one of the seven material participation tests understanding material participation testsmaterial participation in an income producing activity is generally speaking an activity that is regular continuous and substantial income producing actions in which the taxpayer materially participates are active income or loss an active loss is deductible but subject to at risk rules or other limitations imposed by the internal revenue code irc 1passive activity rules apply to participation that fails to meet one of the material participation tests a passive participation in an income producing venture is participation that is not regular continuous and substantial income producing actions in which the taxpayer passively participates are passive income and loss passive activity rules limit the deductibility of any passive loss 2material participation may or may not be worse than passive participation in any given situation it s a good idea to enlist the help of a financial advisor in making that decision types of material participation testsfor any tax year a taxpayer or their spouse qualifies as materially participating in a venture if they satisfy any one of the seven material participation tests limits to material participation testsnot all time spent in certain activities will count toward the 100 hour or 500 hour thresholds of tests one three four or seven time spent as an investor will not count unless you can show direct involvement in the day to day management of the activity work not customarily done by an owner is not counted towards material participation hours nor is time spent commuting work undertaken for the primary purpose of avoiding the disallowance of losses under the passive loss rule is not material participation and finally participation in a purely managerial activity where other managers receive no compensation cannot be counted 4real estate rental activity is generally considered passive activity even if you materially participate unless you re a qualified real estate professional 5the participation of limited partners in enterprises owned by them is passive participation unless they pass material participation tests one five or six when a taxpayer participates in two enterprises operated through the same pass through entity at least one of the seven tests for each venture must be met for them to be considered to have materially participated in both activities 6special considerations for material participation teststaxpayers with an ownership interest in a venture receive participation credit for work done for it they establish their participation by identifying the hours spent and the nature of the work done taxpayers base participation on records they maintain such as appointment books calendars narrative summaries or any other reasonable means 6