January 24 2023

Did You Play an Active Role in Your Business?

Playing an Active Role in Your Business

This means that you were actively working in the business on a consistent, year-round basis. (An investor normally does not qualify.)

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You “materially participate” in a business if you do any of the following:

– Work more than 500 hours in the year, or between 100 and 500 hours in certain cases, OR

– Perform all the work, even if you work fewer than 100 hours, OR

– Worked actively for five of the last ten years (they do not have to be consecutive) or three years if it was a personal service, such as consulting

EXCEPTION: If this business is a working interest in an oil or gas well, then you are treated as a “material participant” regardless of your level of active work for the business. Leave the “did not actively participate” box empty if this is the case.

Example 1:

You worked 200 hours in your business and your employee worked 100 hours. You were actively involved.

Example 2:

You worked 200 hours in your business and your employee worked 300 hours. You were not actively involved. (If you work more than 500 hours in the business, it does not matter how many hours others work.)

Note: The time a spouse works in your business, even if not a part owner, counts toward your time working in the business.