DEFINITION of 'Material Participation Test'

A set of criteria that determines whether a taxpayer is a material participant in a business venture. The material participation test will determine whether business income received by the taxpayer is active or passive.

According to the IRS, if the taxpayer participates in a business activity on a regular, continuous and substantial basis, then the taxpayer materially participates in the business.

BREAKING DOWN 'Material Participation Test'

There are seven tests the IRS uses to determine whether participation in a business activity is material or not. Two of the criteria that they use are the amount of time spent participating in the business activity and how much control the taxpayer has over the activity. Only one of the tests must be passed in order for the taxpayer to be considered materially involved with the production of income, which would then be deemed active income.

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