A "passive loss is a loss from a business activity that a Taxpayer does not materially participate in."
Thus, taxpayers need to understand how they can be "deemed to materially participate in a business, and thereby avoid the passive loss limitation rules." The following are some of the ways a taxpayer may show material participation and thus avoid passive loss rules;
- The Taxpayer participates more than 500 hours in the activity during the year, or
- The Taxpayer's participation constitutes substantially all of the participation in the activity, or
- The Taxpayer work's more than 100 hours per year in the activity and not less than any other person, including non-owners, or
- The Taxpayer works more than 100 hours per year in each of several activities,totaling more than 500 hours per year in all such activities.