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Passive Activity Loss ATG - Exhibit 4.2: Material Participation Decision Tree

Publication Date - December, 2004

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.


Table of Contents / Exhibit 4.3
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Exhibit 4.2: Material Participation Decision Tree
Reg. 1.469-5T(a)

Is the taxpayer a material participant in a business activity?

Decision Tree

If answer to any one is yes, losses are excepted from the passive loss limitations and generally fully deductible.

  • Did the taxpayer work more than 500 hours in the activity during the year?
  • Did TP perform substantially all the work in the activity?
  • Did TP work more than 100 hours and more than anyone else (including non-owners)?
  • Did the taxpayer work more than 100 hours, but less than 500, in two or more businesses and the sum of all the hours in these businesses is more than 500?
  • Did the taxpayer materially participate in the activity for any five of the last ten years?
  • If the activity is a personal service activity, did the taxpayer materially participate for any three prior years?
  • Under all the facts and circumstances, did the taxpayer work on a regular, continuous and substantial basis in the activity?  This test is not available if anyone was paid compensation in connection with management of the activity.

If answer to all the above tests is no, the taxpayer does not materially participate.  The loss is passive and not deductible in the absence of passive income.

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Page Last Reviewed or Updated: 01-Jul-2014