Active income – income derived from the
direct efforts of the individual, such as
wages, salaries, commissions, etc
Passive income – income from passive
activities, such as limited partnerships and
rental real estate
Portfolio income – income from stocks,
bonds, annuities, royalties, dividends,
is the involvement of a taxpayer in the operations of an activity on a
regular, continuous, and substantial basis. The determination of material participation is
important because it may establish whether an activity will be characterized as a passive activity
or a nonpassive activity. There are seven tests for material participation. Satisfaction of any one
qualifies as “material participation:”
1. Taxpayer participates more than 500 hours per year.
2. Taxpayer’s participation is substantially all of the work done in the activity.
3. Taxpayer participates more than 100 hours per year and not less than any other
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