Regular, substantial, and continuous involvement in a business on the part of either the taxpayer and/or spouse. Allows losses from trades or businesses to be deducted without limitation under the passive loss rules. Applies to S corporations and partnerships.

Generally, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Material participation is strictly defined in the Internal Revenue Code and is one of several tests used to determine that a trade or business is not a passive activity.

Where a taxpayer participates regularly, continuously, and substantially in the management and operation of a business; the most active level of participation in an income- producing activity. To qualify, the taxpayer must meet at least one of six defined tests (see page 40). Management expenses, property taxes, and interest on indebtedness for timber held at this level of business activity all are deductible against income from any source. Also see ‘Active income,” “Business,” “Income,” “Investment,” and “Passive.