Material Participation

[Kram BergGold]

Husband and Wife are each 25% owners of a partnership. I have read that a spouse's participation is added to the taxpayer's participation when trying to meet the material participation test. I assume this does not apply when each is a partner. That is, when only one is an owner, then the hours worked by both count. But, when each is a partner, each has to qualify on their own. Am I correct?

[DaveinTexas]

Materially participating

When both spouses are partners (or shareholders of an S Corp) you can use the participation of both spouses jointly and they do not have to qualify on their own separately.

In IRC 469(h)(5), it specifically mentions this provision. So if one materially participates, then using this provision in the code, this means both spouses participates and the activity is non-passive. You still have to have at risk basis to pass through losses of course.

Keep in mind, unless these regs have been updated, Regs. §1.469-5T(e)(3)(ii) is silent as to whether status as a general partner interest held by one spouse will be attributed to the other spouse who is a limited partner. In other words, the IRS isn't clear if this situation would warrant the protection under the provision I mentioned.

[Kram BergGold]

Thanks

Than ks for the in depth response.

[DaveinTexas]

You bet

No worries at all my friend. Thank you for your help with my questions over the years.

Dave