Question

Ned, a full-time college professor, owns a real estate rental business in which he participates in the current year. He has one employee who works part-time in the business. Which statement is correct below?

a.    If Ned participates for 120 hours and the employee participates for 120 hours during the year, the income or loss from the business is active income or loss.
b.    If Ned participates for 95 hours and the employee participates for 5 hours during the year, the income or loss from the business is active income or loss.
c.    If Ned participates for 500 hours and the employee participates for 520 hours during the year, the income or loss from the business is active income or loss.
d.    If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, the income or loss from the business is active income or loss.
e.    None of the above is correct.

Answer 1

Material participation test states that participant must participate for more than 500 hours regardless of how much others participate. This is the first test of active income.

In the given question, except option d, Ned has worked for 500 or less hours in a ,b and c. That would render the income derived not active.

In option d, Ned has worked more than 500 hours. The employee participation is immaterial. This passes the material participation test. Hence, the correct option is d. If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, the income or loss from the business is active income or loss.