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If the corporation meets any of the five

Monitoring the finances or operations of

Material Participation

exceptions listed above and the activity is a

the activity in a nonmanagerial capacity.

Personal service corporations and closely

trade or business activity in which the

If the individual is married for the tax

held corporations materially or significantly

corporation materially participated, report

year, the individual’s participation in an

participate in an activity if one or more

any income, deduction, loss, or credit from

activity includes any participation in the

individuals (each of whom would materially

the activity on the forms or schedules

activity during the tax year by that

or significantly participate in the activity if the

normally used.

individual’s spouse, whether or not the

corporation’s activity were the individual’s

spouse owned any interest in the activity

If the rental activity did not meet any of

activity) directly or indirectly own more than

and whether or not the individual and

the five exceptions, it generally is a passive

50% (by value) of the corporation’s

spouse file a joint return for the tax year.

activity. Special rules apply if the corporation

outstanding stock. For this purpose, an

conducted the rental activity through a

individual’s participation in all activities other

Tests for individuals. An individual would

publicly traded partnership (PTP) or if any of

than activities of the corporation is

materially participate in an activity of the

the rules described under

disregarded.

corporation if one or more of the following

Recharacterization of Passive Income on

A closely held corporation also materially

tests are satisfied.

page 5 apply. See PAL rules for partners in

participates in an activity if the corporation

1. The individual participated in the

PTPs on page 9.

satisfies the qualifying business

activity for more than 500 hours.

requirements of section 465(c)(7)(C)

If none of the special rules apply, use

2. The individual’s participation in the

(without regard to section 465(c)(7)(C)(iv)

Worksheets 1 and 2 on page 6 to determine

activity for the tax year was substantially all

for the excluded business exception from

the amount to enter in Part I of Form 8810

of the participation in the activity of all

the at-risk limitations).

for each passive rental activity. If the

individuals (including individuals who did not

These requirements are met if:

corporation has credits from passive rental

own any interest in the corporation or the

activities, use Worksheet 5 on page 9 to

activity) for the year.

1. During the entire 12-month period

figure the amount to enter in Part II of Form

ending on the last day of the tax year,

3. The individual participated in the

8810.

substantially all the services of at least one

activity for more than 100 hours during the

full-time employee of the corporation were in

tax year, and that individual participated at

the active management of the activity;

least as much as any other individual

Trade or Business

2. During the same period, substantially

(including individuals who did not own any

Activities

all the services of at least three full-time

interest in the corporation or the activity) for

nonowner employees were directly related

the year.

A trade or business activity is an activity

to the activity; and

4. The activity is a significant

(other than a rental activity or an activity

3. The deductions attributable to the

participation activity for the individual for the

treated as incidental to an activity of holding

activity and allowed solely under sections

tax year, and the individual participated in all

property for investment) that:

162 and 404 exceed 15% of the gross

significant participation activities during the

1. Involves the conduct of a trade or

income from the activity for the tax year.

year for more than 500 hours. For this

business (within the meaning of section

purpose, an individual’s participation in all

Participation. For purposes of the material

162),

activities other than activities of the

participation tests listed below, participation

2. Is conducted in anticipation of starting

corporation is disregarded.

generally includes any work the individual

a trade or business, or

A significant participation activity is any

did (without regard to the capacity in which

3. Involves research or experimental

trade or business activity in which the

the individual did it) in connection with an

expenditures deductible under section 174

individual participated for more than 100

activity in which the corporation owned an

(or that would be if the corporation chose to

hours during the year and in which the

interest at the time the individual did the

deduct rather than capitalize them).

individual did not materially participate under

work.

any of the material participation tests (other

Work is not treated as participation,

than this fourth test). For more information

Reporting Income, Deductions,

however, if the work is not work that an

regarding significant participation, see Pub.

Losses, and Credits From

owner of that type of activity would

925.

customarily do, and if one of the individual’s

Trade or Business Activities

5. The individual materially participated

main reasons for doing the work is to avoid

in the activity for any 5 (whether or not

Trade or business activities with material

the disallowance of losses or credits from

consecutive) of the 10 immediately

participation. If the corporation materially

the activity under the passive activity loss

preceding tax years.

participated in a trade or business activity,

and credit rules.

6. The activity is a personal service

that activity is not a passive activity. Report

Proof of participation. Participation in

activity in which the individual materially

the income, deductions, losses, and credits

an activity can be proved by any reasonable

participated for any 3 (whether or not

from the activity on the form or schedule

means. Contemporaneous daily time

consecutive) preceding tax years.

normally used.

reports, logs, or similar documents are not

An activity is a personal service activity if

required if participation can be established

Trade or business activities without

it involves the performance of personal

by other reasonable means. Reasonable

material participation. In general, use

services in the fields of health, law,

means for this purpose may include, but are

Worksheets 1 and 2 on page 6 to determine

engineering, architecture, accounting,

not limited to, the identification of services

the amount to enter in Part I of Form 8810

actuarial science, performing arts or

performed over a period of time and the

for each trade or business activity in which

consulting in any other trade or business in

approximate number of hours spent

the corporation did not materially participate.

which capital is not a material

performing the services during that period,

If, however, the corporation held the activity

income-producing factor.

based on appointment books, calendars, or

through a PTP or the activity is a significant

7. Based on all the facts and

narrative summaries.

participation activity, special rules apply.

circumstances, the individual participated in

Tests for investors. Work done as an

See Publicly Traded Partnerships (PTPs) on

the activity on a regular, continuous, and

investor in an activity is not treated as

page 9. See Pub. 925 for details about how

substantial basis during the tax year.

participation unless the individual was

to report income or losses from significant

The individual did not materially

directly involved in the day-to-day

participation passive activities.

participate in the activity under this seventh

management or operations of the activity.

test, however, if the individual participated in

In general, if the corporation has credits

For purposes of this test, work done as an

the activity for 100 hours or less during the

from passive activities, use Worksheet 5 on

investor includes the following activities.

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tax year. Participation in managing the

page 9 to figure the amount to enter in Part

Studying and reviewing financial

activity does not count in determining

II of Form 8810. However, if the corporation

statements or reports on operations of the

whether the individual materially participated

held the activity through a PTP, special rules

activity.

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under the test if:

apply. See Credits From PTPs on page 10

Preparing or compiling summaries or

for details about how to report credits from

analyses of the finances or operations of the

a. Any person (except that individual)

received compensation for performing

these activities.

activity for the individual’s own use.

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Instructions For Form 8810 - Corporate Passive Activity Loss And Credit Limitations - 2006 Page 3

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