Organize activities that involve everyone to ensure their participation in tasks and projects.

Material participation is an important concept when it comes to deducting losses from a business venture or hands-on investment. To be able to do so, the taxpayer must materially participate in the activity. This means that they must spend more than 500 hours on the activity, more than 100 hours but nobody else spends more time, spend more than 100 hours in the activity and more than 100 hours in some other activities and in total, their hours spent in all of these “significant participation activities” exceed 500 hours, have been involved in the activity on a “regular, continuous and substantial basis” for five of the last ten years, or have materially participated in a personal service activity for any three years.

Married couples must combine hours to determine material participation. For example, if two spouses each spend 300 hours, the total material participation hours equal 600 hours.

One other way to achieve material participation is through grouping activities. The Treasury regulations provide some guidance on what is considered a reasonable method. They suggest looking at all the relevant facts and circumstances and giving the “greatest weight” to similarities and differences in types of trades or businesses and the extent of common control.

For example, if a taxpayer invests in and works in four activities and doesn't qualify as materially participating in any of them, they may be able to combine two of them so that the time spent in the combined activity is sufficient for material participation.

Grouping activities is a great way to get around the rules of material participation and achieve the desired result. It’s important to understand what the regulations require and to be aware of the possibilities this option offers.
Material participation matters when it comes to deducting losses from a business venture or hands-on investment. To be able to do so, individuals must meet one of seven material participation recipes. This includes spending more than 500 hours on the activity, spending more than 100 hours but no one else spending more time, as well as three other criteria.

However, there is an additional way to qualify as materially participating — through grouping activities. Grouping activities is when a taxpayer combines two or more activities in a reasonable manner based on the relevant facts and circumstances. This can be done if none of the seven material participation recipes are met.

For example, let's say someone has a significant ownership interest in a bakery and a movie theater in Baltimore and Philadelphia. This individual may not qualify as materially participating in either business. However, if they combine the two businesses, this may be enough to qualify as materially participating.

When grouping activities, the Treasury regulations provide some useful guidelines. They recommend looking at all the relevant facts and circumstances, as well as giving the greatest weight to similarities and differences in types of trades or businesses, and the extent of common control.

Grouping activities is a great backdoor way to materially participate, in situations where the usual recipes don't work. It's important to keep in mind that once the activities are grouped, that same grouping must be used in subsequent taxable years unless there is a material change in the facts and circumstances.

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