Sorting Out "Material Participation": The Trap In FOBD
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The term “material participation” has become a standard component of tests to determine whether a “business” exists. Generally, for an arrangement to be a business, the owner (or someone on behalf of the owner) must be (1) bearing the risks of production, (2) bearing the risks of price change and (3) involved significantly in management. Material participation is used as a standard for determining whether there is sufficient involvement in management to meet that part of the test.