Business planning involves not only determining what entity type best fits a client’s needs, but also ensuring that the client meets all requirements to be considered an active participant in the business. Planners need to understand the rules behind material participation to ensure that their clients qualify as active members, or they could lose their ability to take losses in the current tax year (IRS Publication 925). If a client decides to start a business, they must understand the importance of these rules, so that they do not end up classified as a passive participant and lose the beneficial tax treatment for losses. This paper seeks to inform advisors of the available options to plan for participation in a business to avoid the IRS reclassifying an activity as passive.
Stephanie Wendling, CPA, MSTFP, is a lecturer at Widener University where she teaches tax and financial planning courses at the graduate and undergraduate levels. Tax is the primary focus of her research. Stephanie received both her bachelor’s degree in business administration with a concentration in accounting and her master’s degree in taxation and financial planning from Widener University in Chester, Pennsylvania.