You would need to meet both the active participation rules and material participation rules in order for the income to be considered non-passive. Merely being involved with management would satisfy the active participation rules, but not the material participation rules.
Here are the material participation rules:
1.____ Does taxpayer and/or spouse work more than 500 hours a year in the business?
2.____ Does taxpayer do most of the work? Even if taxpayer does not meet 500 hour test, but his participation is the only activity in the business, he materially participates. Example: sole proprietor with no employees.
3.____ Does taxpayer work more than l00 hours and no one (including non-owners or employees) works more hours? Example: If owner puts in l75 hours a year and an employee works 190 hours a year, taxpayer would not meet material participation test.
4.____ Does taxpayer have several passive activities in which he participates between 100-500 hours each, and the total time is more than 500 hours? The following activities should not be included in the above test: rental activities: activities involving portfolio or investment income, and activities in which the taxpayer does most of the work.
5.____ Did taxpayer materially participate in activity for any 5 out of l0 preceding years (need not be consecutive)? Example: taxpayer who retired and his children now run business, but he stills owns part of partnership.
6.____ Did taxpayer materially participate in a personal service activity for any 3 prior years (need not be consecutive)? Personal service activity includes fields of health, law, engineering, architecture, accounting, actuarial science, performing arts and consulting.
7.____ Do the facts and circumstances indicate taxpayer is materially participating? Test does not apply unless taxpayer worked more than 100 hours a year. Furthermore, it does not apply if:
- any person, other than the taxpayer, received compensation for managing the activity; or,
- if any person spent more hours than taxpayer managing the activity.