Bob is a general partner in Fresh Foods Partnership and is trying to determine if the income reported on his K-1 should be classified as passive or active trade or business income. List three different criteria that, if met, would allow Bob to treat the income from Fresh Foods as active trade or business income.
What will be an ideal response?
Income from a trade or business is treated as active income if a partner is a material participant in the activity. Regulations provide seven different criteria that, if any one is met, would qualify a partner as a material participant. If Bob satisfies any one of the seven tests in the table below, he will treat his income from Fresh Foods as active trade or business income.
| Tests for Material Participation | |
| 1. | The individual participates in the activity more than 500 hours during the year. |
| 2. | The individual's activity constitutes substantially all of the participation in such activity by individuals. |
| 3. | The individual participates more than 100 hours during the year, and the individual's participation is not less than any other individual's in the activity. |
| 4. | The activity qualifies as a "significant participation activity" (more than 100 hours) and the aggregate of all "significant participation activities" is greater than 500 hours for the year. |
| 5. | The individual materially participated in the activity for any five of the preceding 10 taxable years. |
| 6. | The activity involves personal services (personal services in health, law, accounting, architecture, etc.), and the individual materially participated for any three preceding years in the personal service activity. |
| 7. | Taking into account all the facts and circumstances, the individual participates on a regular, continuous, and substantial basis during the year. |
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