Question

Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business. a.If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant. b.If Rick participates for 500 hours and the employee participates for 620 hours during the year, Rick qualifies as a material participant. c.If Rick participates for 120 hours and the employee participates for 120 hours during the year, Rick does not qualify as a material participant. d.If Rick participates for 95 hours and the employee participates for 5 hours during the year, Rick probably does not qualify as a material participant. e.None of these choices applies here.\

Answer 1

A) If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant.

Step-by-step explanation:

There are seven tests used to determine if an individual is an active participant or not of a business activity. Test 1 states that anyone who participates more than 500 hours (550 in this case) in any business activity is considered an active participant, regardless of how many hours other participants may have worked on the business activity.

All you need to do is qualify for just one of the tests and the IRS will consider you a material participant (IRS Publication 925: Passive Activity and At-Risk Rules, March 2020).