What must be calculated to determine whether an individual shareholder materially participates in the business?

To determine whether an individual shareholder materially participates in a business, it is essential to calculate the number of hours the individual participated in the activity during the tax year. This calculation is crucial because material participation is defined by the IRS guidelines in regards to how much time an individual actively engages in a business activity.

Material participation has specific tests that primarily focus on the individual's involvement, one of which is based on the number of hours worked. For instance, an individual who works more than a certain threshold number of hours—generally 500 hours during the year—would meet the criteria for material participation.

The emphasis on the individual's hours worked reflects the IRS's aim to distinguish between investors, who may have minimal involvement, and active participants, who play a significant role in managing and running the business. Therefore, tracking the exact hours spent actively working in the business directly impacts the determination of material participation and the ability to deduct losses or qualify for certain tax treatments.