An individual is considered to materially participate in an activity if any of the following tests are met with the exception of the individual participates in the activity for more than 500 hours during the year. the individual participates in the activity for 75 hours during the year, and that participation is more than any other individual's participation for the year. the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years. the individual's participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals.

Tom and Shawn own all of the outstanding stock of Brady Corporation. This year, Brady generates taxable income of $20,000 from active business operations, and also reports investment interest of $22,000 and losses of $28,000 from a passive activity. As a result, Brady Corporation reports net income of $42,000. interest income of $22,000 and a passive loss carryover of $8,000. business income of $20,000 and a passive loss carryover of $6,000. business income of $20,000, interest income of $22,000, and a passive loss carryover of $28,000