The tax law limits benefits derived from certain “passive activities,” in which a taxpayer doesn’t “materially participate” in the activity. In general, losses from passive activities can only offset income earned from other passive activities, and any excess passive loss is suspended unless you can satisfy one of numerous tests spelled out in IRS regulations.
But recently, the Tax Court found on behalf of a business owner who worked primarily remotely from a different location than his headquarters. The business owner in "Barbara, TC Memo 2019-50, 5/13/19" was in the business of lending money from a headquarters office in Chicago but spent 60% of the year working from a location in Florida and only 40% of his time in Chicago.
The business reported losses for three specific years, and the IRS contended they were passive activity losses and the taxpayer was not a material participant. But the Tax Court disagreed and said the business owner qualified as a material participant. This was a taxpayer victory.
Find out more about the case so you can advise your clients accordingly.