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I am a limited partner in the company where I work full time in a middle management role. (Or more specifically, I am a limited partner in the holding company that exists for the sole purpose of owning the company I work for.)

I understand I am allowed to deduct my portion of the partnership's losses on my personal income taxes if I "materially participated" in its activity.

https://www.irs.gov/publications/p925#en_US_2018_publink1000104581 The IRS says:

Any work you do in connection with an activity in which you own an interest is treated as participation in the activity.

And, the first test for material participation:

You participated in the activity for more than 500 hours.

I certainly worked more than 500 hours, but it is unclear to me whether my day job is "work in connection with" whatever the parent holding company does, which I suppose is mostly administrative tasks done by one or two people.

My guess is that this case is somewhat open to interpretation, but it seems in the spirit of the guidelines to say I did materially participate in the partnership. Am I missing anything?

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    The answer might be "no", given that you're a limited partner and work in middle management, not senior management. – RonJohn Aug 4 at 18:10
  • @RonJohn: His losses are already adjusted for his ownership share, it doesn't make sense for being a lesser partner to count against him again. – Ben Voigt Aug 4 at 21:21
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There is specific wording that applies to you in Publication 925

Limited partners.

If you owned an activity as a limited partner, you generally aren’t treated as materially participating in the activity. However, you’re treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year.

The 500 hours you mention is test #1, so being a limited partner does not disqualify you from using that test.

This section also appears important.

Participation.

In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity.

Work not usually performed by owners. You don’t treat the work you do in connection with an activity as participation in the activity if both of the following are true.

  1. The work isn’t work that’s customarily done by the owner of that type of activity.
  2. One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules.

Being a middle rather than senior manager might be a strike against you regarding bullet #1, but you are only disqualified if both bullets are true, and #2 should save you.

That same publication mentions indirect ownership several times. Therefore you don't need work in connection with the holding company... the work you do is in the employ of the indirectly owned company. I am assuming that the losses are in relation to the indirect ownership. If they are produced by other activities of the holding company, it would be less clear.

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