Material participation and solar investments: the seven tests and how they are applied

By the Tax Field Guide editorial team. Published 2026-10-26. Facts checked 2026-10-26. Related strategies: Solar Investment Credits, Short-Term Rental Losses.

Education only; not tax, legal or investment advice. Tax rules change, and how they apply depends on your facts. No outcome is guaranteed.

Some solar equipment programs are marketed to high earners on the promise that the owner will "materially participate" in a solar leasing or power business, so that the investment tax credit and depreciation can offset wages or other non-passive income. Whether that works depends on facts that have to be proven year by year.

The seven tests

Under the regulations, you materially participate in an activity for the year if you meet any one of these:¹²

1. You participate for more than 500 hours in the year.
2. Your participation is substantially all of the participation of all individuals in the activity.
3. You participate for more than 100 hours and at least as much as any other individual (including non-owners).
4. The activity is a "significant participation activity" and your total in all such activities exceeds 500 hours.
5. You materially participated in any 5 of the preceding 10 years.
6. For a personal service activity, you materially participated in any 3 preceding years.
7. Based on all facts and circumstances, you participate on a regular, continuous and substantial basis (this test is unavailable if you participate 100 hours or less, and management work does not count if someone else is paid to manage or spends more hours managing).

What does not count

Work done in your capacity as an investor, such as studying financial statements or monitoring operations, does not count unless you are directly involved in day-to-day management or operations.¹² Hours of a spouse can count toward your participation.² Material participation is tested every year, and the IRS can ask for contemporaneous records such as calendars and logs.²

Why solar programs draw scrutiny

When a project is run by an operator or the seller, the operator's employees usually do far more work than any investor, which makes tests 2 and 3 hard to meet. A 500-hour year is about ten hours a week. The Tax Court has rejected solar investors' participation claims; for one example, see the summary of Strieby v. Commissioner, T.C. Memo. 2025-28, linked below.³ Our solar ITC strategy page collects the case law and IRS sources we track.

Short-term rentals are a different rule

Short-term rental strategies rely on a separate rule: a rental with an average customer stay of seven days or less is generally not treated as a "rental activity" under §469, so the ordinary material participation tests apply to it.¹⁴ See short-term rental losses.

Questions to ask

1. Which test do I expect to meet, and how many hours will the operator's own staff work?
2. What work will I actually do, and is it management or operations, or investor review?
3. What records will I keep, and when will they be made?

Common questions

How many hours do I need to materially participate in a solar business?

There is no single number. One test is more than 500 hours in the year; another is more than 100 hours and at least as much as any other individual. Any one of seven tests is enough, and each is applied year by year.

Do hours spent reviewing reports from the solar operator count?

Generally not. Investor-type work such as reviewing financial statements or monitoring operations does not count unless you are directly involved in day-to-day management or operations.

Education only; not tax, legal or investment advice. Talk to a qualified professional before acting.

Sources

1. Treas. Reg. §1.469-5T (material participation), https://www.law.cornell.edu/cfr/text/26/1.469-5T
2. IRS Publication 925, Passive Activity and At-Risk Rules, https://www.irs.gov/publications/p925
3. Summary of Strieby v. Commissioner, T.C. Memo. 2025-28, https://www.currentfederaltaxdevelopments.com/blog/2025/4/3/navigating-the-murky-waters-of-investment-tax-credits-and-passive-activity-rules-a-deep-dive-into-strieby-v-commissioner
4. Treas. Reg. §1.469-1T(e)(3)(ii)(A), https://www.law.cornell.edu/cfr/text/26/1.469-1T