A trade or business where the taxpayer does not materially participate is known as what?

A trade or business where the taxpayer does not materially participate is classified as passive activity income. This designation is crucial for tax purposes, as it shapes how income and losses associated with the activity are treated under the tax code.

In general, passive activities are those in which the taxpayer does not take an active role in the management or operations of the business. This classification is important because losses from passive activities can typically only offset income from other passive activities, rather than active income or ordinary income.

This distinction enhances taxpayer understanding of how to report income from various sources and the implications for tax liability. By correctly identifying activities as passive, taxpayers can navigate the complexities of tax deductions and losses effectively, ensuring compliance and optimizing their tax situations.