Attention Business Owners: Just How Active Are You? / Owners of businesses set up as S corporations can shield the income from a new 33.8% tax by being active owners.

Arden Dale for the Wall St Journal writes: Financial advisers have a simple question for some of their clients who own businesses: Are you an active or passive owner?

For clients whose businesses are set up as S corporations, the answer is crucial if they want their income from those businesses to be shielded from a 3.8% tax that took effect this year as part of the 2010 Affordable Care Act.

The tax is applied to dividends, capital gains and other investment income for married joint filers who have more than $250,000 in adjustable gross income, or singles with more than $200,000 in adjustable gross income. But for those who own S corporations, the Internal Revenue Service imposes the tax when it thinks the owners are playing more passive roles—like investors—a determination based partly on how much time they spend on the job. Active owners don't have to pay the tax.

Doctors, lawyers and other professionals have made S corporations one of the most popular business structures, along with others who use them to run businesses of all sorts, from manufacturing to retail. S corporations provide liability protection while allowing profits to pass through to the owners' personal tax returns.

Before the tax strategy can be employed, advisers need to examine their business-owning clients' K-1 forms to determine whether they are actively involved or only have a passive role like an investor.

The IRS uses a series of tests to decide whether a business owner is active or passive. Among them: spending annually 500 hours or more in a trade or business activity, being its sole participant, or, in the words of the IRS, being involved on a "regular, continuous, and substantial basis."

"I think it's very significant—there are a lot of people out there who truly shouldn't be paying this tax," says John Evans, a principal at Truepoint Inc. in Cincinnati, which has about $1.2 billion under management.

One client, according to Mr. Evans, will save at least $4,000 in taxes a year by spending more time working in two of his S corporations that own hair salons. Now retired, the man will still have time to play golf and relax. But he will take on some jobs like negotiating leases and managing personnel that show the IRS he is truly an active owner.

Mr. Evans says his fellow advisers need to be mindful of the strategy. Business owners often simply rely on an accountant to file a tax return, and may miss big savings this way. Accountants, he says, need to communicate with advisers and clients so everyone is on the same page.

Adviser John D. Smith says anyone who plans to switch from being a passive to an active owner must understand the IRS rules and "be able to document your activity in the business." Mr. Smith is a wealth manager at Balasa Dinverno Foltz LLC, an advisory firm in Itasca, Ill., with about $2.1 billion under management.