As many American taxpayers and investors familiarize themselves with Qualified Small Business Stock, they may be eager to look towards their own shares or investment opportunities to see where they can reap the benefits of this favorable tax treatment.
One of the industries excluded from leveraging Section 1202 and QSBS is the hotel industry. Sadly, hotels and motels both are outlined in section 1202 as among the unqualified trade (along with performing arts, financial services, farming businesses, restaurants, and several others).
How Is a Hotel Defined?
While Section 1202 does not further define the term hotel and motel business, it is defined elsewhere in the code:
“The term hotel means an establishment known to the public as a hotel, which is primarily engaged in providing lodging or lodging and meals for the general public. Included are hotels operated by membership organizations and open to the general public and apartment hotels which provide accommodations for transients. However, an establishment whose income is primarily from providing a permanent place of residence or from providing residential facilities complete with bedrooms and kitchen for leased periods longer than 3 months would not be considered a hotel within the meaning of the Act. An apartment or residential hotel is not considered a hotel unless more than half of its annual dollar volume is derived from providing transient guests representative of the general public with lodging or lodging and meals. Establishments in which lodging accommodations are not available to the public are not included. Also excluded from the category of hotels are rooming and boarding houses, and private residences commonly known as tourist homes. Resort or other hotels even if they operate seasonally are regarded as hotels.”29 CFR § 779.383(b)
If you currently hold shares in a hotel business or are looking to exercise an opportunity to do so, you may be wondering where to turn. While the ‘unqualified’ list of trades seems extensive, many small businesses will in fact qualify for QSBS as an investment opportunity. Specifically, those that are product based or have some sort of proprietary technology or digital platform will be likely to qualify under Section 1202 and provide a great investment potential for those looking to invest in a Qualified Small Business and reap the associated benefits upon exit.
Looking for specific advice on QSBS and Capital Gains? Contact us to learn more.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.