Allocation of Purchase Price & Taxes When Selling a Business
Selling any company is complex, but an iGaming exit layers on still more variables: multijurisdictional licences, player-data privacy rules, and technology IP that may be registered in Gibraltar yet operated from Romania. Amid the headline price, working-capital targets, and earn-out waterfalls, one element routinely drifts to the back of the deal room—until, suddenly, it stops closing day in its tracks:
Purchase-price allocation (PPA).
Because the Internal Revenue Code treats each component of the business differently, buyer and seller must agree how the consideration is spread across cash, code, customer files, equipment and—often the largest slice—goodwill. The agreed schedule is then filed on IRS Form 8594, one copy with the seller’s return and one with the buyer’s. Failure to mirror each other’s numbers invites the IRS to reconcile them for you.
Why the IRS Cares
Section 1060 forces both parties in a trade-or-business asset deal to allocate the price among seven asset classes shown on Form 8594. Capital gains on Class VII goodwill are typically kinder to sellers than ordinary-income recapture on fully depreciated slot servers (Class V). Buyers, conversely, want a high basis in assets they can depreciate quickly—especially intangible player databases that fall under Section 197’s 15-year amortisation regime.
Stock versus Asset Structures in Gaming
Stock deal
The shares of “AlphaBet N.V.” change hands. The purchase price largely attaches to shares; the buyer inherits historic basis and any latent tax or regulatory liabilities. Jurisdictional gaming authorities (Malta, Curaçao, New Jersey) may need to pre-approve the share transfer, stretching timelines.
Seller upside: long-term capital-gains treatment; clean break from contingent liabilities.
Buyer downside: no step-up in basis; limited future depreciation; exposure to legacy issues.Asset deal
AlphaBet sells its player database, source code, brand, servers and selected contracts. The buyer chooses what to take and writes up most assets to fair value, harvesting early depreciation while isolating pre-closing risks in the old entity.
Seller downside: ordinary-income recapture on tangible assets, potential state sales-tax leakage if servers or terminals transfer in the U.S.
Buyer upside: stepped-up basis, Section 197 amortisation on intangibles, and ring-fenced liabilities.
For smaller iGaming studios and affiliate networks, tax economics usually drive negotiations toward an asset sale, even when the headline press release reads “acquisition.”
Asset Classes, Typical iGaming Examples, and Tax Consequences
| Form 8594 Class | iGaming Illustrations | Common Allocation Approach | Seller Tax Result | Buyer Tax Result |
|---|---|---|---|---|
| I – Cash | Euro balances in payment processor accounts | Rarely transferred; if so, face value | No gain | Basis equals cash |
| II – Securities | Treasury bills held as player-fund safeguard | Usually excluded | No gain | Basis equals par |
| III – A/R | Outstanding B2B skin royalties | Often retained by seller and collected post-close | No gain until collected | Future cash passed through |
| IV – Inventory | Unredeemed gift cards, branded hardware | Allocated at cost | Little or no gain | Deductible when sold |
| V – Tangible Property | Data-centre racks, kiosks, company cars | Fair-market (“replacement”) value | Recapture at ordinary rates | Depreciable over remaining life; possible sales tax |
| VI – Intangibles | Betting platform code, licences, non-compete | Typically small % for restrictive covenants; higher for software/IP | Ordinary income on covenants; capital gain on software if held > 1 yr | 15-year amortisation (Sect. 197) |
| VII – Goodwill | Brand equity, player-lifetime value, assembled workforce | Residual (“plug”) value | Long-term capital gain | 15-year amortisation |
Note: Neither side is legally obliged to adopt identical numbers, but experienced tax counsel will insist on matching schedules to avoid audit roulette.
Negotiation Dynamics and Practical Tips
Delay specifics early on. The teaser or CIM should cite “fair-market value to be determined” for hard assets. Locking yourself into a high equipment figure can reduce your capital-gains cushion later.
Model after-tax proceeds, not headline price. A €50 m offer yielding €40 m after taxes is worth less than a €48 m bid structured to generate €43 m net.
Coordinate with regulators. In some EU states, transferring a player database triggers data-protection filings; delaying approval can shift your year-end PPA and, therefore, the period in which taxes fall due.
Draft the allocation schedule before signing. Attach it as a schedule to the definitive purchase agreement and re-confirm numbers immediately prior to closing if earn-outs, inventory roll-forwards, or working-capital true-ups move the goalposts.
Pros and Cons of Different Allocation Priorities
Favouring Goodwill (Seller-friendly)
Pros: maximises capital-gains rate, minimal recapture; one line-item simplifies negotiations.
Cons: reduces buyer’s year-one amortisation; may lower perceived ROI, depressing price.
Favouring Depreciable Tangibles and Software (Buyer-friendly)
Pros: accelerates tax shield, boosting post-tax cash flow; aligns with purchase-price accounting under IFRS 3.
Cons: triggers ordinary-income recapture for seller; potential state sales-tax exposure on equipment.
Balanced Allocation (Compromise)
Pros: keeps both models within acceptable net-present-value ranges; lowers audit risk.
Cons: Requires granular valuation work (third-party appraisals) and longer closing timetable.
Frequently Asked Questions
Q: Is Form 8594 required even in a share deal?
A: Technically, Section 1060 applies to asset acquisitions. In a pure share deal the form is not filed, but if the contract carves out side agreements—e.g., a personal covenant-not-to-compete—the parties may still need to allocate and report those elements.
Q: Can the allocation be changed after filing?
A: Only by filing an amended return—costly once integration is under way. Lock accuracy before you hit “Send.”
Q: How do earn-outs affect PPA?
A: Contingent consideration is added to the purchase price when it becomes “fixed and determinable.” Buyer and seller must each file a supplemental Form 8594 for the year the earn-out crystallises.
Q: What if the buyer is a non-U.S. entity?
A: U.S. asset transfers still trigger Form 8594; however, foreign buyers may have no U.S. filing obligation beyond the form itself if they are not otherwise engaged in a U.S. trade or business. Always coordinate with international tax counsel.
Q: What valuation methods are acceptable for intangible assets?
A: The IRS recognises cost, market, and income approaches. In iGaming, the income method (discounted cash flow per active player) is prevalent for software and player lists, while relief-from-royalty often supports brand valuations.
Conclusion
The purchase-price allocation is not an afterthought; it is an integral, value-shifting lever in every iGaming transaction. Structured wisely, it converts headline value into optimal after-tax proceeds for the seller and usable tax shields for the buyer. Structured poorly—or left until midnight before closing—it can sink the deal entirely. Engage tax advisers early, model several allocation scenarios, and document the final schedule in your definitive purchase agreement. The result is a smoother closing, predictable cash flows, and one fewer surprise when the next IRS envelope lands on your desk.
