Shohei Ohtani Anaheim Angels Oakland

Shohei Ohtani’s New Contract & Taxation

Shohei Ohtani's signing with the Los Angeles Dodgers on December 11, 2023, for 10 years and $700 million. It is the largest contract for any player among North American team sports. Today we outline some of the conditions and tax considerations for the deal.

Shohei Ohtani’s signing with the Los Angeles Dodgers on December 11, 2023, include reported terms of $2 million per year for 10 years, followed by $68 million for 10 years. Although the confirmation and contract details are undisclosed, and while there may be additional terms for earnings or reductions, we can speculate based on the contract terms at reported face value. While income deferral may be a common practice in MLB player contracts, our analysis shows there were mutual advantages on both sides to motivate signing the deal.

At first glance, we must consider Shohei’s residency and taxation in Japan and US. Often Professional Athletes will come to the US on a visa (for example, the P visa for Professional Athletes will allow him to legally earn income in the US as a non-resident). The international tax requirements could significantly affect tax planning to avoid double taxation and foreign asset and income reporting penalties. If he has obtained a green card, we would consider his residency at the federal and state level to determine taxation regarding each layer. Since he has resided in California playing for the Anaheim Angels for several years, we can assume he will be taxed similar to most Californians.

We will attribute his earned income as W2, and for sponsorships and other income, they will be excluded from this assessment. The $2 million salary is primarily taxed at the highest tax bracket, where for simplification, the relevant tax rate of the significant portion is 37% for IRS and 14.4% for CA in 2024. Employee taxes include Social Security 6.2%, Medicare 1.45%, and CA SDI at 1.1% in 2024, where Medicare and SDI do not have a wage limit. High income earners are further affected by additional medicare 0.9% and net investment income tax.

There is no maximum limit for Ohtani’s income deferral, and it presents several tax planning options. According to Article XVI of the CBA, “there shall be no limitations on either the amount of deferred compensation or the percentage of total compensation attributable to deferred compensation for which a Uniform Player’s Contract may provide.”  Meanwhile, the minimum contract for 2024 season is $740,000, so the $2 million per year is near the base salary limit though not aggressively maximized to the limit.

The $700 million contract generates headline news, however the amount may be reduced by liabilities on Ohtani’s side. The income deferral is reported to be interest-free, which would accumulate to a large amount in the millions over 20 years, in favor of the Dodgers. Then, as a installment payment, the constant yearly income value would decrease in purchasing power against inflation, which could be attributed as a 1-8% decrease for recent years’ inflation rates. Additionally, the tax rates over the next 20 years could increase or decrease, and whether the Dodgers would still exist in 20 years and afford to pay the salary, should be weighted compared to receiving the income up front.

Athletes who play in multiple states are taxed by the other states, often referred to as the “jock tax.” California taxes on income as a CA resident, however provides a tax credit offsetting tax paid to other states up to a limit. With such large numbers, the calculation of tax and credits would be considered in thorough detail to avoid double taxation. 

Will Ohtani avoid CA income tax with the income deferral? Hypothetically, after the end of the Dodgers 10-year contract, Ohtani could move to another state or to Japan. The CA Franchise Tax Board may contest that the deferral is CA sourced income, based “upon unique facts and circumstances of a taxpayer as well as the terms of any compensation agreement.” Furthermore, FTB Publication 1017 provides guidance to withholding for payments made to nonresident athletes and entertainers who provided services in California.

There are additional conditions that could take affect if Ohtani retires after the Dodgers contract. Under Federal Title 4, Section 114 of the Internal Revenue Code, a state can’t impose an income tax on retirement income of a person who doesn’t reside in that state. The code defines retirement income to include “nonqualified deferred compensation plans” when conditions are met under section 3121(v)(2)(C).

For the Dodgers, the taxation on the deal may benefit the organization. It is noted that the Dodgers must set aside the funds per the Article XVI of the labor code: “Deferred compensation obligations incurred in a Contracted executed on or after September 30, 2002 must be fully funded by the Club, in an amount equal to the present value of the total deferred compensation obligation, on or before the second July 1 following championship season in which the deferred compensation is earned.” Therefore, the income deferral does not allow the Dodgers to spend freed up cash on upcoming free agents.

By deferring a large portion of Ohtani’s compensation, the Dodgers may have reduced their own tax burden to MLB. While there is no team salary cap for MLB teams, a Competitive Balance Tax, known as the “luxury tax,” is due for all teams who carry payroll above the threshold, i.e. $237 million for 2024. The average annual value of each player’s contract plus any additional player benefits are calculated at the end of each season. The luxury tax starts will pay tax at 20% in the first year violation and escalates for consecutive seasons to 30% and 50%, while also holding additional surcharges for significant overages. Ohtani’s $68 million per year would take up almost a third of the threshold, however in 10 years, it’s possible the Dodgers may already factor in that the limit would be inflated much higher or that the rules could be replaced, such as the team salary cap.

Ohtani may be further motivated for income deferral because of the additional sponsorship and other income, assuming agreements are at the peak of Ohtani’s career. Therefore Ohtani could offset the earnings to lower income years. Surely there are also Japan sponsors and income requiring a Japanese tax return. Also further considerations would be needed for holding assets in Japan and transferring or gifting to his parents in Japan.

Shohei Ohtani’s contract, being the largest North American sports contract, is an inspirational comeback story for a hall-of-fame caliber player. Los Angeles, holding the largest Japanese community on the US mainland outside of Hawaii, wholeheartedly welcomes the superstar who has been awarded Japan’s prestigious People’s Honor Award at such an early start to his career. Taxation remains universal in affecting decisions regarding contracts, organization and business strategy, international/multi-state income, and tax/legal planning for tax avoidance.

The information provided here is intended for informational purposes only and does not substitute for professional advice. Please refer to the terms of service for website usage.

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