Shohei Ohtani‘s recent contract with the Los Angeles Dodgers has sparked widespread debates about the innovative structuring of professional athlete contracts to optimize tax benefits. This move, while groundbreaking in Major League Baseball (MLB), mirrors a long-standing strategy employed by NFL players to navigate the complex landscape of income taxation. 

The essence of these strategies lies in deferring income and leveraging bonuses, a tactic that not only benefits the athletes financially but also offers teams with greater flexibility in managing their payroll and salary cap space.

Shohei Ohtani’s new deal & how it’s similar to past NFL contracts

Ohtani’s contract, valued at a staggering $700 million over 10 years, is structured in a way that defers a significant portion of the payment until after the contract’s active years. Specifically, Ohtani will receive $2 million annually over the next decade, with the bulk of the contract, $680 million, deferred without interest to be paid out in the years following. 

This structure significantly reduces the annual average value (AAV) of the contract for luxury tax calculations, providing the Dodgers with considerable payroll flexibility. This approach to contract structuring is not merely a financial manoeuvre but a strategic play that aligns with Ohtani’s desire to win by allowing the Dodgers to allocate resources more effectively to build a competitive team around him.

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The NFL has seen its share of innovative contract structuring to optimize tax implications for players while sticking to the league’s salary cap regulations. NFL contracts often include signing bonuses, performance incentives, and guaranteed money. These elements are utilized to provide players with upfront cash (as signing bonuses) that is distributed for salary cap purposes over the contract lifetime. This proration allows teams to spread the cap hit over several years, thus managing their salary cap efficiently.

NFL performance bonuses are also categorized as “likely to be earned” (LTBE) and “not likely to be earned” (NLTBE). LTBE bonuses count against the current year’s salary cap, while NLTBE bonuses, if earned, are applied to the following year’s cap. This distinction provides a mechanism for players to increase their earnings based on performance while offering teams a way to manage cap implications preemptively.

The strategic use of deferred payments and bonuses in NFL contracts serves a dual purpose. It provides players with a measure of financial security through guaranteed money and potential performance incentives. Plus, it allows teams to navigate the salary cap more effectively. This approach to contract structuring is a testament to the sophisticated financial planning that goes into managing professional sports contracts.

In conclusion, while Ohtani’s contract structure may have captured the public’s imagination for its novelty in MLB, it reflects a broader trend in professional sports, like the NFL, toward effective financial planning and contract structuring.

Players who saved on taxes

1. Tom Brady: The former New England Patriots quarterback restructured his contract several times throughout his career. By converting his base salary into a signing bonus, he was able to receive a lump sum payment that was distributed during the term of his contract for salary cap purposes, which also had tax implications.
2. Drew Brees: The New Orleans Saints quarterback also restructured his contract multiple times. In 2016, Brees signed a contract extension that included a $30 million signing bonus, which was spread out over the contract lifetime for cap purposes, potentially offering tax benefits.
3. Ben Roethlisberger: The Pittsburgh Steelers quarterback restructured his contract in 2021, converting most of his salary into a signing bonus. This allowed him to receive more money upfront and spread the cap hit over the remaining years of his contract.
4. Matthew Stafford: In 2021, the Los Angeles Rams quarterback converted $20 million of his roster bonus into a signing bonus. This decision not only helped the team’s salary cap situation but also provided Stafford with a tax-advantaged lump sum payment.
5. Aaron Rodgers: The former Green Bay Packers quarterback restructured by converting base salary into a signing bonus. This allowed him to receive a larger portion of his contract’s value upfront and potentially save on taxes.

These instances demonstrate how NFL players and their financial advisors use contract structures to manage their earnings and tax liabilities effectively. The distribution of signing bonuses over the term of a contract can lower the player’s short-term tax burden and provide immediate liquidity. So the next time you see a player converting their contracts for what looks like lesser money, that might not be the case.