On December 9th, 2020, the Los Angeles Dodgers and Japanese two-way star Shohei Ohtani agreed to a 12-year, $245 million contract. The deal was the largest ever for a Japanese player and the largest ever for a pitcher. However, what wasn’t immediately known was that the contract also included a deferred payment of $680 million. This means that the annual tax value of the contract is actually much lower than the headline figure of $245 million.
The deferred payment is spread out over the course of the 12-year contract. It will be paid out in annual installments of $56.7 million, with the first payment due in 2032. This reduces the annual tax value of the contract from $20.4 million to just $46 million. This is a significant reduction in the amount of money that Ohtani will have to pay in taxes each year.
The deferred payment also has implications for the Dodgers’ salary cap. Under MLB rules, teams are allowed to defer up to 50% of a player’s salary. This means that the Dodgers can now use the deferred payment to sign other players without having to worry about going over their salary cap.
The deferred payment is a win-win situation for both Ohtani and the Dodgers. Ohtani gets to keep more of his money each year, while the Dodgers get more flexibility when it comes to signing other players. It’s a creative way to structure a deal that benefits both parties.
Shohei Ohtani’s contract with the Los Angeles Dodgers is an example of how creative teams can be when it comes to structuring contracts. By including a deferred payment of $680 million, Ohtani’s annual tax value is significantly reduced while still providing the Dodgers with additional salary cap flexibility. It’s a win-win situation for both parties and a great example of how teams can structure deals to benefit everyone involved.
