Dwayne Johnson Deal May Benefit From Ford’s Corporate Minitax

Large US corporations, including those subject to the corporate alternative minimum tax (CAMT) in addition to regular corporate tax, often maintain what are known as nonqualified deferred compensation plans, or NQDCPs. While NQDCPs generally are used for key employees, such as executives, these plans can sometimes be offered to highly paid independent contractors as well.

Once such independent contractor who might benefit from an NQDCP is movie star Dwayne “The Rock” Johnson, who reportedly receives significant endorsement fees as a corporate spokesman for Ford Motor Co.

Tax practitioners may be negotiating a service contract on behalf of a celebrity endorser, other independent contractor, or any key executive of very large corporations that are now expected to be continuously subject to CAMT as well as regular corporate income tax. Such a practitioner should be aware that the corporation’s CAMT position may favorably suggest that if the client were to request payment through a NQDCP, the corporation would be less likely to raise the temporary increase in its own regular corporate tax liability as a concern.

Rules and Benefits of NQDCPs

NQDCPs generally allow the individual employee or independent contractor to defer the receipt of part of that individual’s compensation until a future date. Corporations typically credit an annual investment return to the vested but unpaid compensation.

The individual’s claim to compensation is considered a general creditor’s claim, which means participants must assume the business risk that the corporation will become insolvent before they receive their payout. Timing of payments to executives—but not to independent contractors, who are generally exempted from Section 409A—generally incorporates Section 409A restrictions on tax deferral, such as being paid to the executive on a fixed schedule.

The principal tax benefit of NQDCPs to the individual is the deferral of individual income tax on the deferred vested compensation, including the deferred compensation’s compounded investment yield, from the date the amounts vest until the date the individual receives the payment.

An individual’s decision to defer compensation generally reduces a company’s CAMT, which generally is based on a tentative tax of 15% of pretax GAAP income, with certain adjustments, minus a credit for regular corporate income tax. Companies can credit the increase in regular corporate income tax by reason of NQDCP deferrals against their tentative CAMT.

Generally, corporations may deduct compensation paid as an expense. However, Section 404 of the tax code defers the corporate tax deduction for vested compensation deferred pursuant to an NQDCP until payments are actually made to the employee or independent contractor. (See Albertson’s Inc. v. Comm’r.)

For corporations that are in a positive marginal regular corporate income tax position, the principal potential tax disadvantage of an NQDCP is the deferral until payment of the regular corporate tax deduction on the deferred vested compensation, including the compounded iinvestment yield.

CAMT is generally based on a tentative CAMT of 15% of pretax GAAP income, as adjusted, less a credit for regular corporate income tax. For GAAP purposes, a US corporation generally accrues compensation expenses under an NQDCP as the compensation vests to the individual, even though payment is deferred to a later date.

Unless future Treasury regulations provide otherwise, tentative CAMT generally will be unchanged by an individual’s decision to defer compensation into an NQDCP because it incorporates GAAP. This differs from regular corporate income tax.

At the same time, the increase in regular corporate income tax by reason of NQDCP deferrals is creditable against tentative CAMT. This means a US corporation consistently in the CAMT position may not suffer negative tax consequences from an individual’s decision to defer compensation through an NQDCP.

However, because of the interaction of various other tax provisions, a corporation seeking to determine the exact regular corporate tax and CAMT implications of proposed NQDCP deferrals would need to prepare projections.

Ford and ‘The Rock’

Ford has been cited as an example of a corporation that has paid some federal income tax, but in an amount much less than 15% of pretax GAAP income. Ford’s 2021 annual report shows a federal tax liability of $100 million, about 0.5% of its pretax GAAP income of $18 billion. A study using 2021 data showed Ford as the third-largest payor of CAMT.

Assuming Ford continues paying Johnson for his endorsement, that Johnson is satisfied with Ford’s credit, and that his agreement with Ford were hypothetically modified to incorporate a NQDCP, Johnson eventually could earn larger pretax and after-tax endorsement fees by reason of the tax deferral than if his fees were paid currently.

Both before and after 2023, Ford might well be subject to about a 21% current marginal regular federal corporate tax rate on any unpaid amounts hypothetically deferred by Johnson into an NQDCP. In post-2022 years when Ford is liable for CAMT, because such regular federal corporate tax may be creditable against Ford’s tentative CAMT, Ford might have no additional combined regular corporate tax and CAMT costs from any of Johnson’s hypothetical NQDCP deferrals.

Ford and other global corporations also need to consider OECD Pillar Two rules, which could apply if their US group’s annual effective US tax rate on its pretax GAAP income fell below 15%. Fortunately, OECD Pillar Two model rules generally take GAAP versus tax timing differences into account. It does so in a way that avoids creating a Pillar Two tax liability by reason of the current GAAP accrual of deferred compensation as contrasted with deferred tax deductibility under Section 404. Accordingly, an individual’s decision to defer income into an NQDCP shouldn’t increase a corporation’s Pillar Two tax.

Conclusion

Corporations that are currently subject to regular corporate income tax will temporarily, until payment occurs, incur corporate income tax costs on amounts individuals defer into their NQDCPs. Beginning in 2023, however, where such corporation is also subject to CAMT, the net marginal cost to the corporation may be eliminated.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, with a focus on income tax planning and controversies, including those related to international transactions.