Updated: 10/07/2024

January is a stressful time of year, mainly due to tax season. If you're a property manager, you are most likely worried about the accuracy of your 1099-MISCs and 1099-NECs. There are a lot of things that need to be reviewed before you finalize your 1099s, one of those being prepaid rent.

If the prepayment balance is inaccurate, then you may over or under state the income on your owner's 1099-MISC. Additionally, under or over collected suppressed fees can cause inaccurate balances. Keep reading to learn more about how they affect prepayments and your 1099-MISC total.

What is a prepayment?

A prepayment, or prepaid rent, is a payment made by a tenant that exceeds their current balance. The excess funds then apply to the next charge(s) on their ledger. For example, if Sally Joe has a balance of $50.00 on 12/15/2024, and she makes a payment of $1,500, then she has a prepaid balance of $1,450. Once her rent ($1,425) and property insurance ($25) post, the prepaid rent will apply, leaving her with a $0.00 balance.

What is a suppressed fee?

A suppressed fee is a fee collected in addition to your standard management fees and suppressed from the owner's statement because you collect 100% of that income. Typically, we see suppression apply to accounts like Application Fees, NSF Fees, Property Insurance, and Late Fees.

To maintain suppression, the property management company needs to collect them in the same month they are received. They cannot be paid by a prepayment because this breaks the suppression in AppFolio if prepaid rent is not suppressed from the owner’s statement.

Prepayments and Suppression

When you combine prepay from 1099 reporting, which is common. This is a big issue, right? So, how do you check your books to ensure this isn't happening?

Finding a suppressed fee paid by a prepayment

To double-check if you have this issue in your AppFolio database, follow these steps:

1. Run a Charge Detail report

1. Properties > All
2. Tenant Status > All
3. GL Accounts > Check all suppressed additional fee GLs
4. Date range > 01/01/2024 - current date
5. Status > Paid
6. Grouping > "Do not group rows"
   

2. Run the report‍

On this report, focus on the "Type - Receipt Date - Reference" column. If you see something like "ACH (or CC) - 01/01/2024 - ABCD-1234", you’re in the clear. However, if you see a receipt with just a date, such as "01/01/2024", that suggests a prepayment is paying that charge.

Click the charge amount to check the "Receipt Amount 0.00." If you don't see that, close out, as it’s not an issue. Click the 0.00 to bring up the zero-dollar receipt. At the bottom if you see “Prepaid Rent” as the credit, you have found an issue. Here is an example:ments and suppressed fees, it can cause significant issues for you and your owners. Prepayments should never apply to a suppressed fee, as it will throw off the owner's statement by that amount. However, this shouldn’t be your biggest concern.

If a prepayment is made in December 2024 and applies to a suppressed charge in January 2025, your owner will be taxed on the prepayment but will never actually receive that income if the additional fee GL account is exempt 

‍Correcting a suppressed fee paid by a prepayment

Once you've found a charge paid by a prepayment, follow these steps:

1. Click the "Prepaid Rent" line to pull up the original payment
2. "Reapply Receipt" under "Tasks"some text
   • Type the amount of the suppressed charges to the right of each to apply the receipt directly to them
   • Check "Make Prepayment?" at the bottom to apply the remainder towards prepaid rent
3. Click "Reapply"
4. Go to the tenant page > Apply Credits under tasks (refresh if needed)
5. Apply the outstanding prepayment to the outstanding charges
6. Save

Now, run a Cash Flow report and exclude suppressed fees (01/01/2024 - 12/31/2024) for all properties. If you see a suppressed fee, continue reading. The suppressed balance may appear on some Cash Flows; the reason isn't always clear. If you find one, make the following journal entries to correct it.

Journal Entries to Correct Suppressed Fee Errors

Journal Entry #1:

• Date: 12/31/2024
• Debit: Suppressed Fee account(s)
• Credit: 2120: Security Deposits Clearing (your clearing GL number and name may differ, see Accounting Settings to verify)

Journal Entry #2:

• Date: 01/01/2025
• Debit: 2120: Security Deposits Clearing
• Credit: Suppressed fee account(s)

If these items are not corrected, you may overstate income on your 1099-MISCs, and it won’t "work itself out" in 2025 unless the tenants make the exact same prepayment.

For more help on 1099 preparation, get our guide that helps property managers streamline tax reporting across all major software platforms, including AppFolio, and ensure IRS compliance. Download the guide, today!

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Need expert help?

You don’t have to do it alone! Our experts are here to assist you. We can clean up your books and help you get ready for the new year. Contact us today to schedule a free 30-minute consultation with our experts.