Don't get audited! Are you reporting THIS in your 1099s?
Updated: 11/30/2022
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 just may be overstating the income on your owner's 1099-MISC. Additionally, suppressed fees can be a culprit for 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) that posts on their ledger. For example, if Sally Joe has a balance of $50.00 on 12/15/2022, 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) posts, then the prepaid rent will apply and leave her with a $0.00 balance.
What is a suppressed fee?
A suppressed fee is a fee that is collected in addition to your standard management fees and is 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.
In order to maintain suppression, the property management company needs to collect them in the same month they are received. Also, they cannot be paid by a prepayment because that breaks the suppression in AppFolio.
<blog-cta>Have more questions on suppressed fees? We are happy to help!<blog-cta>
Prepayments and Suppression
When you combine prepayments and suppressed fees you get a nasty situation that will affect you and your owners. As I previously mentioned, prepayments should never apply to a suppressed fee, otherwise, the owner's statement will be off by that amount. However, this shouldn't be your biggest concern.
If a prepayment is made in December 2022 and that applies to a suppressed charge in January 2023, then your owner will be taxed on the prepayment, but will never actually receive a cent of that income. This is a big issue, right? So, how do you check your books and make sure that this isn't happening?
Finding a suppressed fee paid by a prepayment
To double-check if you have this issue in your AppFolio database, please follow these steps:
- Run a Charge Detail report
- Properties > All
- Tenant Status > All
- GL Accounts > Check all suppressed additional fee GLs
- Date range > 01/01/2023 - current date
- Status > Paid
- Grouping > "Do not group rows"
- Run the report
On this report, you're going to pay attention to the "Type - Receipt Date - Reference" column. If you see one that has something like "ACH (or CC) - 01/01/2023 - ABCD-1234", then you're in the clear. However, when you see a receipt that simply has a date, such as "01/01/2023", then that most likely suggests a prepayment is paying that charge.
Once you select the charge amount, you should see "Receipt Amount 0.00", if you don't, close out of the charge, it's not an issue. Click the 0.00, which will bring up the zero dollar receipt. At the bottom, you will see something like this:
<blog-cta>Need help tracking down these charges? Reach out to us today!<blog-cta>
Correcting a suppressed fee paid by a prepayment
Once you've found a charge that is paid by a prepayment, then you will need to make the following corrections:
- Click the "Prepaid Rent" line and that should pull up the original payment
- "Reapply Receipt" under "Tasks"
- Type the amount of the suppressed charges to the right of each to apply the receipt directly to it
- Check "Make Prepayment?" at the bottom to apply the remainder towards prepaid rent
- Click "Reapply"
- Go to the tenant page > Apply Credits under tasks. Refresh the page if you don't see the option
- Apply the outstanding prepayment to the outstanding charges
- Save
Now, run a Cash Flow report and Exclude Suppressed Fees (dated 01/01/2022 - 12/31/2022) for all properties. See a suppressed fee? Then keep reading. The suppressed balance shows on some Cash Flows, the reason isn't too clear why. If you see a suppressed fee, you will need to make a series of Journal Entries on the affected properties.
Below outline the journal entries you will need to make to correct this error:
Journal Entry #1:
Date: 12/31/2022
Debit(s) Suppressed Fee account(s)
Credit 2120: Security Deposits Clearing (your clearing GL number and name may differ, see Accounting Settings to verify your clearing account if you're not sure)
Journal Entry #2:
Date: 01/01/2023
Debit 2120: Security Deposits Clearing
Credit(s) suppressed fee account(s)
We know, it's a lot of steps. Unfortunately, if these items are not corrected, then you will be overstating income on your 1099-MISCs and it will not just "work itself out" in 2023 unless the tenants make the exact same prepayment.
Did you learn something new?
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