Rent collected early (for example, January rent paid in December) sits in a prepaid liability account until it’s applied. The IRS generally treats rent as income when it’s received, so turning on Include Prepayments adds that money to the 1099 for the year it came in.
The Prepayment Amount is the net change in the owner’s prepaid balance from the start of the tax year to the end of it. Prepayments carried in from last year and applied this year bring it down. New prepayments collected this year bring it up.
Where Include Prepayments is set
Settings › Tax Reporting: Include Prepayments by Default turns it on for every compile.
Tax Reporting › Actions › Recompile: the Include Prepayments toggle lets you change it for that compile.
Run a General Ledger for your prepaid account
Go to Reports and open General Ledger.
Set Date Range to the tax year (for example, Last Year).
Set Account to Equals and choose your prepayment account (for example, 2300: Prepaid Rent). Not sure which one? In Settings › Chart of Accounts, open the account and look for Tracked as Prepayment: Yes.
In Ledger, choose the owner’s portfolio.
Set Cash / Accrual to Cash and click Build Report.
Read the net change year over year
The report opens with a Starting Balance row, lists each debit and credit, and ends with a Totals row. Because prepaid rent is a liability, balances show as negative numbers.
Examples | |
Starting Balance (Jan 1) | -$1,500.00 |
Ending balance (Dec 31) | -$2,000.00 |
Net change | $500.00 more held in prepaid |
Prepayment Amount on 1099 | $500.00 |
If the ending balance is smaller than the starting balance, more prepaid rent was applied than collected, and the Prepayment Amount can be negative.
Compare last year to this year
Run the General Ledger once for Last Year and once for This Year.
Last year’s Starting Balance is the prepaid rent carried in from the year before.
Last year’s ending balance should equal this year’s Starting Balance. That’s the carryover.
Each year’s net change is that year’s Prepayment Amount.
Cross-check with Cash Flow Annual
Run Cash Flow Annual for the same year and portfolio, with Include Prepayments set to Yes. Your prepaid account shows as its own line under Adjustments (for example, 2300: Prepaid Rent). That line equals the General Ledger’s net change for the year. If the two reports agree, you’ve confirmed the Prepayment Amount.
The Income section of the Cash Flow Annual report is the same whether Include Prepayments is Yes or No. Prepayments only show under Adjustments.
Need lease-level detail on what’s held right now? Run the Prepayments report under Lease Reports.
Frequently Asked Questions
Can the Prepayment Amount be negative?
Yes. If more prepaid rent from last year was applied than new prepaid rent came in, the net change is negative.
Should I include prepayments?
That’s a decision for you and your tax advisor. Whatever you choose, use the same setting on your reports so they match the 1099.
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