(FORTUNE Small Business) – Every year more small-business owners get whacked by the IRS through the alternative minimum tax (AMT). Created in 1969 and intended to prevent very wealthy Americans from avoiding taxes altogether, the AMT wasn't indexed to inflation, so it now hits taxpayers who earn as little as $100,000 a year. Business owners who live in states with high income and property taxes are especially susceptible. And some investments designed to legally avoid taxes--such as muni-bond funds--can cause more headaches under AMT rules.

It's a bleak picture, but here's good news: Fidelity, Oppenheimer, and other companies are offering new mutual funds managed so that their gains will be exempt from the AMT.

Municipal-bond funds are typically used by high-income investors to generate interest that is free from federal tax and sometimes state tax as well. But once you fall into AMT territory--as 3.2 million taxpayers will in 2004 and as 33 million will by 2010--much of that interest can suddenly become taxable. "This is a subject people never thought about before--are portfolio managers investing in bonds that are subject to the AMT?" says Eric Nottonson, vice president of product management for fixed-income funds at Fidelity Investments. In October, Fidelity shifted the holdings in its Spartan Tax-Free Bond fund to avoid bonds that are subject to the AMT, and in January it started offering six AMT-free money market funds as well.

What AMT-shy investors have to watch out for, in tax-code parlance, is "private activity bonds." They are muni bonds that benefit a private party in some way, such as those that fund construction of an airport or a sports stadium, or a bond that funds certain types of bundled mortgages. The average U.S. bond fund held 13% of its assets in such bonds as of 2003, according to Tom Roseen, senior research analyst at Lipper Group, which tracks the mutual fund industry. Fund managers buy the bonds because they pay a slightly juicier yield--about three-tenths of a percentage point higher than a comparable regular muni bond. That spread could widen to five-tenths in the next few years, estimates Ron Fielding, portfolio manager of Oppenheimer AMT-Free Municipal fund, as more investors demand non-AMT bonds. Before it went AMT-free in early 2003, Fielding's fund held about 20% private-purpose bonds.

Investing companies will probably roll out more of these products and convert existing bond funds. Before you switch, though, you should have your accountant or financial advisor perform an AMT calculation to figure out whether they make sense for your portfolio. "If you're not subject to AMT, buy the regular muni-bond fund and take the slightly higher yield," says John Nersesian, managing director for wealth management at Nuveen Investments. "If you're reasonably confident that you are subject to AMT, take the lower-yield bond that is free of taxes." For AMT payers or borderline cases, that extra yield is minor compared with knowing that your tax-free investments are genuinely tax-free.