The IRS pays close attention to deductions claimed for business travel expenses. As a result, both employers and employees must meet strict record-keeping requirements or face the consequences. Fortunately, you can obtain some relief by using IRS-approved per diem allowances in lieu of accounting for every expense.

The per diem rates are actually the allowances approved for travel by U.S. government employees. However, a business owner cannot use either type of per diem allowance if he or she owns 10% or more of the company.

There are two basic per diem rates. The first rate is based separately on the employee’s travel destination. The second rate depends on the annual “high-low” rates established each year for certain areas.

Starting Point: As long as employees properly account for their business travel expenses, including the cost of meals and lodging, employer-paid reimbursements are tax-free to the employees and deductible by the company. But this can lead to a record-keeping nightmare. With a per diem allowance, employees don’t have to keep receipts for all of their travel expenses. The employer simply pays the government-approved allowance -- no muss, no fuss.

Employees don’t even have to report the payments on their tax return. However, they still must substantiate the time, place and business purpose of their business travel. In addition to adjusting the allowances for each specific travel destination, the government establishes a flat rate for certain high-cost areas.

The list of high-cost areas includes industry centers like New York and Chicago. In addition, other areas may be included on a seasonal basis, such as Miami in the winter or Nantucket in the summer. All the locations that are not listed as high-cost areas automatically fall into the low-cost category.

New Rates: The IRS recently announced new per diem rates for the 2007 tax year. It has increased the approved per diem rate for high-cost areas to $246 ($188 for lodging plus $58 for meals and incidental expenses). That represents a substantial $20-per-day increase from over a year ago. In recent years, the annual increase has been only a few dollars.

The IRS-approved per diem rate for all other destinations is $148 ($103 for lodging and $45 for meals and incidental expenses). This represents a $7-per-day increase from the $141 rate established a year ago.

Note: These new rates may be used for business travel expenses incurred after September 30, 2006.

To reduce the paperwork burden, you might use the high-low method for employees who travel extensively, especially if they generally are traveling to major cities. On the other hand, you can require other employees to use the specific-location method if they frequently travel to low-cost areas. Finally, you can have those employees who travel infrequently keep detailed records of their actual expenses.

1. Classroom teaching can be an effective way to train workers, especially in more basic skill areas. Community colleges are often a good resource for companies. Almost all of them have evening classes, while many also hold classes early in the morning.
   
   Frequently, these schools will work with your company to create specific courses for your employees and schedule them at off-hours. In some cases, the courses are given right on the business premises.
2. Consider audio and video tapes and similar media that enable employees to improve their skills in the car or at home. Besides providing flexibility, media may hold an employee’s attention better than a classroom lecture.
   
   Also, a video may demonstrate skill techniques, present information in a dramatic and meaningful way or highlight information by means of charts and graphs in ways that might not be easily done in a classroom. It can even bring an employee into a new facility before it is completed.

3. Computer-based training may also help employees improve certain skills. For example, some educational software companies have developed courses so employees can progress at their own pace. A course may even have a built-in examination that is graded by the computer on the spot.
4. One of the latest technological advances in training is the interactive video disk. Computers with CD drives and video cards, as well as home interactive video systems, can be used as powerful training tools. They are designed to combine some of the best aspects of classroom instruction, video courses and computer-based educational software.
   
   In effect, employees go one-on-one with the interactive course. The courses can truly be multimedia lessons, with text, graphics, voice, music, motion pictures, charts, graphs and animation aids added to the mix. Training progresses at the learning pace of each individual employee instead of a teacher’s pace or the pace of the slowest learner.

Although you may have spent years building up a business, your family may be forced to sell it soon after your death to pay the federal estate-tax bill. The full amount of the estate tax is generally due nine months after an individual’s death. Although the federal estate tax is scheduled to be repealed in 2010, it will be revived in 2011 unless subsequent legislation is enacted. However, there is some possible estate-tax relief if a family inherits a small business.

Key Point: Assuming the estate qualifies, an election can be made to pay no tax on the business interest for five years. What’s more, subsequent payments can be stretched out over ten years.

Result: The family can take up to 15 years to pay the tax. (Actually, it is a 14-year period, since the due date for the last installment of interest coincides with the first installment of tax.)

There is one catch. Interest must be paid each year on the unpaid portion of the tax. But the estate pays only 2% interest on the amount attributable to the first $1 million (adjusted for inflation) of the taxable value of the business interest. For 2007, the adjusted figure is $1.25 million. The interest rate for tax underpayments applies to amounts in excess of the $1.25 million threshold.

When does an estate qualify for the estate-tax deferral? Generally speaking, the business must comprise at least 35% of the adjusted gross estate. Your adjusted gross estate is the gross estate less any expenses, debts and losses.

In addition, you must have operated the business as one of the following: (1) a sole proprietor; (2) a partner with an interest of 20% or more in the partnership, or with an interest in a partnership that has no more than 45 partners; or (3) a corporate stockholder owning 20% or more of the voting stock, or owning stock in a corporation with no more than 45 shareholders.

Finally, a proper notice of election must be attached to a timely estate-tax return.

• Improved Tax Mileage
• Pass-through Entities

The IRS has announced the annual increase in the standard mileage rate for business drivers. For the 2007 tax year, you can deduct a flat rate of 48.5 cents for every business mile traveled (up from 44.5 cents per mile in 2006) plus business-related tolls and parking fees. This deduction may be claimed in lieu of deducting your actual expenses for business use of a vehicle such as depreciation, oil and gas, insurance, repairs, etc.

According to a recent report by the U.S. Treasury Inspector General for Tax Administration (TIGTA), we are experiencing substantial growth in the number of S corporations and partnerships. For the period between 2000 and 2004, S corporation and partnership returns increased from 4.96 million to 6 million (up 21%). The annual returns for these pass-through entities are projected to reach 8.49 million by 2012 (up 42% from 2004).