Federal -- Wrong tax treatment

ChatGPT presented running a side business primarily as a tax-saving vehicle without adequately distinguishing that this strategy is largely beneficial only for the ultra-wealthy or those with genuine business profit motives. Under IRC §183 (hobby loss rules), a business must be operated with a bona fide profit motive to deduct losses; the IRS applies a facts-and-circumstances test, and expenses from an activity not engaged in for profit are non-deductible. For average earners, setting up a side business solely to generate deductions—without a real profit motive—risks IRS reclassification of the activity as a hobby, disallowing all related deductions and triggering back taxes, interest, and penalties.

A small business owner who follows this advice and deducts side-business losses without a genuine profit motive risks IRS audit, hobby-loss reclassification under IRC §183, disallowance of all claimed deductions, and assessment of back taxes plus accuracy-related penalties under IRC §6662.