Katie operates a ceramics studio from her garage. She incurs the following expenses:
Clay and paints $3,500
Painting technique seminars 400
Pottery wheel 75
Utilities for the ceramic studio 375
Personal property taxes on ceramic equipment 50
Katie's gross receipts from her business were $2,000.
a. If the studio is deemed to be a hobby, then calculate the amount of expenses Katie may deduct, and describe how she may report the income and expenses on her tax return.
b. If the studio is not a hobby, then calculate the amount of expenses Katie may deduct, and describe how she may report the income and expenses on her tax return.