Katie operates a ceramics studio from her garage. She incurs the following expenses:

Clay and paints $3500

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.

Instructions: Answer the following questions.

1. If the studio is deemed to be a hobby, then calculate the amour of expenses Katie may deduct, and explain how she may report the income and expenses on her tax return.

2. If the studio is not a hobby, the calculate the amount of expenses Katie may deduct, and explain how she may report the income and expenses on her tax return.