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.