Your Client, Ashley Mason, is an artist who specializes in henna tattoos. Four years ago, she entered into a five$-$year contract to rent a kiosk inside the local mall to sell henna tattoos to customers. She called the business $$Ashley$$s Arm Brands$$ and hired two other local artists to assist in the work. She opened a separate bank account to keep track of the business cash, and she tracked all expenses and income using a detailed spreadsheet. She is not incorporated.

In the first year, the business did fairly well, but then revenues and customer interest declined. Another local artist opened a competing henna studio at a nearby location that seemed to get more foot traffic and was able to bring in celebrity artists to complete work. Ashley increased her marketing and advertising, including creating both a webpage and a Facebook page, offered discounts and contests, and created deals with other kiosks to increase business.

Ashley works at the mall kiosk almost $40$ hours a week. She is there in the evenings for several hours and then all day on weekends. She also has a full$-$time job Monday through Friday doing graphic design for a local marketing company that specializes in webpage design. This job pays her about $$73,000$ a year in salary.

Ashley has decided that she will give the business one more year, even though she has reported losses every year, except for the first year. Her losses in the past three years have been $$17,456$; $$13,920$; and $$22,825($current year loss$).$ Most of her expenses are from the monthly rent of the kiosk and paying the other two artists, who work on commission plus a low hourly wage.

Ashley recently had a friend who was audited by the IRS regarding his small business and whether he could deduct his losses. The IRS classified his business as a hobby. Ashley is worried and has approached you to advise her if she has been correct in reporting as a business. After deducting the losses from her ordinary income, she is in the $15\%$ marginal tax bracket. She fears next year could be even worse in terms of revenue.

Determine what IRS forms Ashley would use to report the activity's income and expenses if it is deemed a hobby.

Determine what IRS forms Ashley would use to report the activity's income and expenses if it is deemed a business and One other form she would probably need to fill out related to this business.

Do you think Ashley is running a business or engaging in a hobby? Explain in one$-$two paragraphs. Support your answer with at least two additional primary sources.