There is a 3 out of 5 year rule for the IRS to make a determination as to whether a business has a profit motive. The rule means that a business must show a net profit for 3 out of the first 5 years that the business is in operation or the IRS will make the determination that the business is a hobby.
If the IRS determines that the business is a hobby, they will change the tax returns that the business has filed under hobby income and expense rules (the income is reported on line 21 of the return, and the expenses are limited to the gross income and they are deducted as a miscellaneous itemized deduction.
This will have an effect on an NOL if the losses that generated the NOL were from the business losses.
