Final answer:
Business or investment expenses are deductible only if there is an intent to make a profit, which is true. Profit is the main motivator for business decisions, expansion, and market entry, and lack of profit can result in a business exiting the industry.
Step-by-step explanation:
It is true that business or investment expenses are deductible only if the taxpayer can demonstrate that the activity was engaged in with the intent to make a profit. The crucial measurement for staying in business is profit, which is calculated as total revenue minus total cost. For an expense to be deductible, it must be considered an ordinary and necessary expense incurred in the pursuit of profit. This principle aligns with the broader objective of most business decisions, which are made in pursuit of profit—the difference between the cost to produce a good and the price received from selling it.
Profitability is a key motivator in a competitive market that influences companies to develop, expand, and innovate. Profit acts as a 'red cape', inciting businesses to take action, such as expanding factories or building new ones. Similarly, when other firms notice increased profits within an industry, they may enter the market, which is known as entry. On the contrary, when businesses are not successful and fail to turn a profit, it often leads to their exit from the industry. This is a natural part of the market cycle, as firms cease to exist when they cannot sustain profitability.