Profit Motive

What Is the Profit Motive?

The profit motive is the intent to accomplish a monetary gain in a project, transaction, or material undertaking. Profit motive can likewise be understood as the underlying justification for why a taxpayer or company participates in business activities of any sort.

Basically, the profit motive proposes that individuals will generally make moves that will bring about them bringing in money (profiting). In economic idea, Adam Smith recognized the profit motive in his book, The Wealth of Nations, as the human propensity to truck, barter, and trade.

Figuring out the Profit Motive

Profit motive is believed to be one of the primary drivers behind economic activity. [Economists](/market analyst) have frequently attempted to figure out why individuals do the things that they do. A few responses point to simple survival. Much of the time, individuals need some form of income to pay for the necessities of life. Be that as it may, what drives certain individuals to face the challenge of starting a business or improving?

The response can be outlined in terms of a person's profit motive — the drive to attempt a few activity with the hope and expectation of being wealthier for doing as such. In this view, the explanation we live in a world of cell phones, fast fashion, and matcha lattes is on the grounds that somebody figured they could bring in money selling them.

The possibility of a profit motive was behind Adam Smith's invisible hand, which recommends that self-intrigued, profit-seeking people are extensively beneficial to society. Smith noticed that individuals seeking profit through the buying and selling of goods, for instance, help to successfully disperse capital and goods obviously better than a political body could.

How the Profit Motive Works

In theory, the profit motive aides everybody from people to corporations choose what to do at a particular time. Taking a gander at profit, or the potential for profit, works on numerous decisions. On the off chance that a company makes five distinct products and procures the vast majority of its profit from just two, then the profit motive view would recommend that the company dump the unprofitable lines and invest more in the profitable [production lines](/product offering).

Essentially, a person would need to zero in on the activities or employment opportunities that offer the most return for their efforts. For certain individuals, this will mean the highest paying job. For other people, it might mean making their own enterprise bearing in mind the end goal of a higher income later on.

The profitability of a particular activity is, in theory, conveyed by market flags that eventually are a function of supply and demand. The higher the demand (or likely demand), the higher the profitability (or expected profitability). At the point when the profitability is high, more individuals and businesses will search out that activity.

While profit being part of the motivation behind all habits of economic activity isn't dubious in itself, there has been more examination and analysis around applying it as the main factor in decision making.

Studies of the Profit Motive

In practice, the profit motive is one of many factors that impacts how individuals and businesses act. Individuals, in particular, pursue their choices in view of a number of social and personal motivations past profit.

Individuals might pick a less profitable activity since it benefits them in alternate ways that are not estimated in terms of money. Businesses, too, are being urged not to zero in exclusively on profits, particularly with the push for environmental, social, and governance (ESG) criteria.

The pushback against the profit motive as the principal driver behind decisions is many times associated back to the fallout of the 2008 financial crisis and the recession that followed. Corporations exclusively persuaded by short-term profits and boosted to look for them by investment capital unleashed destruction on a highly interconnected global economy.

Albeit a significant number of the scrutinizes and reactions were targeted at companies searching for excess profits while disregarding inherent risks, the possibility of the profit motive being a kind force acting on society was likewise a successive target. While the possibility of the profit motive is as yet considered extensively right and able to make sense of economic activity overall terms, it isn't meant to be a playbook for companies to use in the entirety of their decisions.

Profit Motive and Taxation

The profit motive is utilized in a more humble manner as a characterizing factor in tax decisions. As indicated by the Internal Revenue Service (IRS), taxpayers might deduct ordinary and fundamental expenses for leading a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer's trade or business. A vital expense is one that is fitting for the business. Generally, an activity qualifies as a business in the event that it is carried on with the reasonable expectation of earning a profit, that is to say, an activity embraced with a profit motive.

Profit motive is likewise which isolates a hobby from a business according to the IRS — losses from a hobby are non-deductible since there is no intent to create truly economic gain. Since side interests are activities participated in for self-delight, losses incurred from taking part in them can't be utilized to offset other income. Hobby income, even if periodic, must be reported as "ordinary income" on Form 1040.

Taxpayers used to have the option to deduct hobby losses as a miscellaneous itemized deduction on Schedule A, yet the Tax Cuts and Jobs Act of 2017 wiped out that deduction.

Another way a business owner can lay out profit motive is by showing that they worked for profit under the IRS's nine criteria profit motive test. The nine critical factors utilized by the IRS to determine whether a business is run for profit or as a hobby are:

Whether the activity is led in a business-like way
The ability of the taxpayer or their guides
Time and exertion spent in operating the business
The probability that the business assets will see the value in esteem
Past outcome of the taxpayer in participating in a comparable (or divergent) adventure
History of income or loss of the activity
Amount of any intermittent profits acquired
Taxpayer's financial status
Any components of personal joy or entertainment

Highlights

Profit motive is likewise a technical term involved by taxing specialists to lay out a basis for demanding taxes.
As a result of the profit motive, individuals are induced to design, develop, and face challenges that they may not in any case seek after.
The profit motive alludes to a singular's drive to attempt activities that will yield net economic gain.