Energy-efficient Renovations As A New Benchmark For Accounting: The Revised Version Of IDW RS IFA 1 In Germany

Background and relevance for tax advisory practice

The distinction between capitalised production costs and immediately deductible repair and maintenance expenses relating to buildings has long been a key issue in tax accounting. Driven by political initiatives promoting energy‑efficient refurbishment of existing buildings, its practical relevance has increased substantially. Important reference points are the Institute of Public Auditors of Germany (IDW)’s revised IDW RS IFA 1 (2024), and the German Federal Ministry of Finance (BMF) guidance of 26 January 2026, which are not fully aligned and may lead to divergences between commercial and tax accounts.

Production costs under Section 255(2) HGB

Under German commercial law, production costs arise not only from initial construction but also from subsequent measures that extend or materially improve a building beyond its original condition. The decisive benchmark is generally the building’s condition at the time of its initial recognition by the current owner. Measures that merely restore or maintain a contemporary standard qualify as repair and maintenance expenses, and are expensed immediately.

Extensions and rooftop photovoltaic systems

An extension exists if a building’s usable capacity or functionality is increased, for example, through structural additions or new functional components. Of particular relevance is the installation of rooftop photovoltaic systems. According to the IDW, such systems qualify as subsequent extensions if they are functionally integrated and form a uniform operational unit with the building – for instance, where installation is legally required or where the electricity produced is largely consumed within the building. In these cases, costs must be capitalised as subsequent production costs of the building. For tax purposes, photovoltaic systems are often still treated as separate depreciable assets, requiring careful differentiation.

Material improvements and core building features

A material improvement presupposes a substantial increase in utility value, typically evidenced by a higher standard. The catalogue of core building features has been significantly expanded by the revised IDW RS IFA 1. In addition to heating, sanitary equipment, electrical installations, windows, and insulation, it now includes energy generation, supply and storage systems, as well as IT and building automation. As a rule, a material improvement is assumed if at least three features are upgraded.

Energy‑efficient refurbishment

If energy‑efficient measures reduce end-energy demand or consumption by at least 30%, they are deemed equivalent to a standard upgrade under commercial law. The related costs must therefore be capitalised and depreciated over the remaining useful life. From a tax perspective, the rules on acquisition‑related production costs pursuant to Section 6(1) No. 1a of the German Income Tax Act (EStG) must also be assessed.

Advisory conclusion

Recent guidance significantly expands the scope of capitalisable costs, particularly regarding energy-efficient retrofitting. To ensure regulatory compliance and mitigate risk, we recommend prioritising early structural planning, maintaining rigorous technical documentation, and strictly separating commercial and tax accounts.