Distinction between Acquisition Costs, Production Costs, and Maintenance Expenses

1. Introduction

In the field of taxation and accounting, the precise distinction of terms is important, as otherwise serious errors can occur. This information sheet explains how to distinguish the term acquisition or production costs from the term maintenance expenses. In principle, acquisition or production costs for an asset must be systematically depreciated over their useful life. The potentially tax-reducing effects therefore occur gradually. Especially for buildings or generally depreciable assets with a long useful life, it can take years for a tax impact to be fully noticeable.

Maintenance expenses, on the other hand, are in principle fully tax-deductible in the year they are incurred and thus reduce income. The more expenses are considered maintenance expenses, the greater the possible, timely tax reduction.

2. Definitions

2.1 Acquisition Costs

Acquisition costs of an asset are all expenses incurred to acquire the asset and bring it to a condition suitable for its intended purpose (operational readiness). The commercial law definition of acquisition costs in § 255 paragraph 1 of the German Commercial Code (HGB) is also decisive for tax law.

The classic case is the delivery of an asset, such as a machine. Upon acquisition, the recipient receives an already completed asset without any action on their part. Incidental acquisition costs (e.g., freight costs) or subsequent acquisition costs (e.g., through extensions) are also included in the definition of acquisition costs.

2.2 Production Costs

Production costs are defined as expenses incurred through the consumption of goods and the use of services for the production of an asset, its extension, or a substantial improvement beyond its original condition. The commercial law definition of production costs in § 255 paragraph 2 HGB is also decisive for tax law.

It is important that in production, a previously non-existent asset is newly created, for example by constructing a building or producing goods.

2.3 Maintenance Expenses

Maintenance expenses involve repairing, maintaining, or modernizing something that already exists. They mainly include repair expenses, maintenance costs, and servicing costs.

3. Acquisition/Production Costs vs. Maintenance Expenses for Buildings

3.1 Acquisition-Related Maintenance Expenses

Under certain circumstances, maintenance expenses on a building can also be considered part of the production costs of a building. This applies to repair and modernization measures carried out within three years after the acquisition of the building, if the expenses exceed 15% of the acquisition costs of the building excluding VAT.

3.2 Distribution of Maintenance Expenses

According to § 82b of the Income Tax Implementation Regulation, there is an option to distribute larger maintenance expenses over several years. This can be particularly useful to allocate expenses precisely in the years when higher positive income is expected.

3.3 Substantial Improvement as Subsequent Production Costs

If modernization expenses result in a substantial improvement of a building in the overall view, they are reclassified as subsequent production costs of the building.

3.4 Other Special Cases

4. Acquisition/Production Costs vs. Maintenance Expenses in Other Areas

4.1 Fitted Kitchens in Rented Apartments

According to the case law of the Federal Fiscal Court (BFH), a fitted kitchen is treated as a single asset, even if it consists of several components.

4.2 Maintenance Expenses for Software

For custom software developed or adapted exclusively for a specific user (e.g., ERP systems), adapting to new requirements or major updates often entails significant programming work.

5. Gratuitous Acquisition

If a property is acquired gratuitously (by way of gift or inheritance), expenses for construction measures that bring a building to an operational state do not result in acquisition costs due to the lack of acquisition.

6. Burden of Proof

The burden of proof for facts that justify the treatment of expenses as acquisition or production costs lies with the tax office.