"There is a champagne mood in German boardrooms," said the institute, whose closely watched business confidence index rose to 114.6 points from 113.01 in April.
"This is the highest level since 1991. Both the current situation and expectations have been clearly corrected upwards by companies," said Ifo.
The bounce was underpinned by positive data from manufacturing and construction.
Manufacturers are reporting the best business climate since July 2011, while construction struck record levels since 1991.
"The prospects for the German economy are as bright as this week's weather across the entire country," noted Carsten Brzeski from ING, as Germany enjoyed a string of sunny days.
"The economic recovery is still going strong, even though it is already in its ninth year of expansion. Remarkably, growth is now broadly spread across all sectors," he said.
The German economy expanded by 0.6 percent in the first quarter, the federal statistics office said Tuesday, confirming preliminary data released earlier in May.
The government expects growth to hit 1.5 percent for the full year, while several economists have given more optimistic readings and predicted that it would reach at least last year's level of 1.8 percent.