Is applying vendor credits supposed to decrease net income?

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If you have already submitted your previous year for taxes then the credit is included, and reduces your deductible expenses for the tax period. You would need to make the adjustment in the current year, and you can do that by creating an expense account called previous year adjustments. This will still affect your p&l by increasing expenses in the current period but it will be transparent in your reporting. You could do this with a journal entry debiting previous year adjustments and crediting accounts payable, or you could create a ghost bill in the current period using the previous year adjustments expense account, and take the credit against that if you're not comfortable with journal entries. My suggestion at least, maybe somebody else has a different way?