Here’s a practitioner-style, everything-you-need guide to Local Business Permit “Tax Credit” vs BIR Income Tax in the Philippines—what each levy actually is, how they interact (or don’t), how to treat them on your books and returns, and the traps that cause disallowance. (As requested, no web search used.)

Big picture (read this first)

Local business taxes/fees are LGU impositions (city/municipality/barangay) under the Local Government Code (LGC). They include the local business tax (LBT), mayor’s/business permit fees, regulatory fees (sanitary, garbage, fire clearance), and surcharges/interest for late payment.
BIR income tax is a national tax under the NIRC.
LGU “tax credits” (or overpayment credits) cannot be used to pay BIR income tax. Jurisdictions and funds are separate. There is no cross-offset between an LGU-issued credit and national internal revenue taxes.
Proper treatment for LBT and permit fees vs BIR income tax is almost always as a deductible expense, not as a credit against income tax due (with the usual itemized-deduction caveats).

1) What counts as “local business taxes/fees”

Typical line items when you renew a business permit each January (or upon start-up):

Local Business Tax (LBT): Based on prior-year gross sales/receipts (or fixed schedules for certain activities).
Mayor’s/Business Permit fee: Regulatory license fee to operate.
Regulatory fees: Sanitary, garbage, signage/billboard, zoning, fire inspection, etc.
Barangay clearance fee (often a prerequisite to the mayor’s permit).
Surcharges/interest for late filing/payment (LGU code-based).

Some LGUs issue Tax Credit Memos (TCM) or “overpayment credits” when you’ve paid too much. These are LGU-only instruments—usable to offset future LGU liabilities (next quarter’s LBT, next year’s renewal), not BIR taxes.

2) Why an LGU “tax credit” can’t pay your BIR income tax

Different taxing authorities: A city/municipality can’t extinguish your national tax debt to the BIR, and vice versa.
Different legal bases and treasuries: LGU collections go to the local treasury; BIR collections to the national treasury.
Only BIR-origin tax credits offset BIR income tax (e.g., creditable withholding taxes, prior-year excess quarterly income tax, BIR-issued TCCs). LGU credits do not qualify.

Bottom line: Treat an LGU TCM as “Other current asset—LGU tax credit” (to be used against later LGU dues), not as a reduction of your BIR income tax payable.

3) How local taxes/fees affect your BIR income tax

A) Deductibility (Itemized deductions)

General rule: Taxes paid or incurred in connection with trade, business, or profession are deductible, except:
- Income tax itself (national or foreign),
- Estate and donor’s taxes, and
- Special assessments.
Thus, LBT, mayor’s permit fees, barangay fees, environmental/inspection fees, and similar LGU charges are ordinarily deductible as Taxes and Licenses (or split into Taxes and Regulatory/License fees in your chart of accounts).
VAT interaction: Local taxes/fees are not input VAT; they do not create a VAT credit. They are simply cost/expense.

B) Optional Standard Deduction (OSD)

If an individual or corporation opts for OSD in lieu of itemized deductions, you cannot separately deduct LBT/permit fees. The OSD is your only deduction.
Choose OSD only if it’s more tax-efficient than itemizing (run the math).

C) Timing (accrual vs cash)

Accrual basis: Deduct when the liability is fixed and determinable (e.g., at year-end when LBT for the next renewal can be computed based on final gross). Conservatively, many claim the deduction when paid at renewal to avoid timing disputes.
Cash basis: Deduct when paid.
If you accrue and later receive an LGU credit/refund, record the credit as a reversal (or other income) in the year received/approved.

D) Surcharges, penalties, interest

Conservative approach: Do not deduct surcharges and fines/penalties for violation of law (late payment). Treatment of interest on delinquent local taxes is more nuanced; some take the conservative view to disallow it along with surcharges. If you do deduct, document the business nexus and be ready to defend reasonableness.
Best practice: Avoid the issue—pay on time.

4) How it shows on your returns & books

A) Income Tax Return (ITR)

If itemizing, include LBT and permit/regulatory fees under “Taxes & Licenses” (or equivalent line).
Do not place LGU amounts under “Tax Credits/Payments.” That section is for BIR credits (CWT/expanded withholding, prior quarter payments, foreign tax credits where allowed, BIR TCCs, etc.).

B) Financial statements (typical accounts)

Taxes and licenses – Local business tax (expense)
Taxes and licenses – Business permit/other LGU fees (expense)
Other current assets – LGU tax credit/TCM (if any)
Accrued taxes and licenses – LGU (liability at year-end, if unpaid)

Sample entries (illustrative):

Upon payment at renewal
- Dr Taxes & licenses – LBT …… XXX
- Dr Taxes & licenses – Permit/fees …… XXX
- Cr Cash ………………………………………… XXX
If overpayment credited by LGU (TCM issued)
- Dr Other current assets – LGU tax credit …… XXX
- Cr Taxes & licenses – LBT (or Other income) …… XXX (choose consistent policy)
When using the TCM on next LGU bill
- Dr LBT payable …… XXX
- Cr Other current assets – LGU tax credit …… XXX

5) Common edge cases & answers

Q: Our city gave us an “excess credit” for LBT; can we net it against percentage tax or income tax? A: No. Use it only against future LGU liabilities in that LGU (per the TCM terms). It cannot offset BIR taxes.

Q: We’re VAT-registered. Can LBT be treated as input VAT? A: No. LBT is not VAT. Record it as expense (or part of cost).

Q: We chose OSD this year. Can we still deduct the LBT we paid? A: No. OSD replaces all itemized deductions.

Q: We accrued LBT at year-end, then the LGU granted an incentive/discount or audit reduced our base. A: Adjust the accrual; any reduction/refund/credit becomes other income or a reversal of the expense in the period granted.

Q: Are barangay fees and regulatory fees deductible? A: Yes, as part of business taxes and licenses (itemized), provided they are ordinary and necessary for operations.

Q: We paid late; can we deduct the LGU surcharge/interest? A: Safest stance: do not deduct surcharges/fines (they’re penalties). Interest is debatable—many adopt the conservative non-deductible view for delinquency interest tied to a violation. If you claim, document and be prepared for challenge.

Q: Do we need withholding on LBT or permit fees? A: No. These are government taxes/fees, not payments to a supplier subject to withholding.

Q: We operate in multiple cities. Can an overpayment credit in City A pay our LBT in City B? A: No. LGU credits are not cross-LGU fungible unless the LGU itself allows intra-city transfers across separately billed lines under its own rules.

6) Planning tips to avoid disallowances

Pick a method and be consistent: If you accrue LBT at year-end, document your computation (final gross, LGU rates/tiers). If you cash-basis the expense at renewal, keep the official receipts.
Separate taxes from penalties in your ledgers—don’t lump them.
Archive the entire permit pack: Assessment breakdowns, official receipts, clearances, and the LGU TCM if any.
Model OSD vs itemized annually: If you have material local taxes and licenses, itemized often wins over OSD.
Mind “unconscionable” add-ons: If an LGU or third-party imposes unusual “processing/service” pay-to-play charges outside ordinance, challenge or exclude from deduction if not strictly necessary/official.

7) Quick compliance checklist (wallet card)

LGU charges paid? Yes → Expense under Taxes & Licenses.
LGU credit/TCM received? Yes → Record as Other current asset; use only for LGU dues.
Filing method: Itemized vs OSD chosen and documented.
Penalties/surcharges? Prefer non-deductible (conservative).
No attempt to credit LGU amounts against BIR income tax.
Keep ORs, assessment sheets, TCM, and reconciliations with books.

Bottom line

LGU business taxes/fees reduce your BIR income tax only via deduction (itemized), not via credit.
LGU “tax credits” are not BIR tax credits. Treat them as LGU-only assets to be applied against future LGU liabilities.
Choose itemized vs OSD with eyes open, keep immaculate documentation, and separate tax from penalty components to avoid nasty disallowances.

If you want, tell me your entity type (individual/corporation), accounting method (cash/accrual), and give a sample LGU assessment breakdown. I can map the journal entries, show the ITR placement, and model OSD vs itemized so you pick the cheaper path.