Threatening small claims for security deposit

[Joe Williams]

Our tenants just moved out and left our home dirty with stained carpet (which was brand new when they got there) lots of scratches on the wood floor, holes in the walls, chipped paint and large scratches in walls. Also didn't pay their water bill for about 3 months and we were stuck with it. 

We had it cleaned by a cleaning crew and had the carpet professionally cleaned (same people we used right before they moved in) We withheld the cleaning fees and the unpaid water bills from the deposit which totalled to about 500 (the water bill alone was over 200). Now they want to take us to small claims saying that they left it better then when they moved in and they should not be charged the cleaning. We have photos of all the damages they left (which we have been fixing ourselves and did not charge for everything) and receipts for the cleaning we paid for before they moved in and after. What are our rights as landlords?