Cost to replace including shipping and handling is $63.15, should it be added to security deposit deductions or is it wear and tear item?

I pay him out right for his work but I've heard of people deducting payments out of the rent or giving cheaper rent to those type of tenants.

Generally, no, this does not avoid income tax.It's usually helpful for the non-tax practitioner to use deductive reasoning in these situations. 

So you do report the gross but you also deduct the expenses.

If they refuse to pay at all, wait and deduct it from their deposit when they move out.

If you keep part or all of the security deposit because the tenant damaged the property and you must make repairs, include the amount you keep in that year if your practice is to deduct the cost of repairs as expenses.

Your property expenses will need to be divided between business deductions and personal deductions.House-hacking will also complicate your taxes if you sell the property.

Forgetting about the $12,000 you needed to put in upfront is not fairly deducted against your yearly cash flow.

While I'm NOT a CPA, generally you can deduct those expenses regardless of entity because you can deduct them as a sole proprietor.

Subtract from that any expenses (taxes, insurance, avg repairs/maintenance, utilities if you think you'll pay for them, property management if you will pay a manager, a deduction for vacancy).