You use whatever starting inventory you had then include any amount donated in the amount converted to personal use. A sole proprietorship cannot take any credit or deduction for charity donations, so the inventory became yours and you chose to donate it. Yes, your ending inventory should be zero if you are closing the business.
The cost or market value, whichever is lowest, can be entered as a charitable contribution under Itemized Deductions for your Schedule A if you have the require supporting receipts from the charity.
