I own a small business and am phasing out one portion of the business. I would like to donation some inventory to a 501C3. How do I process this on my business return?

What type of small business is it? A Schedule C? You would need to remove the asset from service and say yes to special handling.

If you make a gift of depreciable personal property or real property, you do not have to report income on the disposition. However, the depreciation deducted on the asset must still be taken into account as explained below.

Gifts to Charitable Organizations

Your charitable contribution deduction must be reduced by the amount that would have been ordinary income (due to depreciation recapture) or short-term capital gain if you had sold the asset for its fair market value. This generally has the effect of limiting your deduction to your basis in the property.